How Venture Can Survive and Even Thrive in Recessions

In this part, I’ll address the impact of COVID-19 on AVG, what we’re doing in response, and the longer-term investing trends that we anticipate in the post-pandemic world.

PART 2

What COVID Means for AVG

In both good and bad economies, the fact that Alumni Ventures Group is not a typical venture capital firm works to our advantage. First, we’re different in that AVG is strictly a co-investor, seeking to invest alongside proven venture capitalists under equivalent terms. We don’t sit on boards or negotiate terms or governance. We look to be helpful to every team we back and every VC we partner with.

Our base is also much broader and more deeply connected than that of a typical venture firm. We are a network of 16 alumni funds and about 50 investment professionals. Most importantly, we are a community of 500,000 — entrepreneurs, investors, and others —  who are disrupting the status quo to build a better future.

In times of adversity, when social mistrust runs high, alumni communities draw people closer together. In my own community, I was deeply moved by the note of gratitude from Lawrence Bacow, President of Harvard. Both he and his wife had been “laid low” by COVID-19. There is something intrinsic about your alumni community, a time forged by youth and shared experience.

Over the last five years, AVG has invested in more than 450 companies alongside 130+ established VCs. Access to these investments has almost universally been a function of portfolio managers, portfolio customers, or the VCs involved having gone to one or more of the universities represented in our alumni communities.

Our connections run deep — and all to the good in this era when social distancing forces business to be conducted remote. This makes venture investing enormously challenging. Truisms in venture are to chase your winners and for the next round of funding to be led by fresh capital — an arm’s-length, experienced, and trusted venture capitalist. It’s that lead’s responsibility to set valuation, terms, governance, and other important operational matters.

In today’s environment, however, it’s nearly impossible to conduct proper company, market, and customer diligence. Zoom calls do not cut it! This means the best deals will be funded by “insiders” and by those where trust and relationships matter more than usual. It’s almost as though AVG’s unique community-based model was built for this moment.

Do not mistake AVG’s investment volume or co-investing strategy as indications that we are not diligent. On the contrary, we are a process-based and highly disciplined investor, with numerous checks and balances and a rigorous scoring methodology to leverage the wisdom of our seasoned teams. We are also very much cognizant of changed circumstances. Almost overnight, the cost of capital dramatically increased for every company in the country. Fortunately, our wide-reaching community and resilient capital base has afforded us an unparalleled advantage as a co-investor in a downward-trending market.

What AVG Is Doing

AVG takes the long view, and our investment strategy does not change with market cycles. COVID-19 has only heightened our resolve to execute upon solid investment fundamentals:

• Portfolio first: Some of our companies will need additional financing, and we will look to lean into our winners.
• New investments: We will redouble our efforts to access quality investments, led by management teams who have experienced market cycles and are backed by steady and well-capitalized VCs.
• Lead investor conviction: We will look for rounds ideally led by the conviction of outside fresh capital or trusted insiders with aligned interests.
• Runway: With capital becoming more selective, we will look to back entities with long operating runways, demonstrated capital efficiency, and realistic fundraising plans and revenue forecasts.
• Line of sight: In this uncertain environment, we will look for management teams that are clinically realistic, focused, and able to manage conflicting information to execute measurable business milestones.
• Unique terms: In addition to lower valuations, we will look for seniority in capital structures and other protective terms to ensure that our investors are protected in a downward trending environment.
• Exit strategy: Even viable public listings are on hold, but consolidation by the well capitalized will accelerate as due diligence becomes more feasible.

The key points are to remain disciplined and judicious in how we invest our capital and how we build our companies for enduring success.

Beyond COVID 

As venture capitalists, we strive to make the world a better place. Even when billions of people are on lockdown, human ingenuity never stops inventing. More than ever, the dreams of entrepreneurial people today are wrapped up in the hopes of growing a business to solve some of the world’s most intractable problems — which the response to COVID-19 has made abundantly clear. AVG aims to help.

While it’s difficult to contemplate life after COVID-19, it’s clear that things will never go back to “normal.” Some of the largest venture funds in the U.S., including NEA and Lightspeed, have just closed on mega funds to tap into the market disruptions that lie ahead. In all adversity, there is opportunity. In fact, the best-performing vintages tend to be those which invest at the bottom of a recession and into the early stages of a recovery. During this time, valuations are lower, management teams are more resilient, startups are more frugal, and revenue lines become propelled by macro tailwinds.

The magnitude of market changes over the next 18 months will be profound, and the opportunity for the nimble, brave, and creative will be colossal. What are the social and business changes we can expect to see over the next 3-5 years? What might consumers value? Where will there be structural change? What new companies will emerge?

We don’t have all the answers, but what is clear is that the shift to digital-everything has been amplified for individuals and companies alike, and adoption of new technologies will be quicker. Listed below are a few trends and ideas that AVG sees proliferating:

• Cloud: Movement to cloud computing and storage will accelerate, making applications and data more accessible — and at a lower upfront cost. After all, nearly half of humanity carries a smartphone in its pocket, creating reams of daily data.
• Robots: The move toward automation within old-school and e-commerce pick-and-pack warehouses, last-mile delivery, and even vertical farming will muscle out low-skilled labor.
• Supply Chains: Supply chains will be redesigned to offer more flexibility and redundancy, so that they can be maintained globally or closer to home.
• 3D Printing: There will be a surge of local, tech-driven manufacturing to ensure businesses are self-sustaining.
• Independence: As people grow more aware of our global interdependence — and the accompanying risks in a climate of international crisis — more companies will focus on energy and food independence.
• Future of Work: Alan Jope, CEO of Unilever, a consumer goods behemoth, recently called remote working “dead easy” for his workforce of 155,000, ordering his sales teams to sell virtually. Jope, among others, has made clear that the long-term effects on the workspaces of existing businesses will be dramatic.
• Distributed Structures: Many early-stage companies begin their journeys in a distributed fashion to save on rent and wages, and engineering “teams” are often a disjointed group of remote workers — the new norm. Digital tools like Slack for messaging and Zoom for videoconferencing are only the start of the tools that will emerge to facilitate open-sourced and fully distributed organizational structures.
• Public / Private Partnerships: With insufficient global coordination by governments and NGOs to conquer COVID-19, the private sector will become a necessary part of any solution. Companies of varying shapes and sizes will learn to turn the U.S. government into a key ally and customer, as the government will become the engine of consumption.
• Data and AI: AI, ML, and facial recognition will take giant leaps forward as consumers relax their personal privacy concerns to avoid exposure to the virus behind COVID-19, sharing their data with blossoming public/private partnerships.
• Voice Everything: To avoid the spread of germs, the world will become increasingly touchless with voice recognition, biometrics, and magic passes moving to the mainstream. Digital and mobile payments will get a huge boost from consumers.
• Virtual Learning: With colleges and possibly other educational institutions across the country having to plan for the possibility of remote classes in the fall, all families will open up to new ways of learning, skill development, and peer-induced exercise.
• Virtual Connectedness: Humans are social creatures, and whole generations that were previously reluctant to try something new — Baby Boomers and even Gen Xers — will find that they actually enjoy virtual wine parties. Virtual connectedness between friends and family will become the norm, regardless of distance.
• Healthtech and Biotech: Large and small companies will drive progress in myriad ways as people increasingly embrace healthcare at home, telemedicine, and sharing health records. Tech wearables will be perceived as a small price to pay, first to avoid COVID-19, then to supplement a host of other therapies, leading to improved individual outcomes.
• Recurring Revenue: After watching revenue evaporate at breathtaking speed, all companies — but especially subscription-based companies — will attempt to build more sticky and predictable revenue streams.
• Entertainment: Movement to at-home entertainment will accelerate, and virtual reality will find its moment both inside and, more importantly, outside the home.
• Online Security: As an increasing number of people begin to work remotely, online devices will proliferate, exposing corporations to malware and increased vulnerability. Strained budgets will make room for security.

Those are some of our predictions at AVG. As venture investors, we have the job of watching the near- and longer-term horizons for changes. Like explorers of days past, we’re in uncharted waters. Storms and unforeseen reefs will surely appear, but spectacular vistas and new lands will present themselves as well. Creativity is limitless, and the human spirit indomitable. Despite — and, in fact, because of — all this adversity, now is a good time to be investing in venture.

Featured Photo by Anastasios Agathangelou