Over the past few months, investors and entrepreneurs have needed to adapt in unprecedented ways to a new way of work. One of the key questions that is top of mind for entrepreneurs is “Are venture capital firms still signing checks?”
To be sure, venture capital firms, at large, have taken a hit since the pandemic started. According to research by Startup Genome, global venture capital funding has declined 20% since the outbreak of the pandemic. Perhaps not surprisingly, China’s venture capital landscape has been especially adversely affected—especially in early 2020—plummeting more than 40% in funding in January and February.
While the venture capital landscape might not be as active as compared to a year ago, deals are still happening. Top-tier venture capitalists recognize the importance of adopting a long-term perspective. They also recognize the value of adopting a contrarian view. The logic is simple—if you opt for conventional behavior and follow the crowd, you can expect conventional performance. If, however, you’re keen to differentiate yourself from the masses and see above-average performance, you need to adopt a contrarian view. This is your best shot at achieving unconventional above-average returns. Indeed, Howard Marks, co-founder and co-chairman of Oaktree Capital Management—the largest investor in distressed securities worldwide, recently explained,
To be a superior investor…you have to deviate from the behavior of the crowd. You have to do things that are different from what they're doing…We have to try to do what's called contrarian behavior.
Recently, OMERS Ventures surveyed more than 150 venture capital firms globally in order to find out how venture capital firms have adjusted to a remote working environment. The results were illuminating.
Remote deals are still happening.
The vast majority (96%) of venture capitalists surveyed are still doing partially remote deals. Yet venture capitalists differ in how significantly they are adapting their pre-pandemic practices. About half (25%) are still finding a way to meet in person before signing the check. Yet far more venture capitalists (42%) are adapting their processes so that they’re able to conveniently invest in new portfolio companies, yet still managing risks.
Doubling down on reference calls and due diligence
How are venture capitalists adapting their investment practices? Venture capitalists have ramped up the number of reference calls they do. More than half (56%) are doing more reference calls than usual. Many (47%) are also spending more time on due diligence than usual.
Due diligence can be tricky and time-consuming, especially for new startups and first-time founders that don’t have a track record of success. According to research by UKBAA, investors who devote at least 20 hours to the due diligence process see a positive impact on the likelihood of a multiple investment return.
What does effective due diligence look like? Many top-tier investors prioritize conversation with customers. Sonja Perkins, the founder of Broadway Angels, an all-women angel/VC group, has explained, “The number-one indication of the company being successful or not is its customers. That’s where I start with due diligence”.
Talking with customers is a telling and informative way to conduct due diligence. As part of her tried-and-true due diligence process, Perkins interviews several existing and prospective customers and asks three questions:
- What is your problem?
- How are you solving this problem today?
- How would this new solution solve this problem for you?
If customers are “dying to have the solution”, Perkins is much more confident that the prospective investment has legs.
Top-tier investors also recruit experts that are better able to evaluate an (especially technical) product. They also search near and far for potential references. A number of Affinity’s clients leverage relationship intelligence to identify the individuals who haven’t been included on the reference lists but are in a good position to provide feedback. Affinity’s Alliance feature allows you to understand your network's true connections to fast-track reference calls, without sacrificing quality.
More time spent on portfolio companies
Perhaps not surprisingly, during these uncertain and challenging times, venture capitalists are spending more time on their portfolio companies.
The best venture capitalists is helping their portfolio companies navigate rough waters, especially when it comes to making swift, difficult decisions. Kira Noodleman of Bee Partners, for example, has urged her portfolio companies to “be swift and judicious”. She’s explained,
We are doubling down on portfolio support, with the assumption of a recession as the base case. Be swift and judicious with any opportunity to extend burn at the moment. Hiring cuts should be considered very carefully; if they are needed, a proactive approach is ideal and will feel uncomfortable.
Top venture capitalists are also reminding their portfolio companies of the importance of relationship building and maintenance during these times. Phil Dur, PeakSpan Capital has advised his portfolio companies to “keep your friends close”. He’s explained,
In an environment like this, it’s critical to maintain strong relationships with your key customers, partners, and employees. Have a thoughtful plan of engagement for each of these key stakeholder groups.
With Affinity, you can set automated triggers and reminders to ensure that you don’t drop the ball on important relationships. Keeping tabs on your relationships and ensuring that they remain strong during these difficult times will pay dividends down the road. As Dur put it,
It’s never more important than in times of crisis for your partners to feel like you have their back and are there to support them. Investing in this now creatively and with authentic engagement and energy will pay enormous dividends in the future.
To learn more, check out our conversation with
Dylan Boyd on Capital Connections.