For Fast Company’s Shape of Tomorrow series, we’re asking business leaders to share their inside perspective on how the COVID-19 era is transforming their industries. Here’s what’s been lost—and what could be gained—in the new world order.
Roelof Botha, a partner at Sequoia Capital, joined the storied venture capital firm 17 years ago and now oversees its U.S. team. He has backed startups including YouTube and 23andMe.
We’ve made nearly 15 new investments in seed and Series A companies since the beginning of March, so we’ve been very active despite the lockdown. We look for things that are enduring. When I think about a company like Instacart, [which is part of the Sequoia portfolio], it’s likely that once people have experienced the joy of having groceries delivered, they’ll probably persist. But then I wonder about some of the entertainment applications that are blossoming: it’s not clear that those will persist when you go back to school and go back to work. So if we believe [a company reflects] the future, accelerated, we will make the investment.
For some of the later stage companies in our portfolio, we’re actually pushing them to grow even faster. They have a market opportunity now because of these accelerations. It’s likely that the competitive field will be clear because of what’s going to happen over the next 12 months or so. If they are the survivors, they stand to benefit disproportionately. The key is whether their unit economics are good. Do they have good gross margins, do they charge enough for their product? The companies that got into trouble [recently] had upside-down unit economics. WeWork and Uber haven’t yet proven good unit economics.
[A financial crisis] doesn’t necessarily guarantee that a new crop [of companies] emerges. The previous crisis, in 2008, was shortly on the heels of the launch of the smartphone and the launch of cloud infrastructure. Those platform shifts, I think, would have propelled many interesting companies independent of a financial crisis. If you look at what happened after 2000, it’s probably not until 2002, 2003 that innovation really reemerged in Silicon Valley.
Deven Parekh, managing director of Insight Partners, invests in growth-stage companies pursuing scale. His portfolio currently includes 1stdibs, Calm, and Nextdoor.
We’ve tried to work with our companies to say, look, you’re in an environment now where if you make the right decisions, you have the chance to be even more efficient. The actions you have to take [in a downturn] are actually very similar. The depth of the actions might be deeper in some cases, but the actual actions are the same: Figure out what your demand curve looks like, and then try to right-size the business relative to the demand curve. If you’re able to live to fight another day, put the right strategy in place, and continue to strategically invest in areas where there might still be growth, you can actually come out of this stronger. That doesn’t mean that it’s going to be easy.
Last month we led the $72 million Series C raised by grocery delivery startup Imperfect Foods. The entire diligence process, including the warehouse tour, happened online. Literally, somebody walked the entire warehouse with a phone and showed it to us. Would you rather have done it in person? Of course. But I can have the same conversation with somebody on Zoom. I can still do reference calls on Zoom. I think deals will continue to happen.
I don’t expect that 2020 will be a great liquidity year. If you look at the past two to three years in private equity and venture, what people committed wasn’t that different from what they got distributed. Now, as an LP, you’re going to start seeing your net exposure change, and you’re going to be committing but not necessarily getting that money back. If you look historically, those are the good periods to be investing. These periods of low liquidity, where markets are dislocated, are where there’s more investment opportunity. [Though] typically that investment opportunity doesn’t happen the day the problem hits. It’s very hard to forecast.
Kirsten Green, founding partner of Forerunner Ventures, has backed companies including Glossier and Dollar Shave Club since launching Forerunner in 2010. She is also a founding member of All Raise, which provides mentoring for women in technology.
This is a time of a lot of uncertainty, and uncertainty can often cause fear. That can have to do with your job, your financial situation, your kids, and importantly, your health. Maybe you have aging parents; that’s been top of mind for me. If you think about past crises, they were really anchored around either finance or health or war. This one seems so holistic; it’s hard to imagine that it doesn’t have a profound impact on people. This particular crisis has also required everyone to slow down—literally slow down, and stay at home. As your world gets a little bit smaller, you have an opportunity for more focus. I think that can be a really powerful thing in helping people understand what their priorities are.
Trends that were already in play are beginning to accelerate. Our portfolio has seen a tremendous amount of resilience. Not unilaterally; there are some businesses that can’t operate right now. But for the most part, businesses that were in the path of progress are seeing some increased adoption right now.
I anticipate and I hope that as we move forward, we understand the importance of sustainability and sound practices that reorganize what we’re making and how we’re making it and where we’re making it. I think that the consumer is increasingly interested in that. On the sentiment side, we did some surveys around what [consumers’] framework for priority had been when making purchases pre-COVID and post-COVID. The one area that shifted was sustainability. That is just something that has come more clearly into focus over time [for consumers]. Perhaps people are recognizing it even more while the world has been operating a bit slower and there are reports of cleaner environments or more wildlife.
Christine Tsai left Google in 2010 to become a founding partner at 500 Startups. As CEO, she has grown the firm into a global player in early-stage investing with over $500 million in committed capital and a competitive accelerator program.
It’s definitely a challenging time to feel optimistic. There’s very little control or certainty. We’ve been trying to move quickly in terms of how we adapt. The demo day that we had in March is a good example. We were really apprehensive about it because we were hosting it online and there was a question of whether it would just fall flat, whether this batch of startups would lose momentum. But I actually liked it better than the in-person demo days because a lot more people could attend and it was very focused on the company pitches. We created this private Slack community for the investors, and there was a lot of interaction. We’re still seeing what the ultimate results are in terms of how many companies raise money, but our team has mentioned to me that founders saw up to five times more follow-up in terms of meetings. It also enabled investors from other markets to attend because we posted it online afterwards. Even post-COVID, I’d love to continue with that format.
We’ve invested in about 2,400 companies [globally] over the past 10 years. Often, Silicon Valley is criticized for catering to the one percent. We had already been seeing that innovation comes from all around the world, and I think that’s even more true now.
Because of the size and the diversification of the portfolio, we’re seeing a spectrum in how [our companies] are faring. Unfortunately, there are some companies that no matter how great they were doing pre-COVID, [they’re struggling now in ways that are] out of their control. For many, it wasn’t a decline over the course of several months; it was a week and everything was just obliterated. Others are more wait and see. And then there are some companies that don’t know how to handle the demand.
Lo Toney left his role as a partner at GV, Alphabet’s venture capital spin-out, to found Plexo Capital in 2018. Plexo invests in both startups and other venture firms, with a focus on organizations led by women and people of color.
When you have a downturn and some institutional LPs feel the denominator effect of their public market equities shrinking in value, they may slow down commitments, they may sell off a portion of existing commitments. There’s a flight to quality. Plus it’s difficult for a lot of the more established institutional LPs to get comfortable doing an end-to-end [diligence] process virtually. These things are really impacting first-time venture fund managers. But that said, we know based on the data and history that first-time fund managers perform really well.
This is anecdotal, but it feels like people are more open to doing meetings right now. A lot of people, they have just a little bit more time on their calendars—you don’t have to worry about getting to an office, you don’t have to worry about travel. And so I think that entrepreneurs that are looking for new investors, GPs looking for institutional LPs: everyone needs to up their game on cold emails and figuring out how to get to people. We’ve done at least three deals [recently] that I can think of off the top of my head where we’ve committed to an entrepreneur without meeting them.
We’ve made a lot of gains [in recent years] for women and people of color both on the entrepreneurial side and the GP side. With all of these factors coming together—flight to quality, individuals and smaller family offices being more risk averse, inability to meet face-to-face—I do believe that is going to have an impact on the progress that we’ve made. It’s kind of like, last in the door, first out the door. So I’m worried about that.
Andrew Davis is director of private investments at T. Rowe Price, which he joined in 2010. The firm, which has over $1.1 trillion in assets under management, has ramped up its private market investing in recent years.
Given that we’re a so-called crossover investor, we can truly own a company for a very long time. And so from that perspective, we haven’t changed the parameters of what we’re looking for. I would say what has changed slightly, and this was actually happening pre-COVID, there were some missteps with some unicorns as they became public—or attempted to come public, in WeWork’s case. Those [issues] had already started a shift in terms of the rigor that we were requiring from companies as it relates to the path to profitability, and that’s been doubled-down on. In our current COVID state, additional capital destruction is not tenable. . . . Capital providers [for companies like Uber and Airbnb] are not willing to subsidize highly competitive models to the extent that they were in the past.
I continue to see really innovative things that have the potential to be the next great big companies. But I would also say we have gone through a little bit of follow-on copycatting in the last half of this decade, heading into 2020. The companies that are really going to excel going forward are the ones that are investing in a niche that others haven’t looked at. Those are more interesting opportunities at this time.
[Virtual due diligence] is something that we’ve struggled with over the past two months. It leads you to be more likely to work with a current portfolio company that you already know than a new investment. In one instance, [COVID] did shut down our ability to do due diligence. We were looking at a company that had a significant element of manufacturing associated with it. We needed to be able to go see these two facilities, because a large part of the incremental growth was going to be based on the physical capacity expansion, and we couldn’t. That was just something that was too hard for us to overcome.
More from Fast Company’s Shape of Tomorrow series:
- What restaurants will actually be like in a post-COVID world, according to Chipotle, Panera, street food vendors, and others
- The leaders of the Mayo Clinic, Cleveland Clinic, Doctors Without Borders, and more tell us how healthcare is being transformed by the COVID-19 pandemic.
- Is advertising really dead? Here’s how the leaders of Droga5, TBWA, Wieden+Kennedy, and more are inching forward.
- The retail Armageddon may have finally arrived. Here’s what top executives at Nike, Athleta, and more think it will take for stores and brands to make it through.
- Insiders at LinkedIn, Glassdoor, and Jobcase tell us who will be hiring, what skills will be important, and how the workplace of the future will change.