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Venture Capital in a Time of Historic Change

VCapital Team, August 14, 2020

The pandemic’s end remains unknown. Sharing our thoughts on COVID implications for the economy, and especially for venture capital investment, seems in order.

Economic recovery will take time 

As the nation has emerged broadly from substantial lockdown, we have seen some quick recovery in employment, retail level traffic, and general business activity. However, progress has slowed over the past couple of weeks, evident most visibly in modest increases in new unemployment claims. Spikes in infection rates have occurred in many areas leading some businesses to re-furlough employees and others to shut down. Broad economic recovery to pre-COVID levels seems increasingly likely to take a couple of years, if not longer. 

The downturn remains particularly severe for a number of industries that depend upon customer density and heavy capacity utilization. This includes air travel, hotels, restaurants and bars, sports and entertainment, and commercial real estate. 

Of course, the news is not all bad. Some industries are thriving – much of IT, online retailing, supermarkets and big box stores, and the broad home improvement industry. Consumer dollars usually spent on travel and leisure are being reallocated to homes. 

The public equity market response has been surprisingly logical 

 After its emotional plunge in March, the public stock market has responded the way experts say it should – looking through the front windshield rather than through the rearview mirror – reflecting expected future profits. While the broad market may be a little too buoyant due to Federal Reserve actions (where else do you target dollars when interest rates are near zero?), differences by industry sector make good sense. For example, tech and home improvement-related stocks are doing well, while stock prices in sectors such as air travel, hospitality, energy, and commercial real estate are down severely. 

COVID is impacting VC-funded companies as well, some negatively and some positively 

 Due to lockdowns, the challenges of collaborating remotely, supply chain disruptions, and other COVID-related factors, progress for many VC-funded companies has slowed, and the timing and nature of exit opportunities may be impacted. Surprisingly, though, COVID may accelerate and magnify exit opportunities for others. 

Unfortunately, companies that are at the stage where commercial traction is primary, may be finding that challenge magnified by inability to meet with prospects face-to-face. Some may run out of time and money before they can get to where they need to for a successful exit. Others may grab at the opportunity for a less-than-optimal exit rather than risk an ultimate total loss by waiting and persisting further. 

For other companies, the COVID crisis may represent a welcomed tail wind. For example, Padcaster’s mobile video recording studio capabilities are experiencing strong demand in the face of travel restrictions and social distancing requirements. The New Normal post-COVID will likely continue to aid demand. VCapital’s newest portfolio company, EDJX, may benefit as well from an anticipated New Normal featuring more work from home and remote communication and education that demand significantly increased Internet data transmission capacity addressed through the company’s Edge computing. 

New normal will bring new needs leading to new innovations and venture capital opportunities 

Famed economist Milton Friedman argued that there is little real change in the absence of a great crisis. He asserted that while ideas and programs for progress are “always in the air,” it takes a major crisis that shakes the world to its core to drive real change. 

As venture capitalists, it’s hard for us to dismiss recent advances in information technology and biotechnology as being less than real change. But we do agree that major crisis can accelerate change already in progress as well as spurring more change. 

We therefore believe without hesitation that venture capital opportunities will remain robust. Our mission will remain to find uncovered gems, employ rigorous due diligence to identify the most attractive risk/reward opportunities, and raise the money to establish a solid position, so that our clients can continue to build wealth through venture capital. 

To learn more about VCapital's portfolio companies, please contact us here. Jim Vaughan or Rich McMenamin will be happy to reply with our research reports and quarterly updates.