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Enterprise capital is making a gradual comeback after the onset of the pandemic

November
19, 2020

5 min read

This story originally appeared on cheddar

Before the pandemic, investor Kamran Ansari spent much of his time flying back and forth between New York City and San Francisco to meet with startup founders and management teams. Sometimes these meetings were more formal. Other times, they started out as a 30-minute lunch that expanded into 90-minute conversations.

Now he seldom leaves his Virginia home and holds most of his meetings on Zoom or Google Hangouts, with the occasional masked coffee walk going on.

"It's just become more acceptable to support companies where you don't meet the CEO or the management team in person," said Ansari, partner at the venture capital company Greycroft.

However, face-to-face meetings need to remain a huge part of the business, he says. Early stage companies offer limited hard data, so investors can rely on the founder's background and experience in making decisions.

"The biggest thing you miss with Zoom is building relationships that really understand someone's background," says Ansari. "If you're doing a zoom or hangout, it's usually because of brass nails."

Remote communication has made the process more "transactional," he adds, but not impossible. For example, last week Ansari signed a check for a company after meeting the founder online a month ago. The difference now is that he does more background research and due diligence.

"I think it's changed quite a lot as people became much more comfortable with the idea of ​​checking an entire deal, including management team, diligence and everything else, remotely through Google Hangouts and Zoom," he says.

Related: The Rise of Alternative Venture Capital

Venture capital has made a comeback in the eight months since the coronavirus stalled the global economy. VC investments in U.S. companies rose 22 percent year over year in the third quarter, a seven-quarter high of $ 36.5 billion, according to PricewaterhouseCoopers' quarterly MoneyTree report on the venture space.

Despite these gains, business activity is still down 11 percent year over year.

Safe bets

This partly reflects how even venture capitalists took the time to get out of the early spring doldrums. Ansari said that initially, investors mostly stuck to what they knew, which meant getting ahead with companies they had already invested in or with whom they were building a relationship.

This is known as follow-up funding. If an investor had already provided Series A funding for a company, they were ready to conduct a Series B round.

New companies without a previous donation round have been out of luck at the moment. "I think the companies that have been in the market realized that timing was going to be tough and only delayed their current fundraising processes," said Sarah Foley, partner at SWAT Equity, which mainly deals with the hardest hit consumer goods – and the service sector.

This began to change in the second and third quarters as the economy began to recover, but not without leaving some residual effect on how startups functioned.

Foley explains that as funding dried up, many startups became more self-disciplined, invested less in things like marketing, and focused more on profitability.

However, this renewed self-discipline among startups did not necessarily begin with Covid. After years of well-known companies asserting themselves on private capital without becoming profitable, WeWork's imminent collapse in the third quarter of 2019 was an example for newer startups.

"From the founders' point of view, that profitability discussion resonated in the fourth quarter of last year and now it's a reality that I think is great," she says. "You need to find a way to reduce reliance on continuous funding to just get to an exit and really figure out how to create a sustainable business model at an earlier stage in the evolution."

Financial runway

With Covid, the pressure on startups to prop up their businesses became even greater. Foley said her company spent a lot of time working with founders to help them innovate and cut costs through the troubled period.

"We also spent an inordinate amount of time really walking them through their cost structures and helping them decide where to cut and cut costs to extend their runway," she says.

In venture capital language, the runway is the distance between the last and the next fundraiser. For 305 Fitness, a dance cardio gym in the SWAT portfolio, finding ways to succeed with a longer runway defined the business model during the pandemic.

"Although we had our eyes on the price of opening another 10 studios, this will definitely not be part of the plan right now," says founder Sadie Kurzban. "Instead, we really focused on these other, smaller parts of our business that we thought about during the pandemic and that we really accelerated, or that were just a glimmer of a business opportunity."

Instead of rapidly expanding physically, the company expanded its digital offerings, including a subscription package for trainers so they can run their own training courses on the side.

Kurzban says one benefit for their company is that it has only received small investments from multiple investors. So no single investor is betting on returns.

"What I find unique about our situation is that we didn't have a big check," she says. "I think that was really helpful because we only received support. Nobody has so much skin in the game that they are demanding a return every minute [contact us]."

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