May 22, 2021

Axios Pro Rata

Welcome back to another Saturday! I say this as if there isn't one every week...

  • As always, feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
  • Playing on my Spotify: Empire of the Sun's "Walking on a Dream," and Thelma Houston's "Don't Leave Me This Way."

Today's Smart Brevity™ count is 1,063 words, a 4-minute read.

1 big thing: VC not only survived, but thrived in 2020

Illustration: Aïda Amer/Axios

The venture capital industry successfully adjusted to the new normal, and even thrived, after an initial period of pandemic paralysis.

Why it matters: Many feared the crisis would wreck large swaths of startups. Instead, 2020 birthed a new cohort of companies shaping how we live and work in entirely new ways — especially since they matured during a period of societal shifts.

Flashback: On March 5 of last year, VC firm Sequoia Capital sent a memo predicting that COVID-19 "is the black swan of 2020" and that companies need to brace themselves and "question every assumption."

  • The firm didn’t necessarily recommend drastic moves or layoffs, but did issue a strong nudge to "reassess," according to partner Roelof Botha.
  • "It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained," Sequoia wrote. "It will take even longer for the global economy to recover its footing."

Reality check: The black swan swam on by.

  • "I think what couldn’t have been predicted is the swiftness and extent of the government response," Botha tells Axios.
  • "Consumer pocketbooks were lined way better than we assumed. ... People have money so we see it in the [Square] Cash app and we see it in the [Square] seller business," adds Botha, who's on the fintech company's board.

By the numbers: Venture capital investing had a record year (more than $130 billion), besting even the height of the dot-com boom, per the MoneyTree report.

  • However, the number of deals (6,305) didn't reach the exuberance of 2000's 8,803 venture investments.

The new reality: VCs are continuing a lot of their pandemic-era "Zoom investing."

  • "Despite all the hoopla, I remain surprised by how normal deals felt after just a month or two of settling into remote processes," explains Inspired Capital principal Chris Brown.
  • Another byproduct has been deal-making velocity. Costanoa Ventures principal Amy Cheetham says that routinely, if she meets a company on a Thursday, she’s expected to make a decision by Monday.

Yes, but: The in-person element isn’t going away entirely — whether for due diligence or among VC firm colleagues.

  • "Being willing/able to travel to meet folks during the past few months (including internationally) was also a nice way to stand out on competitive deals," says Full In Partners managing director Elodie Dupuy. "Building a close relationship with entrepreneurs is the best way to win deals, and meeting them in person is the best way to do that."
  • Sequoia's team is still allowed to largely work from home, but Botha points out that the firm still values in-person brainstorming sessions. In fact, its "black swan memo" was born during one of them, he adds.

The bottom line: Venture capital braced for the worst, but instead got the best.

2. Zoom startup fundraising

Illustration: Sarah Grillo/Axios

For many internet startups, the pandemic-induced shift of practically everything in our lives moving online led to booming business.

Why it matters: This translated into a flurry of funding from VCs eager to cash in on the companies making the pandemic — and life beyond it —possible or even better.

What they’re saying: "We had investors try to preempt [the eventual Series E] — showing up for coffee with a term sheet," says Benchling co-founder and CEO Sajith Wickramasekara, whose company makes software for biology labs. After enough investors initiated interest, the company decided to formally raise funding.

Between the lines: The pandemic’s "Zoom investing" was also a boon for startups not based in traditional tech hubs as it leveled the playing field for meetings and investors became more agnostic about geography and distributed teams.

  • Yac, an Orlando, Fla.-based maker of an asynchronous voice and video messaging app for workplaces, even used its own product to communicate with investors as they grew more comfortable with remote work.

The other side: It hasn't been a total walk in the park.

  • "Is there something wrong with what I’m doing? Is there something wrong with me?" Siran Cao, co-founder and CEO of family financial planning company Mirza, remembers asking herself during a grueling fundraising process after a key investor pulled out last spring.
  • She adds that while it was easier to set up investor meetings through Zoom, the lack of in-person rapport also made it easier for folks to "ghost" entrepreneurs (meaning, to stop replying to messages without an explanation).
  • Even Benchling, which closed its Series D in March 2020 just as the stock market dropped 30%, had some investors who were initially interested ultimately not make bids, according to Wickramasekara.
3. The VC experience

Illustration: Annelise Capossela/Axios

U.S. venture capitalists had their own record year for fundraising in 2020, closing on more than $73 billion, according to Pitchbook.

Why it matters: While VCs are supposed to be risk-takers, their investors can often be much more conservative.

The big picture: Similar to the startup experience, fundraising for venture capitalists went through phases, Ecosystem Integrity Fund partner Geoff Eisenberg tells Axios.

  • Act 1: The first couple of months after the pandemic set in, most activity stopped as limited partners reeled from the shock.
  • Act 2: From June through the end of 2020, LPs got back into the game— or at least took many meetings.
  • Act 3: As 2021 began and now a post-vaccine reality kicks in, old habits are creeping back, with many LPs preferring to wait until they can meet face-to-face to make any commitments.

Case in point: Better Tomorrow Ventures was suddenly flooded with interest during the summer, after hitting a wall in March and April and telling existing LPs it would shrink its fundraising target, says general partner Sheel Mohnot.

  • The seed-stage fintech firm even hit its hard cap of $75 million, above the $60 million it initially planned to raise pre-pandemic.

Yes, but: 2020’s good times were not evenly distributed across the industry, especially for a lot of first-time fund managers.

  • 2020 was a seven-year low for first-time funds, according to Pitchbook.
  • This is likely due to the heavier reliance on existing relationships. LPs are having an easier time committing to fund managers they’ve previous backed or have built a rapport with pre-pandemic, and are having a harder time with "Zoom investing" in funds.
  • Eisenberg notes that while there wasn’t too much action last year as far as capital commitments, LPs were much more keen on having initial meet-and-greet calls with more managers, given the ease of setting up video chats.
📚 Due Diligence
  • VC is performing better than ever. Then why are so few first-time funds being raised? (Pitchbook)
  • 'This Is Insanity': Start-Ups End Year in a Deal Frenzy (NY Times)
  • 2020 changed America's startup landscape (Axios)
🧩 Trivia

Sequoia Capital's black swan memo to its portfolio companies isn't the first one that's caught the attention of the broader industry.

  • Question: What was the title of its famous 2008 memo? (Answer at the bottom.)
🧮 Final Numbers
Data: PwC; Chart: Axios Visuals

🙏 Thanks for reading Axios Pro Rata! Please ask your friends, colleagues and pandemic thrivers to sign up.

Trivia answer: "R.I.P Good Times." You can read the full slide deck here, leaked at the time in TechCrunch.