What’s the Impact of COVID-19 on VC?

I’ve spent more than 25 years as a professional and personal venture investor, and as an operating executive in companies ranging in size from startup to Fortune 10. I’ve seen my fair share of cycles. I remember well Black Friday in ’87, the dot-com meltdown in the early 2000s, and the Great Recession which peaked in the fall of 2008. And now we’re faced with the end of the longest bull market in recent history, the uncertainty of COVID-19, and the possibility of a recession.

This crisis does feel different, given the speed and scope at which this seemingly uncontainable virus has swept the globe. We find ourselves unsettled and disrupted as the virus impacts the way we work, travel, and interact with one another. Above all, care for our families, selves, and communities comes first, and we are encouraging our employees to do the same.

Venture Investing in a Downturn

As a venture professional, however, I see this as a promising time to be investing. Let me caveat my comments: I’m not writing to offer you advice on what or what not to invest in. I’m simply sharing my perspective as a veteran of past downturns and long-time venture investor.

So why do professional investors choose to invest in private assets today, while our public markets are trending down? One of the key reasons is that venture returns are largely uncorrelated with the public markets. Past cycles and history show that venture investing is relatively isolated from public markets. (Additional reading on the subject can be found here.)

It’s also key to remember this: Irrespective of what’s happening in the public markets, venture is an illiquid asset class with a ten-year horizon. It’s the long-term nature of venture investing into visionary projects that creates the potential for enormous value appreciation, regardless of the market’s cycles.

Optionality

Downturns also give venture investors more leverage and choice. VCs can often deploy capital at lower valuations, are welcomed into more private deals, and become even more selective with their investment criteria.

AVG actively participates in this reality, as our funds seek to co-invest alongside strong lead VCs who share their selectively culled and negotiated deals.

We also know that a lot of smart venture-backed companies are deep in planning and recalibrating. There’s not a boardroom in this country where venture capitalists aren’t talking to management teams about mapping out contingency plans, extending their cash runway, refocusing on mission-critical projects, ensuring higher ROIs on marketing spend, and doing more with less as it relates to head count.

The Role of VC in Economic Recovery

Lower valuations and more frugality built into the cultures of these private companies means that professional VCs play an important, positive, and mutually beneficial role in company building — as will investors in AVG funds.

In fact, some of the world’s most dominant companies were built in times of adversity. Think Google and PayPal weathering the dot-com bust, and Airbnb, Square, and Uber being built out of the bleakness of the global financial crisis. Each of these entities either launched or scaled in very challenging markets. More of these winners will undoubtedly present themselves in this current environment.

What We’re Doing

AVG takes the long view, and its investment strategy does not change with market cycles. But now is a good time to reinforce our solid investment practices in these uncertain times:

1. Portfolio first: Some of our companies will need additional financing, and we will look to lean into our winners.
2. New investments: We will redouble our efforts to access quality investments, led by management teams who have experienced market cycles, backed by steady and well capitalized VCs.
3. Lead investor conviction: We will look for rounds led by the conviction of outside fresh capital over safety rounds led by insiders.
4. Runway: With capital becoming more selective, we will look to back entities with long operating runways and demonstrated capital efficiency.
5. Line of sight: Management teams that are clinically realistic and able to articulate and execute upon clear and measurable business milestones.
6. Unique terms: In addition to lower valuations, we’ll look for seniority in capital structures and other structured terms to help protect our investors should the uncertain macro environment persist.

The key points are to remain disciplined, be judicious in how we invest our capital, and build our companies for enduring success. In other words, to operate under the same investing principles that we have always abided by.

About Anton Simunovic

Anton has 20+ years of technology experience as a proven venture capital investor, entrepreneur, and operating executive in companies ranging in size from startup to Fortune 10. Most recently, Anton founded and led Vener8 Technologies, a technology commercialization company he started with GE. Previously in his career, Anton led the Software and Internet Infrastructure Group at GE Equity where he directly invested $72 million in 10 companies generating more than $500 million of realized gains. Anton has substantial international experience in Canada, China, Europe, and Israel, and has served on the board of directors of more than 20 private and public companies. Anton has a BSc. Engineering from Queen’s University in Canada, and an MBA from Harvard Business School.