By March 16, founder Janine Yancey was tired of playing the waiting game. After watching the stock market take yet another unprecedented nosedive due to coronavirus, she called up a potential investor.
“If this isn’t going to happen, let’s call it now,” Yancey said, referring to the close of her Series A round, the first capital her culture tech company, Emtrain, would have accepted in 14 years. “At that point, I put my nose to the grindstone; I didn’t have a lot of bandwidth in engaging in conversation that wasn’t going anywhere.”
She had the conversation on Monday, and the deal closed on Friday. “I remember thinking, ‘this is the only deal that is happening this month,’ ” she recalled.
As lockdowns extend to prevent the spread of the coronavirus, investors and startups are searching for new ways to connect with each other. At this moment, deals are happening between screens instead of over drinks at The Battery or coffee at The Creamery. A number of investors have already cut fully remote checks, saying it impacts everything from the due diligence process, to appetite, to who gets to access capital in the first place.
Small talk and size
Ted Wang, an investor at Cowboy Ventures, said his firm spent the first 30 days of the lockdown working with portfolio companies and is just now turning to start sourcing deals. The six-person firm is running the same process on due diligence and has seen deal pipeline stabilize since “market confusion” slowed down a bit.
Wang said the struggles with investing remotely are less about access to deals or video conferencing technology and more about the little things, like small talk.
“We won’t have that little bit of chit-chat at the beginning of meetings,” Wang said. “When you can’t be face-to-face you have to be deliberate to get soft information on how the founder is wired. Cowboy plans to start experimenting with virtual VC dinners or founder gatherings to foster off-the-cuff conversation, and Wang said they are also considering having in-person — but physically-distanced — meetings with founders.
Naturally, the impact of remote deal making is tied to the size of the firm. On one end, Catharine Dockery, who solely runs Vice Ventures, says she is open for business and has recently cut a check into a company. Vice invests in unconventional categories, like cannabis or sextech, and has seen an uptick in tequila-focused startups.
“The valuation was great, the founder was great, and we didn’t even do a Zoom,” Dockery said. “We went back and forth with due diligence.” Dockery runs the fund by herself, and said she has always stuck to doing phone calls and Zoom, instead of in person-meetings.
At the other end of the spectrum, Sequoia Capital has made 10 investments in new companies over Zoom since shutdown orders began, according to the firm’s Roelof Botha.
In a call with Extra Crunch Live, Botha said Sequoia has increased the amount of reference checking it is doing. “You just find these other ways to fill in the information you might have gotten pre-COVID,” he said.
First Round Capital’s Brett Berson said that “it’s very hard to actually get the grand truth on venture activity today,” Berson said. “But we’ve still been meeting with a lot of founders.”
Speed hasn’t been a problem with remote investing: First Round met a founder on a Thursday and had a signed term sheet by Wednesday morning of the following week.
Diversity
Matt Turck, an investor at FirstMark Capital, recently led a $2.7 million round in NextMV. It was the first investment he has ever done without meeting the founder in real life first.
Turck invests largely in the enterprise and B2B space and said that the bar is “clearly higher” between finding a strong fit between the company and their investor. In NextMV’s case, he says it helped that the startup was “slightly technical and a bit of a mouthful.”
“In this case, the startup was 100% in my area of interest and expertise,” he said, adding that it took around double the time to close the deal than it used to in a physical world, because of more calls and more background work.
The real change to investment is that “it would be harder to be experimental right now,” Turck said. Investors may be more likely to stick to the categories they know and love, versus betting on a new sector they don’t know much about. These days, the risky are a little more risk-averse.
But looking past categories, Charles Hudson of Precursor Ventures said a lack of experimentation or openness could disproportionately impact underrepresented founders.
SAN FRANCISCO, CA – SEPTEMBER 18: Precursor Ventures Managing Partner Charles Hudson judges the Startup Battlefield Competition during TechCrunch Disrupt SF 2017 at Pier 48 on September 18, 2017 in San Francisco, California. (Photo by Steve Jennings/Getty Images for TechCrunch)
“Even in probably the greatest bull market I’ve seen in my lifetime as an investor, people of color and female founders struggled to get access to capital,” Hudson said during an Extra Crunch Live call.
“As investors become more conservative and cautious, they will gravitate toward backgrounds and networks that they know well, and they will go back to the well at the schools that they went to, the people that they worked with before and those that they are already most comfortable with. And that is, generally speaking, not female founders and people of color,” he said.
On the flip side, Turner Novak of Gelt VC said remote investing can help or hurt underrepresented founders.
“The playing field is leveled in a sense because you don’t have to be in San Francisco, but if you don’t have the network, previous track record, or current traction it’s still tough,” Gelt said. “I think operating remote will force investors to look outside their existing networks. The firms and investors that do well will be the ones who figure out how to do that.”
Novak said 66% of the capital he has deployed has gone to female founders and 45% has gone to non-white founders. These statistics are higher than most venture capital firms, and he credits his success in part to working remotely.
The investors are all getting at the same point here: Investing during a pandemic is a lot more nuanced than jumping on a Zoom call and putting on a witty background. And while firms might indeed be open for business, it is most certainly not business as usual.
It’s enough to pause at least some founders from picking up a new round altogether. Nadia Tatlow, CEO of Shift, was about to close a round when the pandemic hit Canada. So, she paused the close.
“The waves are the capital markets, and you need good waves to surf. Those waves are what we, as entrepreneurs, do not have control over. What we do have control over is preparation, and getting out there to catch the best waves when they come,” she said.
