What are the world’s top VCs saying about the current investment landscape?

COVID and social justice issues are changing how VCs approach investments. Four alumni, recently named to Forbes’ Midas List of the world’s most influential tech investors, share their thoughts.

From left: Pär-Jörgen Pärson of Northzone; Jeremy Liew of Lightspeed Ventures; Jeremy Levine of Bessemer Venture Partners; and Roelof Botha of Sequoia Capital

Each year Forbes releases the Midas List – a list of the world’s top 100 tech investors. This year, eight alumni (*see full list below) were included. We caught up with a few of them to get their thoughts on how COVID has affected the industry, what they’re doing to advance diversity, and what alumni should think about before starting their own venture.

Has COVID-19 affected the way you approach investments, and/or has anything changed in terms of the number of investment opportunities you are seeing?

Jeremy Liew (AUO 94-96), Lightspeed Venture Partners: From a volume perspective, there has been a tension between VC firms saying that they're open for business and a lower overall level of deal volume. I attribute this in my own life to the demands of being a parent. With kids at home all the time, you're neither out of sight nor out of mind. A certain amount of time is being spent looking after their needs, whether helping with homework, troubleshooting their Zooms, or getting them snacks ALL THE TIME. That's time spent not meeting new companies. More time with portfolio companies helping them navigate this new normal (especially so in the first two months of quarantine, less so now) also takes up calendar space otherwise spent meeting new companies. And so a smaller top of funnel leads inevitably to a smaller bottom of funnel.

Pär-Jörgen Pärson (STO 90-94), Northzone: Some companies have experienced a strong fast forward movement on customers embracing their solutions and have seen strong growth after a brief period of stand still when everybody was assessing the effects of the pandemic. In B2B applications there is now a maturity to deploy automated, remote and fully digital cloud solutions as opposed to incremental change which was the norm before Covid-19. Necessity is the mother of inventions also in this case.

Some companies have obviously been negatively affected and they needed to very quickly act to prolong cash runway and create strategic flexibility since the depth and width of the crisis was and still is to a degree unknown. Some companies consequently slashed their cost base by more than 50%.

Jeremy Levine (NYO 95-97), Bessemer Venture Partners: I’m not sure there is anything on the planet unaffected by COVID-19. At first, it slowed our investment activity at Bessemer dramatically. Our time was entirely consumed working with our portfolio companies to ensure they were prepared for a long drought. We encouraged a lot of belt tightening and caution as government-mandated lockdowns spread around the world. By mid-April, we started to conclude two things.

First, the immediate impact of COVID-19 on our portfolio was not nearly as bad as we had feared. While certain sectors (e.g., travel) were decimated, most of our fast-growth technology startups experienced only a brief pause before their growth resumed.

Second, software, which is the sector in which most of our portfolio competes, is extremely resilient. Over the last two decades, software has quietly become mission critical for nearly every business in nearly every industry. Rather than cut back on software spend in the face of the pandemic, corporations around the world actually increased their investment in software to drive efficiencies and facilitate work from home.

COVID has now demonstrated to investors around the world how critical and deeply ingrained software has become for the conduct of business. In addition, the number of software investment opportunities has started to grow tremendously – not just in large software markets like the US and Europe, but also in places like China where the use (and payment for) business software is a more nascent phenomenon.

Roelof Botha (JOH 96-98), Sequoia Capital: Overall we’re incredibly optimistic about the opportunity for startups today, and we’re continuing to invest in companies with daring founders who are solving long-term problems. Especially in our early business, we’re seeing myriad investment opportunities and have made over fifteen new seed and A investments since March 1. While we are wary of companies whose benefits may not be enduring, we are optimistic about the emerging opportunities for innovation and believe COVID is the shock that will accelerate the future that Silicon Valley has been building.

What has changed in how you support or interact with your portfolio companies as a result of COVID?

Pär-Jörgen Pärson: We have been through a few rough times before, like the dot com collapse and the financial crisis of 2008. Although the current situation is distinctively different from past crises, we continue to advice our portfolio companies to take resolute action sooner rather than later. It is important to read the detailed market signals that are specific to each company´s realities rather than the macro picture or the stock market which currently seems very disconnected from the underlying economic activity.

Roelof Botha: We are always in frequent contact with our founders, but COVID made it such that we are now in constant contact. Our role is to be a shock absorber for founders as they navigate these changing circumstances and we take that role seriously. We are both providing bespoke guidance on board calls and in meetings, as well as creating forums for founders to connect with one another as well as with Sequoia partners. After COVID first hit, we held a seven-week virtual Q&A series with Sequoia founders and organized them into smaller founder-only groups so they could connect on a personal level with those going through similar experiences. These are truly unprecedented times and we want to support our companies as much as possible as they weather this storm.

Are there any changes in the VC industry (or in any of the industry verticals you focus on) as a result of COVID that you think are here to stay?

Pär-Jörgen Pärson: Some sectors have gotten more attention and have closed substantial funding rounds with fully remote investment processes. I would assume that this will long term increase the appetite and acceptance of investing outside of the legacy geography that each manager has stayed within. More competition, in other words.

Roelof Botha: We’re very optimistic about the startup ecosystem because in many ways, this crisis favors smaller startups as they are nimble and can change rapidly. For example, we’ve seen companies like Instacart, Zoom and DoorDash respond incredibly quickly to meet voracious consumer demand. As for the companies that we believe will thrive, those who are focused on communications tools for consumers and businesses, cloud infrastructure, telehealth and ecommerce are poised to do well in a COVID and post-COVID world.

Jeremy Levine: Once we realized our portfolio was largely in decent shape despite COVID’s arrival, we refocused on new investments. Six months ago, I would have laughed with dismissiveness at the idea of one day committing hundreds of millions of dollars in venture capital to companies without ever meeting their founding teams in person. Within the next year, I’m almost certain that will have become reality for our firm, and I suspect investing in startups without necessarily spending time physically with founders will become the new normal.

Jeremy Liew: COVID has really accelerated the adoption of a number of trends that were already happening pre-COVID, such as increased comfort with ecommerce, remote workforce collaboration, blended education, increased adoption of video streaming and gaming over other forms of media.

Ecommerce is an interesting example. Many people have been forced in a COVID world to try ecommerce companies and services for categories that they weren't willing to before – especially around grocery - and have been pleasantly surprised by the ease and quality of the experience and products. While we might expect some reversion to old habits, it won't be 100%. We will see a new, higher normal of adoption.

In other instances, what has seemed like a single category because it was small , such as video conferencing, is now starting to look like the agglomeration of multiple categories, each now of sufficient size to support specialized solutions. So just as Ebay and Craigslist got debundled by specialists like Etsy, Zillow, Vroom, Task Rabbit, Uber, and Airbnb, so too Google Suite and Zoom are getting debundled by specialists like Notion, Airtable, Miro, Asana, Calendly and Outschool, Lunchclub, and Houseparty, respectively.

The VC industry has been criticized for a lack of diversity on both the fund side and the entrepreneur side. Since the death of George Floyd, there has been an upsurge in diversity initiatives – do you anticipate any similar efforts in either the industry or your firm?

Pär-Jörgen Pärson: We started our path towards a more diverse firm back in 2011 when we hired our first female investor and it has been an important differentiator for us in recent years. Today we have 50% female investors and 20% non-white representation in the investment team with the objective to increase that further. We don’t believe it´s a pipeline issue that there are too few diverse teams being funded but rather a deal process issue that we can fix ourselves. We are currently reviewing our deal process from that perspective and we have asked our community to hold us accountable to that objective.

Jeremy Liew: I'm a consumer tech investor so will confine my comments to that area. Consumer tech is now driven more by pop culture than by technology. Social media apps, ecommerce brands; they are as much a part of pop culture as fashion, music, dance, television, YouTube. And in the U.S., the early adopters of pop culture have historically been young women and African Americans. As a result, you're seeing a corresponding rise in both female entrepreneurs and URM entrepreneurs. And firms with a corresponding base of investors are advantaged in connecting with these entrepreneurs, understanding the opportunities, and convincing these entrepreneurs to partner with them. The best firms have already internalized this and are starting to recruit accordingly. At Lightspeed, over the last three years 7 out of our 16 new investors are women, and 2 of the 16 are from underrepresented racial minorities.

Furthermore, our 2020 Lightspeed Scout Program will be dedicated to underrepresented racial minorities across the USA, bringing together Black, Latinx, Indigenous and Pacific Islander communities to receive capital and support as they join the venture industry: www.lsvp.com/services/scouts. We are also continuing to host events to further important discussions within our Lightspeed community, including Lightspeed's "Building Tomorrow's Boardroom, Today,” an event focused on getting people of color and women into boardrooms, and Lightspeed's "Negotiation Summit,” an event that brought together 100+ women to narrow #TheGapTable. We are committed to doing more, and I think we'll see more such change going forward.

Jeremy Levine: I agree with most of the criticism leveled on the VC industry for lack of diversity. Not only is it a societal problem, but my experience suggests that the lack of diversity weakens investment performance. By way of example, one of my close collaborators at Bessemer in 2011 was a woman, and she was among very few female venture capitalists in the entire industry. She surfaced Pinterest as a potential early stage investment and explained its particular appeal to women, who comprised nearly all of the startup’s user base. Most venture capital firms on Sand Hill road were comprised entirely of male investors, and they all passed on the opportunity to invest in Pinterest as they failed to appreciate its female-oriented content. The company has since grown from a small startup to a public company worth more than 100x the early stage valuation we paid. Hindsight demonstrates that our investment evaluation nearly 10 years ago benefited substantially from a diverse viewpoint.

George Floyd’s murder has highlighted racial inequity, and the movements emerging from its aftermath will, hopefully, press society to address many fundamental issues. Investment firms can play a role in addressing societal inequity, but diversity initiatives are a straight-forward act of self-interest – to improve investment returns. Self-interest is a powerful motivator, and so I’m optimistic we will see meaningful efforts, with urgency, among many top investors to diversify their teams and their current and prospective portfolio companies.

About 20% of McKinsey alumni start their own ventures. What advice would you give to alumni entrepreneurs?

Jeremy Liew: There is a certain fascination with being an entrepreneur right now. I think it can be dangerous. Many of the most successful entrepreneurs start a company because they have a compelling passion about a problem that they want to solve. Fewer of the most successful entrepreneurs find a problem that they want to solve because they have a compelling passion to start a company. I'd advise potential entrepreneurs to make sure that they have such passion about their company's mission that they can't not do it. There are many zigs and zags along a startup journey, and without both that passion and vision to serve as a north star and motivation during the inevitable hard times, it can be harder to see success. And for those who are excited about the entrepreneurial journey but haven't yet identified a problem that drives them, there is much great work to be done working for a startup founded by somebody else.

Pär-Jörgen Pärson: Most successful companies we have backed have an inner circle of co-founders and early employees that get some fundamental building blocks right which tends to set the stage for many years to come. Those building blocks are:

An aspirational, high-performance, customer-oriented and transparent culture. "We are the best at what we do, but we are still far from how great we could become"
Attention to detail in delivering a superior customer experience
Data-driven and fast decision making
Focus on hiring top talent - always in recruiting mode.

Roelof Botha: Find a problem about which you are passionate and become obsessed with solving it. The best founders are those who have looked for a simple solution to a problem and found that it doesn’t exist, so they set out to solve it on their own. The profound depth of knowledge you’ll develop will give you an unmatched advantage. You will have thought about the problem so many levels deep that you will keep coming up with new ideas, and it will make it very difficult for imitators to keep up.

** The other four alumni included on the list are Byron Deeter (LAN 96-98), Bessemer Venture Partners; Jeffrey Lieberman (NYO 96-98), Insight Partners; Ann Miura-Ko (NYO, SVO 98-01), Floodgate; and Allen Zhu (SHA 98-00), GSR Ventures.

See the complete Midas List here.