Prediction #11: VCs, Startups and the Great Covid Business Divide

Covid is, has been, and will continue to affect the startup space. 

The onslaught of Covid has divided startups into two drastically different buckets depending almost completely on their vertical.

Companies who are in spaces negatively affected by Covid (think tools to help retail, restaurants, gyms, in-person excursions, hospitality, concerts, sports games) have huge headwinds and will continue to struggle as Covid has crushed those markets. This is true even for companies that had great growth before Covid. Larger startups/tech companies (like Yelp, TripAdvisor) will find the funds to weather the storm but smaller startups are going to struggle. Some may pivot/re-invent themselves but it is easier said than done. The majority are surviving thanks to PPP and other short term loans but will have a hard time continuing once that funding dries up at the end of this month. We’ll unfortunately likely see a huge list of startup shutdowns starting in August.  

On the flip side, companies who are focusing on areas that have experienced growth post-covid (online collaboration, remote workforce tools, food delivery, home office equipment, eCommerce tools) are thriving beyond their wildest expectations. Some of these companies were struggling in early 2020 and are now seen as rocket ships. As Bill Gross says, when it comes to startups, timing is everything – and Covid could not make this more clear. These companies will continue to grow in size and will have much easier access to funding. With that in mind, a lot of new startups and big players will soon crowd this space resulting in lower prices, better assortment, and new innovations.

The VC economy has adapted to this new environment after sitting on the sidelines for the last 3 months tending to their current portfolio and learning how to talk to prospects remotely. With a lot of capital they need to spend and no other places to put it, VCs are now fully back in the water, doubling-down on the areas that are exploding. The subset of companies that happened to be in the right place at the right time is getting sky-high valuations while startups on the wrong side of the new equilibrium are finding it almost impossible to get continuing funding.  

For VCs, finding and building relationships with new startups has become much tougher as networking events have been canceled and meetings are almost always remote. As a result, many are focusing on entrepreneurs with whom they have had previous relationships or investing in Series B and later rounds for more established companies. And given meetings are now remote, VCs have become more open to funding startups outside of the SF Bay Area. Living as a founder in the SF Bay Area right now has lost at least some of its benefits as there are no longer networking events or in-person VC meetings.

Will this continue? My best guess is while post-Covid there will be a rebound of in-person meetings, VCs will likely continue to expand beyond the Bay Area to source new and more diverse companies. The ship has started to sail and will likely continue to sail in that direction.

Opportunities:

•  Recruiting firms and technologies that can transition people from failing startups to now high-performing startups
• Private Equity firms who can buy failing startups on the cheap, and have the capital to keep them in “hibernation” until Covid blows over.
• Remote Speed Dating or online networking tools for VCs to meet Entrepreneurs.
• Angel investments in great entrepreneurs. Now is the time to look more at the entrepreneur and their potential than the market as you have much more information on the former than the latter and there will be much less competition.
• More use of connection tools like HouseParty, etc. to find ways for VCs/entrepreneurs to connect to replace networking events.
• Rise of nifty presentation tools to make your remote pitch look great (for example, mmhmm.com)
• It’s a good time to start a startup outside of the Bay Area!

If you currently are working on one of these opportunities or want to work on them, please contact me at charlie at iamcharliegraham dot com