What Is The Future Of Venture

Capital Post-Crisis?
Suzy Taherian
CFO Network

With all that has changed after this health crisis, it’s relevant to revisit the
venture capital industry to understand how it’s changed. While in the short-
term all VCs are doing a quick evaluation of their portfolio companies and
making adjustments as needed, the long-term outlook for venture capital
investing is still positive.

Venture capital investing has a long-term horizon and beyond the current
turbulence, the outlook is ... [+]

The following is an interview with George Bischof, Managing Director of

Meritech Capital Partners, a late-stage venture capital firm with over $4
billion under management. Bischof and Meritech were early investors in
Facebook, Mulesoft, Netsuite, and Salesforce.com.

Suzy Taherian: Will VCs invest closer to home due to heightened real and
perceived risk internationally and difficulty to travel for due
diligence/board meetings?

George Bischof: Innovation is taking place in so many regions right

now. As a result, the VC industry has been seeing more and more
interesting opportunities outside of the Bay Area and other traditional hot
spots. Post COVID, I believe this trend will still continue. The best
companies will continue to draw interest regardless of where they are
located. There may be a funding pause during social distancing periods but
long term I'm a buyer of innovation being more distributed. Investors will
always get on planes to meet strong talent and technologies like video
conferencing facilitate parts of the due diligence process.

Taherian: Will VCs reprioritize investing with more emphasis on

healthcare companies?

Bischof: Right now, COVID is affecting everybody. Companies focused on

travel, entertainment and SMBs tend to be feeling the downturn in an acute
manner. On the other hand, we have pockets of our portfolio that are
benefitting from the changes taking place such as online services (i.e
Roblox, Nextdoor, GoFundMe) and software that enables remote
work. Healthcare is another area where certain areas are in greater
demand. This pandemic has highlighted the need for improvement in many
areas of the healthcare field such as cloud services and telemedicine so I
think healthcare will be an area that gains interest. Overall though,
investing in private companies requires a long term horizon. The pandemic
will eventually be behind us, and though our experience today will affect
our new normal going forward, many of the best entrepreneurs are looking
beyond today's most visible problems. We remain bullish on the tech sector
as it is still early days in the mainstream adoption of cloud-based
technologies.

Overall though, investing in private companies

requires a long term horizon...  We remain bullish on
the tech sector

Taherian: Will investments in technology that enables virtual activities

(sales, entertainment, work collaboration, finance, etc) become even more
attractive as more work goes online and stays online?

Bischof: People will eventually return to work and welcome the

opportunity to socialize and meet face to face again. Having said this, many
people are right now learning how effective they can be at home with video
conferencing, messaging services and other collaboration based
applications. There will be a realization that not every event or meeting
requires travel or a long commute. Virtual activities and remote services
have now been tested at scale and should remain a great option going
forward even when it is not out of necessity.

Taherian: Will VCs pause to re-evaluate investment strategies for a few

weeks but be back aggressively after that as valuations have taken a hit and
many opportunities are now at attractive pricing?

Bischof: 2020 venture investing levels will drop from prior year

activity. There is a tremendous amount of uncertainty right now. VCs are
working with their portfolio companies to help them navigate these
times. Everyone wants to turn over more cards to see how long and how
deeply the economy is affected. While valuations have declined, pricing in
the private markets often typically takes a few quarters to re-set. Also, only
the companies that really need the capital tend to raise now. All this leads
to a pause. After this, I have no doubt that the industry will rebound in a
strong fashion. There are so many opportunities to innovate and there is a
significant amount of capital in the system looking to invest.

2020 venture investing levels will drop from prior

year activity. There is a tremendous amount of
uncertainty right now

Taherian: Will LPs also re-evaluate investment? Some have taken a hit in

the public equity markets; Some may need to use cash to shore up other
struggling investments. Will investors value liquidity and covid-19 resilient
strategies?

Bischof: In downturns the value of public portfolios decline first and many
LPs find themselves over allocated to alternative assets such as venture
capital and private equity. This can moderate VC industry funding for a few
years which tends to lead to strong eventual returns for the asset
class. There are a number of reasons why an increasing percentage of the
overall total value created over the past several years has come from the
private markets. The private markets should continue to be attractive
relative to the public markets.

Taherian: Necessity is mother of invention; So will the crisis spark

innovation with many new entrepreneurs offering solutions for post-covid
problems?  Will there be a boom in new startups?

Bischof: We find when there is a risk environment that there are probably
fewer entrepreneurs starting companies. The comfort of having a steady job
and salary from a larger company is valued by many during these times. I
will say that we have seen higher levels of quality entrepreneurship during
the tougher cycles. These founders are true entrepreneurs. They are
passionate about solving problems and innovating and are not doing it to
be trendy or opportunistic. Historically, amazing companies are built in
these times. There tend to be fewer competitors in a space and money is not
as free so entrepreneurs build companies with efficient business models.

we have seen higher levels of quality

entrepreneurship during the tougher cycles. These
founders are true entrepreneurs.

Taherian: Will some startup models have a tough time in next 18 months?

For example, sharing economy will be challenged. It will be some time
before people feel comfortable having a stranger stay at their house or
sharing a car with other strangers. 

Bischof: Sadly, several sectors will be affected in more adverse ways than

others. It will be interesting to watch how people's behavior changes when
we resume our normal lives. The 'new normal' may see some residual
impact from what we are living through today. Assuming there is a vaccine
down the road though I'd bet that the attractiveness of what drew people to
Uber and Airbnb will bring them back in large numbers.

Taherian: Will there be a bit of a shakeout in VC world? Will the crisis will

cause some filtering with some poorer performer folding?

Bischof: It is a performance based industry and in prolonged downturns

in particular there is always some fall out in the industry. I'd be lying if I did
not confess there is some luck around timing. If you are a new early stage
fund with only two vintage funds—say 2017 and 2019— it will be
challenging to show returns for the next fund.