Venture investing in the age

of COVID—and beyond
AUGUST 2020

Just like the rest of the

investing world, venture
capitalists have had to adjust
to rapid change during the
COVID-19 pandemic. That
includes long-term investors,
who are increasingly turning
to early stage companies as
a source of diversity for
their portfolios and a way
to access innovation at
its source.
At CPP Investments, we’re thinking ahead about global issues and trends as we invest for
generations. Explore more of our latest insights at cppinvestments.com/thinking-ahead.

At CPP Investments, we recognize the importance of venture investing

in a long-term portfolio. Besides the financial returns on the investments
we make in early stage companies, we also get exposure to new ways
of thinking about the world and new innovations, and in turn we are
able to bring value to our investee companies in the form of improved
governance and board participation. We will continue to monitor the
venture world for insights and innovations that can enrich all of our
global investment activities.

Monica Adractas, who heads CPP Investments’ VC activities from our San
Francisco office, recently sat down with three of the best in the field: Alex
Rampell of Andreessen Horowitz, Ali Rowghani of Y Combinator, and Sonali de
Rycker of Accel. What followed was a spirited, virtual discussion on the state of
venture investing. The conversation ranged beyond COVID-19, getting deep
into the nature of VC investing and thoughts on where the field is headed next.
We present selected insights from that conversation below.

The sweet spot for VC investors

The nature of risk and reward for VC investors is fundamentally different
from that of equity investing. The risks of any individual deal are high—
many early stage companies don’t pan out—but the returns on those that
do can be enormous. For investors who got in on Facebook at its inception,
for example, the returns have been significant, more than enough to make up
for a multitude of disappointments. That makes getting access to deal flow one
of the most important jobs for the VC investor. For VC investors, not getting in
on the next Facebook is what keeps them up at night. “One of the things we’re
always trying to wrap our heads around is the kind of uncapped loss, if you will,
if you don’t invest,” said one participant.

Sometimes investors simply can’t see the potential that an entrepreneur is

targeting. When Uber emerged, many VCs trying to evaluate the size of the total
addressable market, compared the venture to taxi cabs, not foreseeing that ride
sharing platforms could become a much more dominant, pervasive enabler of
transportation and other services. One panelist described the emergence of
Uber as a leap in consumer behavior that now seems normal but in those early
days was hard to imagine – getting into a stranger’s car.

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That makes it essential to understand and invest early in the companies that are
going to be truly transformative, and it’s why the sweet spot for VC investors is
slightly different from that of equity investors. On the equities side, ideally,
investors want to find a company that the market misunderstands and therefore
undervalues. Our panelists called this “non-consensus right.” The non-
consensus element is much less important for VC investors. Being present at
the birth of a great company, even if you pay a rich premium at the time, is
much more important. Thus, “consensus right” is a great place for VCs.

What drives the innovation cycle

It’s tempting to map great periods of innovation with economic cycles. Many
reports, for example, have pointed to the Global Financial Crisis as a period
that gave rise to disruptive companies such as Uber, Airbnb, Square and
Venmo. Our panelists, however, had a slightly different view. Rather than
economic cycles, they think in terms of platform cycles or the emergence of
enabling technologies that allowed a host of new businesses to take shape.
The internet, for example, was once a new platform that drove business
creation.

It was the same dynamic in 2008-2009. “The reason you had so many great
companies is because it was the beginning of a platform cycle, and that
platform was mobile,” said one of our panelists, pointing to the explosion of
apps that exponentially increased the utility of the mobile phone—and launched
a constellation of new businesses, including those listed above.

So, what’s the next enabling platform?

It is critical to spot those disruptive new technologies and platforms early. Our
panelists touched on a few that are on their radar, including cloud computing
and mobility. One of the most surprising was fintech. “Every company is
becoming a fintech company,” said one participant.

A variety of startups are now offering innovative end runs around traditional
banks by bundling customized services that are faster, cheaper and more
convenient. These are companies that can effectively become the “operating
system” for small businesses. In restaurants, there’s Toast, which offers tablets
for servers to take orders digitally, as well as payments processing, lending and
other services in the background that once would have taken place in a bank.
Yoga studios and spas have MindBody, which allows customers to access a
class schedule, sign in, and make payments.

Panelists pointed to the confluence of banking, lending, payments, crypto and

other offerings that can now be transacted and protected digitally. This has led
to the start of a challenger bank movement—a movement with the potential to
disrupt the traditional banking sector. One panelist pointed in particular to the
disruptive potential of cryptocurrency: “I think the notion of currency and
money and custody and all these old-school concepts will be turned on their
head by crypto.”

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COVID-19 and a new wave of health care innovation
A trend toward digital health care had been slowly grinding its way forward
before the pandemic. That trend was thrust into high gear overnight by the
health crisis. “The resistance from payers, the resistance from regulators, public
affairs, etc., just disintegrated,” noted one panelist. While it took a decade for
GP clinics in the UK to integrate WIFI, with the COVID-19 crisis looming, the
National Health Service was able to put out a tender for a digital platform for
their GPs in just 48 hours.

One panelist said the digital healthcare trend meets the ten and tenth test:
telemedicine, for many doctor/patient interactions is ten times better than
traditional in-office visits at one tenth the cost. With that cost/benefit ratio,
it is unlikely that telemedicine will be rolled back when the current crisis ends.
A new generation of entrepreneurs, for whom digital is a first language, will
innovate around the idea of telemedicine with an array of improved offerings
and adjacent services.

Other trends were also accelerated by COVID-19, for example online delivery
services like Instacart. The boost from the pandemic overcame a lot of inertia
and given the benefits and low cost, usage is likely to persist, even after the
pandemic. In other cases, notably travel platforms like Airbnb, the effect from
COVID-19, while severe, is likely to be temporary.

It’s the people – not the tech

When it comes to funding companies that are still at the idea stage, the
idea and the technology matter—but people matter more than either. At an
early stage company, you can try to look at data like total addressable market
and project a future value, but for a company that has yet to earn its first dollar
that’s very hard to do. One panelist estimated the person factor at 98 percent
of the value of an early stage company.

Specifically, our panelists pointed to three traits founding leaders need: the
ability to raise funds; the ability to attract talent; and the ability to imagine a
different future. For the first, VCs look for basic charisma and storytelling ability,
since the founder is going to spend a lot of his or her time wooing investors.
“If you can’t fundraise,” said one panelist, “it doesn’t matter how good your
product is; you’re just not going to get there.”

The next thing venture investors look at are the HR metrics. The ability to attract
best in class talent at a very early stage carries a great deal of weight. When a
company is creating its first products, access to the right talent can make or
break the enterprise. The third factor, the ability to see connections and
patterns and to develop a unique view of the future also matters. Investors want
to partner with someone who can imagine a disruptive new view of the world,
rather than just an improvement to the status quo.

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There was one other X factor that emerged from the conversation: the ability
and willingness to learn. This requires intellectual capacity and resourcefulness
as well as a willingness to invest in knowledge by drawing on networks and
developing an ability to bond with other smart people. One panelist called this
learning muscle “a great marker for extraordinary leaders.”

Location matters
Where companies set up shop matters, of course. The network effect in Silicon
Valley, for example, where you can meet investors and technologists of every
stripe on a simple coffee run, is legendary. But Silicon Valley also has one of the
highest costs of living in the US, making it especially unattractive for young
talent with families. Where workers set up shop also matters. For months now,
a huge swathe of the global workforce has been working remotely, and many
companies are making that arrangement permanent for all or part of their
workforce.

While many have been ready to declare a wholesale shift away from traditional
co-located working arrangements, our panelists had more nuanced views. One
pointed out that In Europe, there is already a stronger tradition of companies
starting out in Tier 2, 3 or even Tier 4 cities. As they start to scale up,
traditionally these startups have moved to a Tier 1 city like Amsterdam or
Berlin, but that’s beginning to change as technology improves and people
become more comfortable with remote work arrangements.

As one panelist put it, “We’re beginning to see innovation in the way in
which companies are built and managed—and that kind of innovation isn’t
frequent.” While Steve Jobs famously insisted that every employee report for
work on site every day, to protect the chance encounters that spark innovation,
some panelists thought that was no longer as necessary, pointing to startups
that have worked remotely from the beginning and are starting to scale, such as
InVision.

Some companies are pioneering distributed workforces that combine remote

working with onsite-working hubs in smaller cities. Some maintain only a sales
presence in Silicon Valley. COVID-19 is accelerating these trends and our
panelists expect new paradigms to emerge. “The remote revolution offers the
best of both worlds because it allows companies to have a presence in the
Valley but not have to be fully located there,” as one participant put it.

Venture investing in the age of COVID—and beyond | AUGUST 2020 5

About the Author

MONICA ADRACTAS
Head of Venture Capital Funds

Monica is responsible for the development and implementation of the

Venture Capital (VC) funds program; leading teams in identifying opportunities,
delivering on and managing fund commitments across the VC market.

Prior to joining CPP Investments in 2019, Monica built and led innovation in
high growth tech environments, including Facebook, Box, and Starbucks.
Most recently she was Global Director at Workplace, an area of Facebook she
helped launch in 2016. Monica also spent 10 years with McKinsey & Company
in San Francisco and New York.

Monica holds a BS in Economics from the Wharton School at the University

of Pennsylvania, and an MBA from the Harvard Business School.

Monica currently serves on the board of Technoserve, an international

development non-profit.

Venture investing in the age of COVID—and beyond | AUGUST 2020 6