VC Investing Refuses to go into Lockdown

The pandemic hit year was expected to derail the vibrant tech startup ecosystem. However, tech space seems to have survived the period and as economy looks to get back on rails, the startups are rebounding much faster than they themselves expected. The early part of the year was characterized by widespread fear, large scale layoffs, furloughs, and pay cuts, and hasty cutbacks in expenditure and operating with bare minimum. In contrast, the economic activity has rebounded sharply in the second half of the year as seen by surge in investment activity, increase in hiring activity and restoration of pay cuts, and rise in expenditure levels for the startups. In addition to a secular shift toward online mode by businesses and pivot by many startups to adapt to the pandemic scenario, the realization that fear of contraction in economic activity was much bigger than the contraction itself, has led to a stronger recovery than widespread expectation.

The slowdown in the early part was largely a knee jerk reaction by investors as well as companies that scaled back. As businesses all-round went into overly cautious mode, cash became king. Gradually, its has become evident that the current crises is not a systematic failure or an economic recession but a large scale health scare that didn’t stop everything, just pushed most of the things online. While the broader economy will take more time to regain normalcy, the fact that the tech industry seems to have avoided the worse of the pandemic has come as a welcome surprise for all. The investment activity for startups has seen just a slight drop from $36 billion in 2Q19 to $34.3 billion in 2Q20. In a survey of VCs by OMERS Ventures in June, 50% of the VCs surveyed reported a similar or stronger pipeline than before the pandemic and over two-thirds were doing deals remotely. 

The SPAC Effect

Additionally, IPO activity has been equally strong with over a 100 IPOs till August  12, 2020 compared to 234 IPOs in 2019. 64 of these have been SPACs that shows a quest for lower volatility and downside protection among retail investors, who have also preferred to have a last-minute exit route in case deal is not to their liking, most likely to avoid the IPO disappointments similar to that of Lyft and Uber.

The VCs have nonetheless been more selective in their approach with more funding going to larger tech companies including DoorDash, Instacart, and Epic Games. Indian  tech conglomerate Reliance Jio raised roughly $15.7 billion in a spree of 12 deals over 11 weeks from high profile U.S investors. Investors have also favored companies that have shown flexibility in molding themselves to the new pandemic normal. ActivityHero pivoted to virtual children activities and Envoy came up with an office system for limiting capacity in the office. Cashdrop, a startup providing e-commerce platform, found strong traction and funding during the pandemic.

“Covid just came and accelerated stuff exponentially” – Ruben Flores-Martinez, Cashdrop founder.

Airbnb – Almost Back on Track

The home-rental sector that was severely hit due to stay at home and travel restrictions, have also shown strong recovery. Startup Sonder has  returned to growth mode, is gradually reinstating lost jobs, and has comfortably raised $170 million from eager investors. The pace of recovery has even got Airbnb excited with the company very likely gearing for an IPO in the next few months.

“This is something I never would have imagined telling you even eight weeks ago. It kind of defies logic in a way” Brian Chesky, CEO Airbnb.