No Face-to-Face Before the Deal? Venture Firms Are Struggling With That
April 10, 2020
By Marc Vartabedian, Yuliya Chernova, and Tomio Geron
Venture capitalists say they are open for business, ready to take advantage of falling valuations and the record amounts of cash raised before coronavirus pandemic waylaid the economy.
But they are worried. Shelter-in-place orders have largely ruled out the face-to-face meetings the industry relies on to get a sense of whether entrepreneurs have the intangible skills to turn a dream into reality. Virtual conferencing, they said, doesn’t quite do that.
“It’s really hard to build a connection with an entrepreneur online only and get conviction to invest in them,” said Byron Deeter, a partner at Bessemer Venture Partners.
So investors have fallen back on existing relationships with both entrepreneurs and other venture capitalists, raising the barrier of entry for young startups looking for their first big break even higher.“We are reconnecting with a lot of CEOs that we already met with. Those deals are easier,” Mr. Deeter said.
Even so, Bessemer partners are meeting with new entrepreneurs online and getting discussions rolling, he said. “But my hope is not to have to close an investment that’s…new entirely,” he added.
For an industry that hunts for big opportunities, investing now might involve weighing the health risk of travel.
“For something super-interesting, I’d get on an airplane,” said Mitchell Green, founding partner at Lead Edge Capital, with offices in New York and Santa Barbara, Calif. He also said he would do a deal without meeting in person, but preferably with someone he already knows.
Peter Wagner, a founding partner at Palo Alto, Calif.-based Wing VC, said firms tend to rely on their existing network. While he has taken online meetings with new founders, his firm hasn’t written checks to any of them, he said.
“You’re going to have greater confidence with founders you’ve worked with before and known quantities,” Mr. Wagner said.
Spontaneous deal-making, a hallmark of Silicon Valley’s insular culture, has also come to a halt. Leonard Speiser, an angel investor who says he did two deals in March, said being out and about in San Francisco is normally a good way to come across deals.
“A lot of serendipity has dropped off,” said Mr. Speiser, who previously founded payments startup Clover Network, which was acquired by First Data Corp. “That tends to be how you meet a lot of people.”
There is plenty of money to put to work. Dry powder, or cash that firms have raised but not invested, rose for a seventh consecutive year to roughly $276 billion in 2019, nearly triple what it was in 2012, according to data provider Preqin Ltd.
Defy Partners, a Silicon Valley venture firm, last year raised a $262 million fund and typically writes checks of up to $10 million to startups ranging from logistics software to fantasy sports apps. The firm has made four investments since the pandemic began, and did finalize those deals virtually, but they were all with companies with whom Defy had an existing relationship, said Managing Director Neil Sequeira. Investing in a company whose founders he had never met face to face would be unlikely.
“If it’s not a written rule, it’s a said rule,” Mr. Sequeira said.
While venture firms are adjusting to the new environment, young startups with fewer connections could be shut out.
Last month, Victor Vitali, chief executive of Hah Parking Inc., a startup in Charleston, S.C., that has raised roughly $1 million from individual investors, was getting ready to fly to New York to finalize a nearly $2 million round with new investors. The startup, which provides an online marketplace for privately owned parking spaces, had recently expanded to several new markets and had growing revenue, Mr. Vitali said.
Then the pandemic scuttled both the trip and the deal.
“Unless you have good connections or previous investors lined up, only small fundraisings are going to happen,” Mr. Vitali said.
For Daniel Hoffer, a managing director at Autotech Ventures in Menlo Park, Calif., which targets transportation-related startups, writing a check to a new startup based only on virtual meetings would require him to break his firm’s unwritten policy of always visiting the company beforehand.
“Certainly the bar is higher in these circumstances,” Mr. Hoffer said.