Welcome to the Atlanta Startup Podcast. This is Lisa Calhoun. I’m founding general partner of Atlanta venture capital firm Valor Ventures. The coronavirus has had an unprecedented effect on everything including venture capital.
For this special edition of our podcast, I’m joined by two active venture capital investors. I wanted to open up this conversation, which we held as a webinar just this morning, and so you’ll hear us talking about the venture capital landscape, but also opening up to questions. I hope you really enjoy this special issue of coronavirus and venture capital and please get back in touch with at atlantastartuppodcast.com or on Twitter and share some of your own thoughts.
Michael, if you could introduce yourself?
Thanks Lisa. Mike Beaudoin from Mark IV Capital and we’re based in Newport Beach, CA, a boutique multi-asset manager that manages the assets of a hotels, industrial real estate, office space . . . I manage the venture capital and private equity portfolio.
Terrific. Also, we have our co-presenter, Peter Teneriello . . .
Things are a little busy with the work on the investing side, on the LP side. So anyways for you know, for those who don’t know me, my name’s Peter Teneriello, I work for Texas Municipal Retirement System. We are an institutional LP based in Austin, Texas. I cover the entire spectrum of PE investing there and end up leading our work in in Venture. You know, one other thing I should note on my background, so this is the first crisis I’ve ever I’ve ever really invested through. I was a freshman in college back in fall 2008. I was a senior during the Eurozone debt crisis and late in the late summer of 2011. And this is this is the first one, so like it’s been, it’s been a very interesting experience so far.
Awesome. Thank you for sharing. And so our format today is after investor introductions, we’re going to each share line our top three points.
Our perspective is active investors in this market. And then we’re going to open it up for questions. So hopefully everyone will find this a pretty stimulating potential dialogue between three investors from three very different points of view. Now we made the tough call of deciding to go in alphabetical order . . . So that means Michael is up first!
Each of our presenters is going to spend about 10 minutes literally sharing with you from their own perspective:
- how they’re approaching this crisis,
- how it’s impacting their investing,
- how they’re thinking it through.
Hopefully at the end we’ll have a few minutes for a dialogue together answering some interesting questions together. So, Michael, if you wouldn’t mind kicking us off.
Thanks, Lisa. So Peter, I appreciate you bringing up experience on this. This is my fourth large financial crisis starting in 1997, when I started. So it was and then graduating undergrad in 2001. It was a phenomenal time to have a finance degree and you know, made the best of it for the next few years. But you know, one thing I’ve learned in these crises is there’s, you know, a perspective that needs to be made and we shouldn’t just be blind saying, okay, you know, everything that goes down, it’s going to come back up. You know, the world will look different on the other side of this. They always do, you know, but there are opportunities, that people can seize on right now. And so, you know, for instance, at least it was talking we were talking about risk capital and pricing of risk capital…
That’s gonna change coming out of this. We just had a major watershed market watershed moment in public markets. We are going to see risk capital change.
It’s going to be harder to go down the capital stack. So if you think of startups kind of at the bottom of the capital stack, there’s going to be a challenging fundraising environment for the next 12 to 48 months. That doesn’t mean there’s not opportunities. Some of the best companies were also built during these times. So, for instance, as a venture manager, you’re still being very active and looking for opportunities. Does that mean the pre money valuations are going to be at $40 to $80 million anymore? Probably not. You know, it’d be coming back down to the normal stratosphere, but yeah, there’s still a lot of wealth to be made in the long run over this period of time.
So, you know, for instance you know, and one of the reasons I guess to kind of go back on why there’s this risk pricing, if we can make, you know, 20 to 30% in a liquid market over the next 12 to 24 months, you know, we don’t want to pay the liquidity premium for an illiquid asset class. So it allows you to shift your allocation back to public markets.
Then, going back and mentioning that venture in particular and private equity tends to be in a uncorrelated asset class. While we will see a lot of people shift back into, you know, public markets or other opportunities, spots where there’s perceivably less risk and more liquidity. You know, we’ve, for instance, had two of our four exits over the last three years this week alone.
So still buying companies—there are still exits happening. Ponderosa Solutions is one we can disclose. It was $120 million exit to Thomson Reuters on Tuesday. So even though there’schaos, even though there’s, confusion if you are building a strong business, it’s solving real problems, you’re going to find capital and you’re going to build a healthier company on the other side of this.
Michael, really appreciate that perspective. For those of you who may have questions, please feel free to jot them down, throw them in the chat or hold them for the end. But at this point I’m going to add to that, share a few more perspectives from my point of view.
First to give you a little bit of background as founding general partner at Valor Ventures, I am a early venture capital investor and Valor, for those of you who don’t know, it’s based in Atlanta, Georgia. So we tend to be a more regional investor and a seed lead. And we have a portfolio of a number of companies where we led their first round then they go for series a, series B. And so I have to say our experience in the last couple of weeks really echoes some of what Michael is saying.
There’s really three things I wanted to share with this group.
One is that crisis, especially financial crises, can often favor venture capital and private equity. You know the venture capital industry, it’s about 40 years old, so Spanish flu and some of the World Wars, those numbers really predate venture capital. But as we look at venture capital through the last crisis, we can see a directional story and like a lot of you, I’ve been looking at as much data as I can and our analyst has been working through information from PitchBook or Crunchbase or CBI. The data for early stage and for venture capital in general is, as I think a lot of us know, a bit spotty, but there are some directional truths that we expect to see happening. And to some extent I would say anecdotally we’re already feeling it.
Capital raising does slow, but a note on that is I would say that it is actually is quite pressurized by the current climate. So for many companies they will be discussing slowed capital race, but a lot of times for a strong firm right now, capital raising is actually faster. Plus, acquisition volume in the past history is tends to slow in crisis. But you know, as Michael is experiencing, for some of the winners when there’s the business case in place can actually be pressurized by crises moment. Of course, we all know less capital-efficient companies die or the noise for investors really slows and a lot of great companies are born. So point number one is for VC investors speaking from my own seat. For us, this is less signal. I mean sorry, less noise, more signal and more signals are a really good thing. The last 208 months of
cycle has created a lot of noise and there’s been a lot of vanity metrics and I would even say vanity startups. Those are rapidly, rapidly coming out of this market.
The second point is I am convinced that seed-stage is one of the best positions to be in to have big winners in a new recessionary economy. There are a few reasons for that. Some of the main ones:
- there’s more talent on the market and we see that happening already. Of course, corporates cut back, they move into operational or survival mode and that means a lot of their interesting kind of discretionary projects that have eaten up developer resources for example, and other talents. Those are being cut back.
- A second point is until now, it was cheaper than ever to start a firm. Well, it’s getting even less expensive to start a firm and that’s a tailwind for entrepreneurs who are already some of the most capital-efficient businesses in our economy and also on that point, investors at the seed stage. This is an opportunity where our dollars also get to work a little bit harder as belts are tightening and some of the basic levers of the economy are ratcheting down instead of up.
And my third and final comment is that entrepreneurs who invest in inclusion are really set to thrive in this new reality. Three small points on that.
- Dense–and exclusive to be honest–venture capital environments that profited from dense network effects, which often meant an endless series of breakfast, lunch, dinner before drink parties, dinner parties, after-dinner drinks…That’s now completely countercyclical. I think that we are entering a very much of a kind of a new reality and perhaps even a new normal. That’s what our experience tends to be proving out. 70% of Valor’s portfolio is led by underrepresented founders. We’ve been in close touch with our portfolio–it’s all hands on deck with portfolio support These scrappy founders are outperforming.
- And in fact, we’re compelled quite a bit by historical numbers across 10 years and 20,000 startups that the Kauffman fellows and the Kauffman foundation brought out recently that underrepresented founders tend to outperform and return 30% more capital to investors. We think some of the forces and dynamics that have pressurized that in the past, are in overdrive now.
Bottom line is it’s an ideal time to be a seed stage investor outside of the venture capital cores. And I’m looking forward to your thoughts and questions on that. And now I’d love to turn the mic over to my copresenter Peter and get his thoughts on what’s going on in these times.
Yes. So well first off just I will caveat it with you know, just again a brief, just a brief, a rehash of like what my position entails. So I’m not investing directly into the companies I’m investing in the funds that the GPs that the, that the venture investors, private equity investors raise. So my, like my, my take isn’t going to be based necessarily from like, boots on the ground, ground zero type of perspective. But it’s going to be filtered from the GPs that we invest in you know, with, with what’s going on right now. Like we, like we have continued to remain active in venture. I mean we’ve made venture commitments last year where we just close the commitment to a life science venture firm last Friday.
We’re on track to close with a later stage venture firm next month. The thing is though like in, in our, so the thing is though, with both those two groups, I mean like both of them had been in process or especially that life science one had been in process for, for a while before this. I mean, coming out of this, I do think that life sciences venture is going to, I don’t see a world where there isn’t more support for, you know, from the regulatory bodies and from LPs and investors like myself to support you know, advances in life science. The other, the other firm we’re backing again, I mean I can’t go into, I mean I can’t say who it is, but it’s a group that they’ve shown the ability to play distress before.
They’re a bit of an odd duck in terms of what they do, but they have they have the capabilities to create opportunities for, or to provide capital solutions for companies and to be creative and what they can give these companies at the mid to late stages. And I’ve, like, I, I’ve been getting to know this group for some, for several years at this point, but again, over this coming six to 12 months, like I see that, the products that they can create and they can provide for companies or their ability to provide those products. Like I see that is one of the, I mean probably the, probably one of the most, probably the most important skill to have. And again, like in, in this environment where we are still seeing investments being made.
But it’s going to get, it’s going to get tough. You know, soon you’re like, we are going to or we are starting to see read trades? I mean I, I can tell you anecdotally from talking with the GP yesterday, they said, we took an investment to our IC and we decided to reduce our asking price by 20% post-term sheet. And the founder accepted it, right off the bat. Like retreads are taking granted I was not a venture-backed that was not a venture GP, but it was a software investor. It was so like if someone broadly in the tech ecosystem and what I mean with that, like, you know, retreads are starting to take place. I do think we’ll start to see a slowdown. I do think we’ll start to see we’re, we’re going to start to see a pretty, a pretty large distress opportunity across, you know, across the entire, across the entire US and across the entire world.
What that means for venture. Like, you know, we are going to see, I mean we are going to see the groups that are either one, not capital efficient or tw, not cash or don’t have cash in the bank right now. They’re going to have a lot of trouble surviving in this world. Or in, in these, in these next coming months. It’s, it will create an opportunity for the more, the better-capitalized competitors and the ones that are or have been running profitably and had been able to control their own destiny. They’re should be able to do better. And then when we do come out on the other side of this you know, when things, you know, things, I mean I hesitate to say get back to normal. When they get to their new normal when things settle out, like there will be, I mean people will return to the market. There will be more liquidity there. There will be, I mean the the volume of financings and then the end, the size of the financings should increase. However, again, right now things are, things are really uncertain. And we’re going to see pullbacks from all market participants.
Thank you. Peter.
One of our portfolio firms, Physician360, does coronavirus testing.
They didn’t do that two weeks ago. I think it’s a great example of how a lot of agile entrepreneurs are able to pivot in these times. So they are a teladoc with diagnostics, and already did flu, bronchitis, did all kinds of testings…UTI. But when the opportunity to serve with coronavirus came forward, that team pivoted. And even though there was no knowns about how to get it done, really dove in–a lot of people working very hard and now they’re able to offer Coronavirus testing in 48 States. That’s very impressive and it’s been an honor to work with them. But I think it’s an example of how this crisis in particular, all crises, how silver linings can promote opportunity for agile entrepreneurs. And interestingly perhaps a little bit more so for those who are out of urban density and central cores where a lot of the network effects are not as effective right now. So I’m going to go back to Michael, go back to Peter. Is there any additional comment or thoughts you would like to add or follow up on?
I think you’re right. I am actually curious to see if we were able to do a poll of how many people are living in more urban cores right now. And would a suburban area or rural area become, you know, more favorable for them at this point? And you know, as a firm, we’ve been focused on suburban cores for quite a while. So if you think of, you know, City of Round Rock instead of Austin or just out of the central business districts. And so I know we’re starting to see more and more movement just because of millennials and their lifestyle and at the point in their lives where they’re looking to have that home. Looking to have just a more suburban lifestyle in general, but still be able to commute into an office.
Yeah. That’s something we can definitely take to the chat. If anyone would like to weigh in. I mean I am actually, I’m in Atlanta, Georgia. We’re considered a second tier market already. I’m definitely urban but not in a classic venture capital city by any means.
I’ve got a couple of questions on chat. Thank you for, “how quickly is Physician360 able to turn around test results and how quickly can they get test kits to people?” So relatively quickly, I mean, this is a little bit dependent on each state, but within that day, so for example, in Valor’s newsletter, we sent out a blurb about this. I actually had a couple of our newsletter readers go ahead and book a test.
And within hours they were tested. So that was very effective. I don’t know what cities they were in.. The nice thing about it is when you go to the Physican360 website and you go to their Coronavirus page, you can book immediately and talk with a doctor in less than 10 minutes, a real doctor. And they’ll provide you the latest information, which is known by the doctors, not necessarily us, because it’s such a live situation. But thank you for that question. They’re helping a lot of people.
So I’ll be freeing up after that. I’m going to go after ms is
I’m afraid I didn’t quite hear that. I do see a chat. So let’s go to the chat and then let’s go to audio. “Thoughts on investors, shifting their portfolio, mix away from impact towards more traditional products.” Peter or Michael, would you like to take first crack at that?
I can take that. I mean, traditional products. I’m gonna have to answer that question, you know, as, as best I can. I can say like for our mandate, we don’t have like a stated impact or ESG mandate. That being said, I, I do consider a lot of what we’ve done in venture to fall .. I mean, I consider venture as an asset class to be impact. The life sciences venture firm that we you know, that we just backed like last week or just close the commitment to last week– I can assure you everything they do is like, you know, everything they do qualifies for social impact.
And now whether we go back to more, again, more traditional products, like I’ll say, like, just more, you know, go back to safer you know, safer types of funds to I’ll say I’ll say, you know, safer private equity funds. You know, we, we like whether we would pull back from venture completely and whether we would just double down with the groups that are, I don’t know, a pretty standard set of returns., I think most people are going to do that. I’ll say we’re not I mean, I mentioned earlier about like, you know, liquidity, leaving the marketplace and market participants, you know, deciding like, Oh, like, you know, we should, maybe we should just wait on sidelines and you know, and see what happens over the next six to 12 months.
I would say no. I’m in the market looking for new opportunities right now. Like it’s, it’s the time to like this is the time for an investor to press forward, press the advantage. You know, look to see what they can, you know, what they can do for their fund. And in my case, like are our beneficiaries, the pensioners that we invest for. So I mean, traditional products, like, I mean, yes, like I could, I could fly to safety, or fly to what people consider safety. But I’m going to look for the most interesting opportunities that I can right now. I’ve been working pretty much nonstop over the past week getting some opportunities lined up and executed hopefully in the next month or so.
And before we hear from Michael, I didn’t want to add, I loved something that he said, which I think is, it’s great to have diversity of opinion safe investments. You know, to echo Peter, I think that Valor is thoughtful about what is safe when there are rapidly changing conditions and new realities. And so we’ve been investing in financial inclusion software platforms for market-rate return, but a significant impact for years now and we see safe as a little bit different.
Safe is, a lot of times things that have not yet been invested in that serve huge, growing, underrepresented populations. So what we’re noticing is we’re a double bottom line. We’re a market-rate return paired with a social impact. We think that this current climate is only pressurizing that as people have financial stresses and healthcare stresses coming in a unique focus. And so what was safe yesterday– we can think of some companies that have had some really devastating setbacks–may not be safe tomorrow. And there’s a lot of thought around antifragile and how when things break they can break very abruptly. This is an interesting market where safe and sustainable –or safe and impact–they actually can be uniquely paired and only time will tell. But that’s a hypothesis I’m currently very curious about and pursuing. Michael, what are your thoughts?
I’ve had a firm belief for a while that there really is no such thing as an impact investment. There are people that are solving problems and a lot of our problems today happen to be things that we all recognize as probably large categories of impact. But ultimately, impact, you know, every investment we’d be making should be making an impact across all of these problems. I mean, reducing carbon footprint is something that can be done with anything from Zoom to telemedicine, reducing exposure to a virus by using, Physican360 or Titan.
These are impactful investments, but they’re really just solving it the core part and issues and helping underrepresented founders, helping them serve underrepresented populations is also, you know, not just impact, it’s just good business. So we know that founding teams that have a broad, diverse team, we know their founding teams have come from, our underrepresented populations tend to outperform as well because they’re solving problems that hadn’t been surface at the top before.
Thank you for that, Michael. We have a couple of questions on chat and so I’m going to try to take them pretty rapidly. Maybe we’ll, you know, so that we can get to more questions? Maybe we’ll try to answer it a little bit faster and appreciate the engagement of this audience.
So one is what are, “what are your thoughts on raising VC funds in Atlanta?”
I’m going to speak to that because I’m raising VC funds in Atlanta. “Is the money, is the money there yet or is it still more beneficial to look at cities like New York, San Francisco, DC for a seed round?”
So I take this as a question from an entrepreneur raising a seed round and my advice to any entrepreneur raising a seed round today is pretty much the same as it was a couple of weeks ago: You need to cast a broad net for strong investors that have a thesis around what you’re building at the seed round. It’s more important than ever to get a VC who has operational hands, really understands your vision and can get behind it.
And so I don’t think that’s a geographic profile, although all things being equal, I think it is more beneficial for the founder and the VC at the seed stage to be somewhat geographically central. So those are my 2 cents.
What’s nice about seed rounds is you don’t necessarily need to raise much to go far. So again, geography may not play such a central role. And then the final, very encouraging thought for you is every local VC that’s a good VC has a large network of VCs. So if they need more capital for around, a lot of times they’re able to pull on co-investors. And so it’s not necessarily a geographic play as much as a business model. So good luck.
Next question is, “aside from healthcare, what other sectors do you think will provide opportunities due to Coronavirus?” That’s a great question. Thank you for that one. Does anyone want to jump in first?
Yeah, I think, I mean, for starters, like I think it’s, it’s too early to say that, you know, it’s too early to say which sectors are going to provide the most opportunities. I mean, we’re like, we’re, we’re, we’re still like very early in this crisis in the U S and with how rapidly it’s taken place. Like there’s still just a lot of uncertainty. And, I mean, who, who would have said that Blue Apron would have been rescued from, you know, the, you know, the like being near bankruptcy and now they’re like, their, their value has, I mean, I don’t even know how much it’s increased over the past several weeks, but you can just, you can just Google, how they’ve done the stock market. They’ve done very well. Like who, who would have guessed that would have been an opportunity?
In trying to think about like what the new normal is on, on the other side of this, I mean, is there, I mean, I would just say, look at the sectors that are getting there. They’re getting directly pummeled right now. Travel, tourism, anything or you know, anything related to that because like, yes, like there is going to be there, there’s a lot of carnage there right now is going to be a lot of wreckage to sort through. But again, on the other side like there will be an opportunity for a new leader or maybe new companies that to spring up. There, there always are.
So for Valor as a venture capital investor where we’re really excited about opportunities, there’s definitely of course healthcare and all the logistics around it. Also the payable and transactions, but industries like insurance and finance, anything that has to do with streamlining major industries including logistics is, is at a premium right now. One of the most exciting pitches we heard yesterday –we hear pitches every day–was from a background screening company that now is on hyper-drive because workforces are even more volatile. So there are a lot of opportunities and it’s almost, I think, interesting to ask in this new reality, what industries are not touched? Have an avoidance because it’s a pretty broad effect. Michael, any thoughts to add to that?
You know, e-commerce obviously is going to be a big boom out of this as well as probably the industrial logistics hubs where a lot of those goods are coming from. You know, I think about what will become the new normal in California last night they announced we’re going to have, but you know, statewide, work from home kind of push. This is how they’re trying to rephrase it now. But you know, I think after 30 days of using Zoom, using Slack, using these different tools, will they become more ingrained? Yeah, that’s a big question to see is how do people work, life and play–habit change is coming out of this.
I really appreciate those of you who have participated so much in this dialogue. I’m going to ask each of our panelists to give sort of a final, you know, one to three sentence summary of how they’re looking at the next four weeks, six weeks as an investor in this market. You know, and I guess what I, what I’d say to you, Michael and Peter, is what are you most excited about?
I think for, for us, one of the main themes is enclosed the door. We’re not gonna stop business and we’re not gonna stop investing in venture and early stage companies. We still think there’s a lot of opportunity. We think that you’re right, life will change a bit and this also forces a lot of discipline back into companies. But ultimately I think that, you know, this is gonna be an opportune time to put money to work and you know, stand out as a leader of where we think the world should be shaped and what it should look like at the outset. At the other end of this.
Yeah, I mean, so I mean, based on, again, conversations I’ve been having with, with investors over the past week, week or two maybe we’re rapidly going down the path, you know, towards a full economic crisis. There’s going to be a lot of pain. There’s going to be I’m starting to see friends and family being affected and in ways I could not have even imagined you know, several weeks ago, let alone several days ago. But, you know, we are going to make it to the other side of, you know, of this crisis of the storm. And when we get to the other side, I’m excited to see, you know, how we can fix some pretty large problems and the inequities that exist in our society and governments in all sorts of systems that we did not know could break–but have broken. We’re going to have the opportunity to fix them all, I think.
Wow. I love that. I love that thought, especially from such a big investor as Texas. So thank you Peter. And from Valor’s point of view, we feel more needed than ever. Right now is a time to be an investor. right now as a time to back companies with outstanding business models. And there are many of them that are rising as the signal above the noise, as people who are sort of playing in the edges of a big boom market pull and say do you know what? I need to reset. I don’t have the chops for this. But entrepreneurs, they usually solve problems and pains that are their own personal passions. They draw on something that is hard to replicate.
We’re really looking forward to meeting more of them and backing founders who are making change in the world and providing a great return to do it.
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