August 24, 2020
We recently had the pleasure to speak with a number of leading global VCs and co-investors, including Laura Lenz, Partner at OMERS Ventures, Matthew Goldstein, Partner at M12 (Microsoft’s Venture Fund) and Maximilian Schausberger, Managing Director of Elevator Ventures (Raiffeisen Bank International’s Venture Group). We wanted to discuss the state of global investing in these unique times, and I trust you will enjoy some insights from our conversations.
As background, according to a report from the Canadian Venture Capital and Private Equity Association, Canadian venture capital investment reached new heights in 2019, with a record CAD$6.2 billion invested over 539 deals. How does that compare globally? A report published by KPMG International shows that the total VC investment globally was US$257 billion in 2019, the second-highest on record after US$300 billion in 2018.
No doubt, plans and forecasts for 2020 had to be adjusted as COVID-19 spread across the globe. According to the Venture Capital Funding Report by CB Insights, US deals fell 9% quarter over quarter (QoQ) in Q1, 2020, with some of the decline likely attributable to the COVID-19 pandemic. Nonetheless, funding still rose 14% QoQ on the back of larger deals.
PitchBook reported that European M&A activity accelerated amid the pandemic. Investors completed €563.6 billion worth of European mergers and acquisitions from January to June, on pace to top 2019 figures.
We asked Laura, Matthew and Maximilian to describe the impact they have seen firsthand and to share insights and advice as investors and entrepreneurs navigate this changing landscape.
How would you describe the first half of 2020 in the context of your own investments and portfolio?
Laura: COVID-19 has had a profound impact on the global VC environment this year, and likely for years to come. However, companies with best in class metrics continue to succeed in raising capital. Four of our portfolio companies have raised money since the onset of the Coronavirus, and each has raised at a multiple of 15x EV/ARR and above.
There has been a flight to quality, Matthew explained. We paused to do a portfolio triage to determine which businesses had headwinds and which ones had tailwinds. The rules have changed, with predictions being less accurate, talent more global and a new reality of investing in people you have never met in person.
COVID-19 has caused an ‘increase in scrutiny’ according to Maximilian: Even before COVID-19, the pressure was mounting to ensure investments would be more sustainable. As a result, existing investments that had been provided with outstanding valuations, were having their business models questioned in terms of their growth prospects, their longer-term financial stability etc., and this scrutiny is now being amplified among VCs and investors.
Matthew echoed a similar view when asked, what advice can you give to entrepreneurs given the current landscape?
With no commute, meetings are back-to-back, Matthew responded. We are doing more diligence than before, with increased customer references and more time in data rooms. Entrepreneurs need to be prepared for this by providing research, detailed models and strong pitch decks. For years, things moved so quickly that ‘gut’ was a major investment driver. This has changed as we have reverted back to more diligence.
Maximilian’s advice: In this environment, entrepreneurs need to showcase that they have full control of their business models, and that they can adapt to global impacts such as what we have witnessed. Entrepreneurs also need to examine VC funds more closely and pick the right one(s) to partner with. Who is a good fit? Who understands their industry, geography, market, customers etc. and is willing to support them through all types of scenarios? Entrepreneurs need to do their own version of due diligence on investors to ensure there is more than just a pure cash investment to be gained.
Laura adds: More diligence is being done during this pandemic because you can’t meet face to face – on the founders, the customers, and the product. There is an increased focus on metrics, not just for growth, but for sustainable growth.
What other impacts has COVID-19 had on the global VC environment? What repercussions will it have over the next 12 to 24 months?
My colleague at OMERS Ventures surveyed over 150 VC firms, Laura responded. Back in May, 56% of funds had not done a deal since the onset of COVID-19 but they were planning to. The consensus is that deals will continue to get done, but the bar will be higher for those seeking investment. We expect to see changes to deal structures, such as price protection on future financings, fewer secondaries, and stacked liquidation preferences.
Matthew: We are seeing a contrast of extremes; half our portfolio companies have benefited from COVID-19 and many others are suffering. Tech has large tailwinds, for example, and we are doubling down on those investments. We are looking for company resilience, larger rounds and capital efficiency. Institutional VC funds are slow to react due to the nature of the capital they raise, so we may therefore see a larger impact of this pandemic for them in 18 to 24 months.
Maximilian adds: Digitalization has accelerated within most markets. It has been proven to be the best if not the only way for companies to interact with customers. The crisis brought about a permanent leap forward in adoption of digital tools – a leap that I believe is not reversible. For example, throughout Central and Eastern Europe, we have seen double-digit growth rates in mobile banking. One of our portfolio companies, called Kompany, enables end-to-end digital corporate customer onboarding for banks by automizing the Know-Your-Business process. They were already making solid business progress, but the pandemic has caused some banks to now embrace this new approach exclusively, which has accelerated the growth for this company.
Have you seen a change in average VC deal sizes or other metrics in recent years, and what is driving those changes?
Laura: A decade ago, the average deal size in Canada was CAD$2.8 million, in Q1 of 2020 it was CAD$11.5 million. Companies are raising more capital, which allows them to scale up more quickly. Laura adds: In Canada, with an average exit value so far of just CAD$70 million, it is clear that the opportunity lies in our ability to create more billion dollar businesses. The data for 2020 is heading in the right direction, with a number of mega deals occurring. I am confident that our ecosystem is now on track to build many unicorns over the next 5-10 years.
Deal sizes in Central and Eastern Europe have seen record years in 2018 and 2019, with 2x increases annually, according to Invest Europe, the Europe VC association, Maximilian shared. This is driven by government programs, a start-up culture and additional funds forming with early-stage funding models. These are all positive developments and efforts to create innovative, sustainable companies.
In business, nothing should be left to chance. However, this pandemic has taught us many lessons. We posed the question whether any companies defied expectations in terms of how they embraced the recent changes and how those decisions have positively affected their business.
Matt: Sometimes things just surprise you. He shared insights from M12 portfolio company Nautilus Labs who advance the efficiency of ocean commerce through artificial intelligence, reducing carbon and saving fuel by operating fewer and fuller loads. The team was concerned about travel restrictions and the collapse of the price of oil. Would people care about saving fuel if it is cheaper?
M12 saw a continued push to decarbonize brought on by COVID-19, which drove surprising upturns in revenue pipeline and customer opportunities for Nautilus Labs that were not expected. Matthew explained: We learned two things: 1 – To borrow a phrase from Satya Nadella (Microsoft CEO): “We’ve seen two years’ worth of digital transformation in two months.” Legacy industries that previously resisted technology have had their hands forced, and they are adopting anything and everything they can to keep themselves in business. 2 – Decarbonization is a macro trend with many supporting factors and forces. Investors, boards, environmental regulations, consumer preferences, etc. This is the best tailwind of all!
Laura, who led the recent CAD$23 million Series B funding round in portfolio company Solink, emphasized the need to listen to customers. As the novel Coronavirus forced business owners to adopt new behaviours, including managing their businesses remotely, Solink listened to its customer demands and adapted quickly. Laura explained: The team built a new video alarm service, enabled remote ‘temporary access’ for people who would otherwise require on-site visits, and introduced expanded cloud storage as well as AI search capabilities to detect and count people and vehicles. This was all done over a span of about three months at no-added cost to customers, which is outstanding.
Maximilian referenced a story from our shared portfolio company Pisano, who provide customer experience monitoring solutions for businesses. Pisano impressed us very much with their ability to adapt and position their ‘Customer Experience Monitoring’ software as a tool for customers to also use internally, with their own employees, to gauge their ‘health’ as they balanced the new demands of working from home, caring for families, etc. during this pandemic. Not only did this represent additional value in the technology Pisano created, it also demonstrated corporate leadership, empathy and compassion toward their employees on the part of Pisano clients.
We have seen many businesses adjust and adapt their operations in response to COVID-19, and we will no doubt see more evolve in the upcoming months. In turn, this will have an impact on the global venture capital environment. But the bottom line is, the industry is still very active, and start-ups will continue to benefit from that.
To learn more about our technology investments, visit our website for details.
Wesley Clover invests in a range of technology companies, and they bring impressive innovation to markets and clients around the globe. I/O is our way of sharing some of the best insights. I trust you will enjoy them.
Terry Matthews, Chairman