Is the End Near for VCs? Webinar Summary
Silicon Valley Directors’ Exchange hosted a webinar on the current state of VCs, Is the End Near for VCs?, featuring speakers Scott Kupor (Managing Partner, Andreessen Horowitz), Heidi Roizen (Partner, Threshold Ventures), and moderated by F. Daniel Siciliano on October 27, 2020.
The booming, venture capital-backed technology industry of the Bay Area has long been the global envy for many decades. But is the venture capital that helped to build Silicon Valley continuing its success, or is it breaking down? There has been a cultural and economic shift between the relationship VCs and the companies they invest in, from managing millennial entrepreneurs to trading far from initial listings. Will VCs be able to adapt to this changing landscape or is the end closer than we think?
Below is a summary of the webinar session:
STATUS of VCs
The end is not near for VCs! We are currently experiencing an amazing time of change and it’s a wonderful time to be an entrepreneur. There is still a lot of capital in the market and it hasn’t been this competitive in more than a decade. The industry is currently very alive and well. Alternate sources of capital will continue to disrupt pure VC, but at the end of the day the things that make VCs interesting are foundational and will remain the same. The nature of the capital has shifted (i.e. later stage), but new company formation is strong. Technology adoption and access to capital is also strong.
POTENTIAL THREATS
There is a difference between collapse vs. correct, and markets correct! The collective impact of various implications of changing taxation models will be a challenge. There are also regulatory policy concerns. There are valuation issues, geopolitical issues, and the like.
CAPITAL MARKETS FUNCTION
There are alternative strategies for grabbing large pieces of capital, not just IPOs. There is also a backdrop of broader capital markets. There has been a general winnowing down of public companies (i.e. the result of M&A), plus time to IPO elongating over time. Therefore, huge sources of capital that were exclusively in the public markets now look to the private markets as a way to garner growth and appreciation. SPACs is a good thing - innovation happening in the liquidity market. Innovation in price discovery, in different forms of capital, is all positive. SPACs may be more temporal if we find ourselves in a different interest rate environment. However, speculative, pre-revenue companies pursuing SPACs are concerning.
Half the bets in venture are part of the risk, which is part of the portfolio business model pursued by venture capital firms. Democratizing this kind of level of risk investing without understanding the coincident risks that come with it is a challenge.
GEOGRAPHY
The economic engine of Silicon Valley has been perfected for decades, which isn’t going away anytime soon. There are still issues, socioeconomic strata, high cost of living, etc. The geographic diversification within the companies themselves is changing. There is an ethos that is Silicon Valley and the connection here - but it’s still unknown if Silicon Valley will remain relevant. Things build off local networks, and early stage capital will often be localized around expertise and where teams reside. However, we are going through a shift due to COVID-19. We can run businesses with people in disparate environments. Companies will think differently about how they hire, with a distribution of employees elsewhere. Then the question revolves around whether those employees ultimately spin out from those companies and be founders themselves. There needs to be local infrastructure with seed capital in those locations. Silicon Valley can continue to be strong, but other locations can also build substantive job opportunities and economic growth. There could be a positive catalyst for the future with market share maybe not materially shifting, but the size of the pie just gets bigger. With a tangible piece of the network effect, does money get used for other productive purposes? There is a common misunderstanding outside of Silicon Valley: There are seeds of an ecosystem born of those who went through successful companies that creates wealth which gets recycled back into the market. Where is the community? It’s not wedded to geography, but professionals you do business with, which could be across the nation. A virtual community will be a part of our society going forward.
WHAT’S NEXT AFTER COVID-19
COVID-19 has not changed the pace. Many companies had COVID-19 tailwinds. Technology companies have done well, while others have had headwinds. Early stage entrepreneurs can be creative about taking problems and turning them into opportunities. The speed at which CEOs reacted to the economic changes with no dawdling impacted success. We are not going through a credit crisis, which has been a big difference from the downturns of 2000 and 2008. A year ago, many were afraid the market was overheated and encouraged portfolio companies to raise money so that they wouldn’t have to in 2020. That sort of thinking helped during the events of this current year. VCs are encouraging entrepreneurs to be comfortable with their capital now, given the unknowns around the future of COVID-19, election fall-out, etc.
What might be the next big transformational opportunity? The intersection of computer science and life sciences will continue to be a big area. Healthcare needs change - delivery, drug discovery, efficiency, use of AI with respect to diagnosis, care for underserved classes. We need ways for small and medium businesses to be more competitive. The food industry, particularly meat (where 40% of the world’s arable land mass is used in the production of meat) needs to be addressed. Meat consumption is going up, which is unsustainable.
VCS AND STEM EXPERIENCE
There are few VCs with a STEM background, even though their investments are largely in STEM fields. There isn’t a great deal of concern about this, as most often it is the non-product things that determine the success or failure of an organization (i.e. inter team dynamics, right go to market strategy, hiring right executives, etc.). It’s not that the best technology wins, it’s about building businesses.
EQUITY / INCLUSION
We are optimistic that people in the VC industry understand that diversity, equity & inclusion are issues. Employee, executive, board representation is important to address diversity. There’s an awareness and appreciation of what needs to be done and the industry is moving in the right direction.
FINAL THOUGHTS
Ethics are really important and need to be paid more attention to. It’s important to focus on optimism - even during a strange year with health, human rights, political crises. If you are concerned about the current state of entrepreneurship and investments, go listen to entrepreneurs and the innovation that is happening. While it is easy to get into the world of cynicism, there are uplifting messages seeing what entrepreneurs are trying out and innovating around.
SPEAKERS
SCOTT KUPOR
Scott Kupor is the managing partner at Andreessen Horowitz where he is responsible for all operational aspects of running the firm. Scott was previously vice president and general manager of Software-as-a-Service at Hewlett Packard. Scott has represented software companies in both financing and mergers and acquisitions transactions at Credit Suisse First Boston and Lehman Brothers. He served as Chairman of the Board of the National Venture Capital Association (2017-2018) and is the author of the national bestselling book Secrets of Sand Hill Road: Venture Capital and How to Get It.
HEIDI ROIZEN
Heidi Roizen is a venture capitalist, corporate director, Stanford lecturer, and recovering entrepreneur. She co-founded software company T/Maker and served as its CEO for over a decade until its acquisition by Deluxe Corporation. After a stint as VP of Worldwide Developer Relations at Apple, she became a venture capitalist, and is now a partner at Silicon Valley-based Threshold Ventures. Heidi is also currently a corporate director for public company DMGT (LSE:DMGT) and private companies Zoox, Planet, Memphis Meats and Polarr.
F. DANIEL SICILIANO, moderator
Dan Siciliano is a successful technology CEO-founder and entrepreneur as well as Chairman of the board of the Federal Home Loan Bank. He is a recognized expert in corporate strategy and governance, capital financial markets, technological disruption and cybersecurity. He is currently Chairman of SVDX and a fellow at Stanford University.