How Investors Can Generate Alpha in 2020
Bottom line: Investors looking to fund entrepreneurs need to change their approach to fit the Covid-19 new normal -- a world that is increasingly remote and increasingly digital. Venture capital (VC) funds should aggressively look for new investment opportunities globally and at communities that are underexposed.
Raising a venture capital fund in any climate can be difficult — particularly for new partners. This year seems to be an even bigger challenge. There has been tremendous instability in the public markets, the inability to meet face-to-face due to COVID-19, and a presidential election year in the United States.
There are three key trends in this Covid-19 new normal:
1) The Migration of Talent
The lockdown caused by COVID-19 made companies embrace new technology and work from home overnight. While some struggled with the change, others leaned into the opportunity. Facebook, Shopify, Square, Twitter, Coinbase, Upwork, and others decided to become permanent remote organizations. This trend will accelerate the migration of top talent across the country and the world. Existing VCs have been slow to adopt this trend, which creates an opportunity for those raising first-time funds. It will no longer be sufficient to invest only in local communities.
2) The Globalization of Venture Capital
VC is no longer a regional industry. Startups aspire to be national and global competitors — they seek talent from all places, and the barriers to getting users or paying customers globally is falling every year. As a result, globalization is occurring in the VC industry that was simply not the case 8-10 years ago. In fact, Kauffman Fellows Research Center reports that as of 2018, the U.S. now sees less than 50% of global venture capital dollars, down from 80% in 2000.
3) The Growing Use of Data
Traditionally, VC firms are introduced to startups through their network (e.g., former companies, other founders, business school connections). At best, though, VCs invest in one out of every 20 deals — which means they spend 90% or more of their time on companies that are not a fit. Data can create an advantage that can make all the difference in identifying the right company before other VCs have the chance. We explore clear uses of data that can help funds with sourcing, diligence, and post-transaction support.
Investors can be aggressive in this environment and look for funding opportunities. With the help of Zoom, investors should think globally and look at which geographies are underexposed and make investments. Investors should resist the temptation to be defensive during this time and look to make funding deals with promising entrepreneurs.
The best returns will come from investors backing remote companies, underserved geographies, and leveraging data to save time. The next era of Uber, Airbnb, and Slack are being made today. And they may not be in Silicon Valley.
Read the full study HERE.