How the Pandemic Impacts the Flow of Venture Capital Funding

Venture capital (VC) funding hasn’t stopped flowing, even amid a heart-stopping pandemic. But we have seen some interesting trends surface. If your company is considering launching a funding round, you must understand the pandemic’s influence on VC investing firms. Here’s what we know about the happenings in this part of the industry.

Understanding the Mini Pause

It’s safe to say that March 2020 hit us all like a brick wall. We learned that a potentially deadly virus had come to our US shores, and life as we knew it was over. As the pandemic played out, businesses faced operational interruption, and over half of the American workforce began working remotely.

These adjustments didn’t come without some severe dings to our personal lives and economic outlook. Many companies wondered if customers would still want to pay for products and services, or would they put back money for the pandemic “what-ifs.”

According to the COVID-19 timeline, the World Health Organization (WHO) declared COVID-19 a pandemic on March 11, 2020. As a result, there was a March to May pause in investing while the business world waited, watched, and then sorted things out.

Furthermore, many VC firms took note of people’s apprehension about the future and took matters into their own hands. Some of these firms announced that they were open to investing and encouraged companies to continue pursuing sponsorship. Although there was a pause, investments picked up again after the initial COVID-19 shock passed — though not nearly at the previous year’s level.

VC Pandemic Trends

While COVID-19 swept across our country, several investing inclinations popped up in the investing world. Here are a few of those trends.

New and Ongoing Deals

Unfortunately, the pandemic hit some portfolio companies hard. Many of them struggled to keep their heads above water. VC firms picked up on this panic and diligently supported portfolio companies, and invested in new deals. As mentioned, there was an initial March to May pause in investing — but fund managers adjusted swiftly.

Late-stage tech and healthcare companies were prime targets for investors. Also, special purpose acquisition companies (SPACs) and sponsor-backed private investment in public equity (PIPE) deals made a splash in the market.

The Funding Gap

Several issues surfaced directly before the pandemic — racial inequality, income gap, voting rights, etc. — and the health crisis exacerbated most of them. We touched on diversity, equity, and inclusion in our post, How a Diversified Board Can Benefit Your IPO. But one issue we saw bubble up was institutional investor’s hesitancy to back lesser-known company managers.

Naturally, this troubling trend brought light to what’s known as the funding gap. First-time managers, specifically women, Black, Indigenous, and people of color (BIPOC), had a tough time raising money. The good news is that this trend encouraged many beneficial dialogues focusing on resolving the issue.

Value-Added Services

As expected, corporations faced multiple challenges with teams working remotely. Stay-at-home orders and social distancing guidelines parked many workers in their kitchen chairs or home offices for remote work. Most managers leaned heavily on enterprise software solutions. Cybersecurity has never been more on people’s radar than during 2020.

Unsurprisingly, VC investors saw an opportunity to shift their focus to companies offering these value-added services. It seemed that the pandemic made some services even more necessary than before. We don’t expect the demand for value-added services to slow down anytime soon.

Digital Due Diligence

VC investors had to find other ways of executing their due diligence process with in-person meetings on hold. For most VCs, this solution meant relying on online communications. Zoom, Slack, and other platforms became a normal part of the due diligence process.

Even though in-person meetings decreased significantly, online communication made up for the drop. The number of meetings didn’t necessarily wane; instead, the way investors and managers held meetings merely shifted.

While some investors were nervous about the new communication style, many have molded their processes accordingly. Some VC firms have hired third-party services to do this groundwork rather than doing it themselves.

Hands-On Advice

Most VC investors tend to have a very hands-on approach, often requiring a seat on the board or another influential position. Throughout the pandemic, VCs became even more involved than ever before. They pinpointed weakness in financial performance and helped secure capital in various ways.

Additionally, many VC investors hired third-party specialists to support struggling portfolio companies. Whether tools or technologies, VCs reached out to offer guidance regarding accounting, finance, legal issues, etc. More than usual, investors met with company leaders to review growth rates, benchmarks, and operational best practices.

Remote Work

With over half of the American workforce working remotely, company leaders had to rethink how they operated their business. Hiring was different, and onboarding was an ocean of uncharted waters. In short, companies took some time getting used to their teams working remotely.

Unlike many people feared, companies continued to hire new team members. Eventually, managers became more comfortable handling remote teams. Investors and leaders put their heads together to create more flexible work schedules. They worked together to reimagine the future of their businesses, whether that meant downsizing office space or implementing hybrid schedules.

What to Expect in the Future

Although the pandemic is nearing its end, we expect some business trends to continue. For example, flexible schedules and hybrid work are here to stay. Attracting and retaining top talent will take nothing less than adopting this new strategy.

Additionally, company leaders will face more scrutiny than usual as shareholders focus on different impacting forces (i.e., climate change, social responsibility, activism, etc.). Directors and officers (D&O) litigation and employment practices cases will likely increase due to the new working arrangement and the market volatility.

But we have hope that navigating these challenges won’t be the nightmare 2020 was. With seasoned VC investors in your corner, among others, you have all the right tools to chart these waters successfully.

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