When the pandemic hit last year, tech startups began laying off employees and braced for impact. The outlook was bleak, with valuations in jeopardy and companies worried about the ability to raise cash from investors.
But by the time 2020 wrapped up, U.S. startups ended up setting all-time highs for total funding raised. There were also records set last year for capital raised by VC funds, and a near-record for VC-backed exit value with a strong IPO market.
With a surge in SPACs and plenty of cash available for startups, don’t expect any slowdown for the tech industry in 2021.
That was one takeaway from the annual investment outlook panel hosted by TiE Seattle earlier this month featuring four Seattle-area venture capitalists:
- Kellan Carter, general partner at Fuse Venture Partners
- Ben Gilbert, co-founder at Pioneer Square Labs
- Heather Redman, general partner at Flying Fish Partners
- Anu Sharma, partner at Madrona Venture Group
Here are quick takeaways from the discussion:
Redman said investors are licking their chops at the behavioral changes caused by the pandemic and how startups can provide solutions. “It couldn’t be a better time to be an investor with all the disruption we’ve got,” she said.
Added Gilbert: “We have an unbelievably fluid economy right now where more people are starting companies than ever and valuations are higher than ever,” he said. “And frankly, there’s more innovation than ever.”
Carter added that the pandemic forced companies take a closer look at what was and wasn’t working within the business — and now many are better for it.
“It’s really been a forcing function to make some of the harder decisions that companies naturally push off,” he said.
Special purpose acquisition companies, or SPACs, quickly became a popular route to go public for startups with more than $125 billion in merger activity last year. The trend does not appear to be slowing so far in 2021. Seattle-area companies Rover and Nautilus announced plans to go public via SPAC this month alone.
Gilbert said the rise of SPACs will create pressure on the traditional IPO process to get cheaper and faster. Ultimately he believes SPACs and IPOs will look more and more similar.
“It’s just a different way to go public, it’s a different path,” he said of SPACs. “It’s just more money chasing the same number of opportunities, and so that’s going to drive prices up.”
Redman said SPACs will threaten some later-stage venture capitalists as public markets and SPAC sponsors have a chance to invest in startups earlier in their journey.
On assessing companies:
When meeting entrepreneurs, Carter said his team indexes to three qualities: The relentlessness to win, the obsession with the customer, and the ability to hire top-notch talent.
Fuse, which launched last year, also likes to talk to customers using the company’s product. “If you make your early customers or users your best sales reps, you’re really onto something,” Carter said.
Redman and Sharma both pointed to the importance of entrepreneurs building companies in large markets.
“A good team is able to potentially understand the market and pain points that nobody else does,” Sharma said. “When they are able to do that, they estimate the market size far better than we do. One of the things I often get wrong is how big the market is, and the founders usually prove me wrong.”
On Seattle’s startup ecosystem:
Pioneer Square Labs, Flying Fish, and Fuse are among a flock of newer early-stage firms that have launched in recent years, adding dollars to a Seattle startup ecosystem long-criticized for the lack of capital. All three have a focus on the Pacific Northwest, banking on the region’s tech and entrepreneurial clout.
“Relative to the number of funds versus the outcomes that have happened in pure dollar value, this is by far the most undercapitalized ecosystem in the country,” Carter said.
Asked about the dearth of later-stage funds in the Seattle region, Gilbert said it’s not a big issue as there are only a handful of companies in the area raising that type of capital.
“By the time [a company] is raising $15, $30, $50, $100 million, it’s already on everyone’s radar,” he said. “There’s no strategic advantage to being a local firm investing with a local thesis, or even a regional thesis, at those later stages because there’s a captive number.”
However, Gilbert said it would be beneficial for Seattle to have local investors as limited partners in funds that invest at later stages.
Redman noted she wants to see money made by local investors come back into the Seattle ecosystem.
“If I make a whole lot of money for somebody who’s here, then we get a new wing of Seattle Children’s Hospital,” she said. “If I make a whole lot of money for somebody who’s in San Francisco, then they get a new wing of the San Francisco Children’s Hospital. So I think getting that flywheel going here locally is awesome and is a real passion project for a lot of us.”