There Are Record Levels of Dry Powder in Venture Capital
The low-rate environment has made significant yield hard to come by for investors, while entrepreneurship could be set for a new surge
Between 2008 and 2012, in the middle of the Great Recession and immediately after, Pitchbook estimates that the level of new company creation in the U.S. more than doubled.
Often is the case following an economic downturn when millions of people get laid off and the need to start a company stops being a luxury or a leap of faith, and becomes a necessity.
While arguably one of the fastest and most abrupt recessions ever, the coronavirus pandemic could also create the perfect storm for venture capital and entrepreneurship.
For one, the pandemic has forced people and businesses to adopt digital technology and habits whether they like it or not because, as we know, face-to-face interaction has been severely limited in 2020.
Traditional retailers have seen their e-commerce and delivery channels explode, prompting heavier use of digital payments. Many office workers have been sent to work in their homes, showing the massive opportunities for work-from-home tools for companies, and people are getting more and more creative in the way they use their homes. These are just some of the sectors ripe for disruption.
That’s the entrepreneurship opportunity. Exciting, though not exactly a surprise. But there is another opportunity — and that’s on the capital front.
The pandemic has sent lots of investors fleeing the stock market due to volatility and economic uncertainty. Meanwhile, when the Federal Reserve lowered its benchmark lending rate to practically zero, it essentially took away any meaningful yield for investors in the bond market.
And commercial real estate is also a scary investment these days, as the future of many commercial sectors such as hotels, office space, and retail looks questionable.
That has made investing in startups in the private markets one of the more attractive segments in the current environment, and one of the few places investors can turn to find returns.
Michael Descheneaux, president of Silicon Valley Bank, which caters heavily to the private equity, venture capital, and startup community, had this to say on the bank’s third quarter earnings call in October.
To put it in perspective kind of the step back from the industry standpoint, we have record levels of dry powder for VC. In terms of fundraising, year-to-date here versus year-to-date last year, we’re ahead toward record highs of fundraising for VC. The investment levels, as you’re seeing, going into the innovation sector are on pace with 2019, which is incredible if you think about it, right, because of the pause that we had a little bit of slowdown as we entered into the COVID and shutting down, but then you kind of marry that with this. There’s still a lot of opportunities being created here, like overnight you’re having industries that are just being resurgent and a lot of great opportunities for people to invest and deploy the money and exactly what Greg is saying. There is such a low rate environment.
Another exciting development is that the dynamic of deal making is changing. Prior to the pandemic, lots of venture capitalists liked to meet their portfolio company founders in person and invest in those companies that were in the same city or geography.
But Silicon Valley Bank CEO Greg Becker revealed that following a slow down of deal making when the pandemic first began earlier this year, venture capitalists have started to get more comfortable executing deals over video conferencing platforms such as Zoom.
When the pandemic first hit, I was on a number of Zoom calls with venture capitalist and the first call, which was probably three weeks into, two weeks into the COVID crisis, there were 20 venture capitalists on the Zoom call and there was one that was considering doing it. We had one a few weeks ago and everyone was doing it. Everyone was doing it and they were just talking about how efficient it was and how this maybe a new normal and allow them to look at investments more broadly in different markets where it’s easier to kind of connect with those founders, the executive team of those companies. And the same, obviously, is holding true in private equity as well a little bit slower. But as we said in the note, it is definitely picking up. So there’s no question that deals are being done over Zoom and I actually think that they’re feeling really good about it.
This could really open the floodgates for investing, and result in more venture capitalists funding startups in different cities and geographies, and possibly moving quicker, too.
Remember, the bulk of startups that came from the Great Recession really began to pop up toward the end of 2008 and the years to follow.
With the exciting developments in the venture capital space and the rapid acceleration of digital technology, record levels of dry powder could lead to an absolutely massive few years of entrepreneurship and opportunity in the private markets.