It goes without saying that 2020 was a year like no other. It was a year where many people globally experienced loss and suffering that will be felt for years to come. As a fund that invests in emerging technologies and business models, this massive change across government, business, and civil society created opportunity. Of all the major events that transpired, there were three key trends that we felt close to Silicon Road. Our team did not hunker down and wait for the storm to pass. Instead, we saw these macro-shifts as an opportunity to be leveraged.
Trend 1: COVID created pause in private equity, followed by acceleration
At the start of 2020, the venture capital industry was coming off a record year in deal volume and deal value (Pitchbook). Optimism was widespread across fund managers - both new and large blue blood funds - as the data suggested there was more cash in the system than at any point in history going into private equity markets. The best startups often had multiple choices of funds to work with. The balance of cash and startups was weighing more on the investor side, which led to some breathtaking pre-product valuations.
Then March 13th hit. The president stopped flights from Europe, international travel generally shut down, schools closed and universities went virtual overnight, and many retailers were forced to shut their doors.
For many funds were forced to triage their portfolio, we were in a position to invest in new companies. Being in year 1 of our capital deployment cycle, we were aggressively looking for deals.
Between March and June, we executed 5 deals. In June, financing started heating back up. Many large, later stage deals were making news. The investors that had been waiting on the sidelines were getting back in the market and pushing more capital to make up for the lost time.
Trend 2: Vertical focused funds are emerging as early winners
When the crisis hit, many institutional LPs (university endowment, pension funds, corporates) shifted focus from emerging fund managers to existing, blue blood venture capital firms. Many general, vertical agnostic funds struggled to land commitments from new LPs. Capital was going into more well known funds and investment into first time funds was the lowest since 2014.
The micro fund managers (<$50M fund size) that not just survived, but also thrived in 2020 were those that seemed to have a vertical thesis. For Silicon Road, the macro shocks to the commerce landscape accelerates the interest in our focus areas. The brands, retailers, and businesses serving the commerce category were forced to evaluate their systems and accelerated emerging tech sooner than many had expected. This positioned Silicon Road and our focus on the future of commerce quite well.
Trend 3: Shakeup in Traditional Tech Hubs
The pandemic also accelerated the remote work trend and forced companies of all sizes to embrace a workforce that was not coming into a physical office. This forced many of the tech workforce, founders, and investors to ask why they needed to live in an expensive city with less than ideal quality of life. Technologies have existed to enable work to happen anywhere, but culturally it became much more accepted during the pandemic. The crisis made it not just technically possible, but socially acceptable to do so. And many individuals (and more and more companies) are leaving these traditional hubs and are moving to more affordable, tax friendly, family friendly, comfortable cities. (FastCompany)
*World Property Journal, November 2020
And as an investor, having a team located in Atlanta instead of New York City or San Francisco means that the employees are spending about half on cost of living, meaning our investment goes farther. There are also constraints that are put on companies outside the Bay Area that generate more lean, thoughtful organizations that often have more sound business fundamentals, like a tech team in Mexico or India versus engineering talent from Google or Facebook that is 8x the cost of 1 engineer overseas. A founder of a well known San Francisco-based software company that directly competes with Calendly (an Atlanta-based company actively raising at a $3B valuation) recently told me “we took too much money early on because we thought we had to hire Bay Area engineers. Really what that meant was we needed more and more venture capital to scale. Out here [in Atlanta] there a more scrappy, lean mindset like what Calendly has done to raise minimal capital, yet still build a massive company.”
As a result, formerly secondary tech cities are now on the rise. Atlanta (where our firm is based), is seeing strong growth in tech.
Startups started in Atlanta are seeing record valuations (Calendly - raising at $3B, OneTrust - $2.5B valuation, Greenlight - $1B+ valuation, Kabbage - acquired by American Express for $800M)
Atlanta is solidifying its specialization across fintech, logistics, retail, payments.
There is a growing support network for early stage startups across Georgia Tech’s Advanced Technology & Development Center (ATDC), Atlanta Tech Village, to Techstars in Ponce City Market backed by Cox Enterprises.
As founders and early employees of these mature startups spin off to do their next thing, wealth and the experience of building a hyper growth business will flow back into the ecosystem. We expect more of these exit events to happen in the next 3-4 years enabling the flywheel to continue. These conditions will create more investment opportunities in our backyard.
In conclusion, 2020 was a year filled with great change across civil society, business, and government. For Silicon Road, many of the changes - from pandemic induced pause in funding to emigration from the major startup hubs into new ones - presented opportunity. We look forward to building on our strong positions for 2020 in 2021 and beyond.