Lehi
25 Jun, Friday
64° F

  

TOP
Image Alt

Utah Business

A conversation about venture capital in 2021

A conversation about venture capital in 2021

During our monthly roundtable event, Utah Business hosted leaders in venture capital to discuss seed rounds, access to capital, and 2021 market predictions. Moderated by Cydni Tetro, CEO of Brandless and co-founder/president of the Women Tech Council, here are a few highlights from the event. 

2020 was an unprecedented year. We had more capital, whether it was through acquisitions or investment, in the state than we’ve ever had before. Why?

Matt Warnock | Chairman | VentureCapital.org

Historically low interest rates. When the best you can get is a couple of percent at the local bank, people go looking for other places to put their money. Plus, Utah has always been a huge hotbed for innovation and that’s drawing more capital here than we’ve seen in the past.

Tim Cooley | General Manager | Park City Angels

One of the big things that we do well in Utah is create playbooks to then pass on to other people. And so what you’ve seen is a network effect that really started with Josh [James] at Domo and then passed on to Ryan [Smith at Qualtrics] and then he had the ability to pass that on to other people. And so I think that you’re seeing that play out as well.

Ben Capell | Partner | Peterson Ventures

2020 was an amazing year in general, for venture capital across the board in the entire US. Q3 was the second-highest quarter ever for venture capital dollars invested and half of those dollars were invested in rounds of $100 million or more. And so one of the takeaways is that there was a lot of capital driven by interest rates and in capital available in alternative assets.

And then it seems like there was kind of a flight to quality. Deals that were doing well and showed good performance in spite of a historic pandemic that we all were tremendously uncertain about in March and April. The companies that did well in spite of this pandemic have attracted a lot of capital.

Derrin Hill | Founder & CEO | RevRoad

There was a lot of question at the beginning of the year as to whether or not the recovery would be V-shaped, U-shaped, or J-shaped. As it turns out, it’s K-shaped. So those areas that have those efficiencies, those areas that have that innovation and the kind of qualities that we have built over decades here in Utah were rewarded.

There are indications that seed rounds and Series A rounds have been more difficult over the last year because so much capital has been going to the efficiency of capital, people who know how to apply it to scale. What’s been the impact and where are we sitting when we look at seed rounds and smaller innovators?

Matt Warnock | Chairman | VentureCapital.org

It feels like we’re getting better quality deals than we’ve had in the past. I think entrepreneurs are getting more knowledgeable about that whole process. One of the things COVID has taught us is that you don’t have to be in the room to pitch, and that opens up the geographical area you can pitch to. So in some senses, there’s a little more competition, especially at the lower end of the scale. Not everybody can deploy huge amounts of capital, but the number of deals and the quality of deals that angels are being exposed to right now is probably as high as I’ve ever seen.

Derrin Hill | Founder & CEO | RevRoad

I think it flows both ways. We’re seeing literally hundreds of new seed-level funds that have opened and started funding at a lower level than they ever did previously. Either new seed funds or they’ve shifted down and whatever used to be a Series A is now a seed for them. And so we’re finding for our portfolio of companies, when they do a raise, you’ve got tremendous demand from all around the country. We’re having funders come from both coasts with great interest in funding the companies in our portfolio. As long as the entrepreneur can get their core metrics together and meet that threshold of qualification, they’ve got far more options than they had previously.

Tim Cooley | General Manager | Park City Angels

Entrepreneurs don’t realize they’re competing for capital from the seed side. If you’re unproven and going against a company that is proven, the odds of the capital going to the proven company are just going to go that way. While there’s still more funding in Utah, you’re still competing for the same dollars. And why wouldn’t you take a bet on something that’s less risky? 

Utah jumped on the lean methodology really, really, really hard. Whereas you look at California and they’re like, “This is crazy, let’s try it.” We’d rather be way less risky because it’s working and so we’re lagging from the investment side for seed when someone comes in with a crazy idea because we can. Even in the earliest stage of companies, we can be picky.

This is the first year where we have seen funds dedicated to Black and Brown people, and to women at a more aggressive rate. And Utah isn’t known for its investment in underrepresented founders. What can we do better to make sure that we’re funding areas like this?

A lot has happened in the last year, but our experts are optimistic. Here's what was discussed during our venture capital roundtable.

Jeff Kearl | Partner | Pelion Venture Partners

Many of our funds came to us said, “Look, over the next few years, we’re going to stop making commitments to funds that don’t have a diverse team.” So I believe the pressure is beginning and all it’s going to take is a very large institution like UTIMCO to say, “We don’t give money to private equity or venture funds that don’t have diverse teams.” 

Once that happens, all the other pensions, foundations, endowments will begin to follow. It’ll tip and if you’re sitting there, the partnership of five white guys like we have at Pelion, it’s going to be increasingly difficult to raise money on the institutional side. So I think that most venture funds are becoming keenly aware of the need to become diverse in their own ranks quickly, let alone the investment candidate deals they’re looking at below that.

You have to be really proactive and intentional about this. If you looked at our deal flow, the [average pitch] is white guys looking for business. So we have to go out and find the deals, the founders, and the people that make up a diverse workforce and proactively recruit them and get them involved in what we’re doing. This requires a substantial, additional effort.

Diogo Myrrha | Partner | Album VC

One of the greatest quotes from The Women Tech Council was, “You cannot be what you cannot see.” And frankly, as a Brazilian immigrant, it took someone who was an entrepreneur and has done a ton of investments over the years here locally to literally take me out of BYU and say, “Hey, come with me,” for me to get in that spotlight or the opportunity to be in the conversations. 

Oftentimes it’s just a matter of being in the conversation. When you do have an all-white guy partnership, it does prevent other voices to be heard in that conversation. At Album, as we look at deals, as we look at, “Okay, what are we not seeing because of our biases? And what are they not being because of those same biases? What could they be if they had a chance?”

Tara Spalding | Managing Director | BoomStartup 

I mentor and work with a lot of women founders. Fear is actually more of a failure than failure itself with these women. They’re so afraid to even just step forward because they think they’re going to be ostracized, unsupported, or just in over their head. So when it comes to the investment opportunities, the deal creation opportunities, even entrepreneur opportunities, any sort of encouragement goes really far. 

Matt Warnock | Chairman | VentureCapital.org

One of the areas that I think really needs some attention in is [bringing women back who have been successful entrepreneurs as angels.] There’s a real dearth there currently, with maybe two female Angels in Salt Lake Angels. We would love to have a lot more. So I would encourage any women who are out there who are interested in getting involved in some of this stuff to just come out and participate because you are badly needed.

Tim Cooley | General Manager | Park City Angels

Park City Angels has six women involved. And I also really like when the husbands bring spouses. We get a lot of different perspectives there as well. I think what people don’t realize about Salt Lake is how open we are. It’s easy to get a meeting with pretty much anybody on this panel in Utah. You go to California, it’d be very difficult. And so I think that what we need to be doing is encouraging early-stage people in all demographics to reach out. The Park City Angels, if you are based in Utah and you apply, I will meet with you. I don’t care what you’re doing, what stage you’re at.

Eric Eliason | Principal | JNivin

I don’t think people realize how open our door is. I’m like, look the door’s open all the time and you’re better off to come in early. Please come and talk to us. It’s there, it’s open, and we love it because your ideas are what’s going to fuel all of us in the future.

Tara Spalding | Managing Director | BoomStartup 

There are over 100 African-American women-owned businesses here in Utah that are applying for grants because they cannot get venture capital. We do have situations going on right now that are only being supported by grants. And that’s a shame because that’s not how you establish scalable businesses in communities that are under-resourced.

SPVs (special-purpose vehicle) and SPAC (special-purpose acquisition company) have been all over the place―this is the megatrend of the year. What is your perspective on them?

Jeff Kearl | Partner | Pelion Venture Partners

I think in some cases [SPACs] can work really well because it’s a mechanism for a company to get a lot of capital to do something ambitious. One of the other advantages, if you’re an entrepreneur, is a lot of the SPAC sponsors are going to entrepreneurs and saying look, if you go public the traditional way, you can expect 20 percent dilution. Come with us and you’ll end up with five percent more of your company than you would have otherwise had if you went down a traditional path of an IPO.

I think the struggle on the back end is just building your book. You’re pitching these big money managers like Fidelity and Vanguard, and you just can’t get enough traction because your market cap is not large enough. And so I think the downside of a SPAC is you’ve still got to go do all the hard work to build a shareholder base after the fact, which is really difficult without a bank on your team. 

Ben Capell | Partner | Peterson Ventures

The SPAC is a faster path to market, which is good and bad. And in companies that exercise that right and get out, but actually aren’t ready for the real scrutiny they will face as a publicly-traded company, and don’t have the investor base to just point, it could be a real challenge after that. But it is this interesting balance of the amount of time and effort, energy and dollars that are required to go public. And if you somehow miss time in the market, because you can’t predict what it’s going to be like in six to 12, 18 months, it can be hard. 

What are your predictions for the capital markets in 2021?

Derrin Hill | Founder & CEO | RevRoad

I predict that the passing of 2020 is dramatically overstated and that we will have some of the big challenges from last year continue this year, and that that K-shaped recovery continues to manifest. And so we’re going to see huge wins for the winners and we’re going to see even greater losses for the losers.

Ben Capell | Partner | Peterson Ventures

I think that we’d love to see less impact from the coronavirus, but we’re seeing that it’s going to be slower in terms of getting the vaccine and what that means for the recovery and moving on. But with that in mind, I think this digitization of the economy, these trends that we’ve been seeing and we’ve been investing behind for years have really accelerated, and those companies that have found their way through this pandemic are going to continue to attract capital.

Eric Eliason | Principal | JNivin

There’s just a ton of money out there. This loose money policy with low interest rates may come back to bite. But from a product standpoint, I think experience will continue to be valued. We’re truly going to see a difference in how people live and that’s going to bear out in the longterm. I think investments that are somewhat based on where that’s going are probably the type of investments we’ll be making.

Gavin Christensen | Founder | Kickstart Fund

I think it’s great for the angel groups, the incubators. It’s a great time to be investing and building in Utah. I think that’s the bottom line. Never been better. 

From a social standpoint in terms of capital markets, I think in the next five to seven years, the K-shape recovery, we’re going to see the first trillionaires, and we’re going to see so much power in the hands of a few people in corporations.

Lindsay Bicknell is the project coordinator for Utah Business magazine. A native of Cincinnati, Ohio, she graduated from Miami University of Oxford with a degree in communications. She has a background in television, print, and web media, as well as public relations and event planning. As a transplant to Salt Lake City, she can't get enough of the mountains and loves snowboarding.