Trends Watch: Global Venture Capital

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Sajan Pillai, Founder, Season Two Ventures.

What is your outlook for venture capital?

First, venture funds used to be more concentrated on areas like Silicon Valley and others. What you're going to find is that these geographic areas will be spread out more globally. Our focus is on India for our first fund given our belief that the region presents significant opportunities at the moment, particularly in B2B.

The second thing, particularly with COVID-19, is that there is serious money on the sidelines and those investors are looking for opportunities for capital appreciation, and venture funds give them the right balance of risk and reward. The amount of money that might be interested in good VCs will increase.

Third, venture funds have grown over the last several years; in many cases, the check sizes are almost as big as private equity. But you will see the micro VCs becoming smaller and smaller, very similar to Season Two, as a growing trend. That being said, early-stage emerging funds will create just as competitive returns as the larger funds, maybe even more.

From a technology perspective, a lot of venture firms do their due diligence, market analysis, and valuation all manually. So there's a tremendous amount of opportunity to disrupt that by using artificial intelligence and other analytics techniques. We see VCs employ AI platforms as opposed to the manual work that they used to do.

Lastly, investors are going to get tired of unicorn hunting. Everybody wants a unicorn but there are only a few unicorns. This is a winner-takes-all game today and what we're going to see is a little bit ratcheted down, but more predictable returns.

Where do you see the greatest opportunities and why?

In terms of sectors, the hot spot of activity is biopharma and you will see investment activities in that sector have gone up through the roof throughout COVID-19. Also, from a global perspective, there is a lot of activity around delivery systems, services that deliver things to your home or office; i.e., DoorDash, Instacart, they are getting funded all over the world, so you will see that is still very strong. The last area is supply chain and logistics, particularly triggered by what happened with COVID-19, so you will see a lot of startups in that area.

VCs are looking for crisis-resistant investments so that’s why you see things like biopharma, things like retail, tech, remote or work-from-home tools, so a lot of the money will go into that. The second thing on a horizontal basis is the whole movement around the cloud. Globally, if you look at enterprise-only investment, only 20% of their assets are in the cloud today. Before COVID-19, this was supposed to be 60-70% by the end of 2030, but COVID-19 has accelerated this dramatically. Now, the estimate is we will go from 20% to 80% of assets in the cloud by 2026, so you’re talking about global scale.

When you think about this in terms of investment stages, early-stage investment in particular has become an area that is focused on by a lot of venture funds, primarily because valuations have gotten more and more expensive, so you have to move earlier and earlier.

Where do you see the greatest challenges and why?

During COVID-19, fundraising is a challenge, because you cannot travel to meet face-to-face.

A second challenge is maintaining relationships and keeping them robust. These are institutional investors in need of a lot of information, so to do this remotely is becoming more and more of a challenge.

The third one is finding the right valuation techniques for the right businesses and geographies. Most investment practices were historically based on a Silicon Valley model. But when you’re doing it globally, things are very different. People have to get very sophisticated as to how to judge the valuation, so that’s a challenge.

There’s one more business challenge that has become also very important. A lot of the VCs typically prefer to be the lead investor in Series A or Series B rounds, but it can often make sense to invest alongside other VCs. As a result, the VC ecosystem is becoming far more collaborative.

What keeps you up at night?

Talent keeps me up at night. Venture funds face intense competition for talent, and a lot of the success is directly dependent on the kind of team you have.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.