Covid-19 is creating both challenges and opportunities in the venture capital space
In the first article of our 2020 impact investment in Canada series, we discussed the surge in ESG investing that took place as a result of the Covid-19 pandemic. Today we come full circle and delve deeper into a similar topic, the impact of the pandemic on venture capital investing in general. With most countries still struggling to push infection rates below peak levels [1], the pandemic has opened investor eyes to the scope of impact of unforeseen shocks exemplified by Covid-19, highlighting the importance of reducing risk by diversifying investments by industry, asset class and geography. A crisis of this magnitude has caused disruption on a global scale and presented challenges to countless industries to varying degrees. However, as the world rebuilds post-pandemic, there will be new and unprecedented opportunities for economic growth, enabling right-sized asset managers like True North to achieve both a positive global impact and competitive returns.
Though the Covid-19 crisis has resulted in the largest and broadest value chain shock in recent memory, it is only the latest in a series of disruptions. According to a report published in August 2020 by McKinsey & Co., profound shocks such as financial crises, terrorism, extreme weather, and pandemics are growing more severe, both in frequency and in economic impact [2]. This same report determined that specific types of shocks are more likely to impact certain industries and regions. For example, pandemics tend to have an inordinate impact on labor-intensive value chains such as apparel, furniture and textile, three sectors that are notoriously important for industrializing countries across Asia, but also hard-hit G7 member Italy. From an investor’s standpoint, this research highlights the importance of offsetting their exposure to a given industry and geography by diversifying their holdings, in order to reduce the risk of erratic global events having a disproportionate impact on their portfolio.
In the venture capital space, Covid-19 has impacted both investment volume and the traditional norms of doing business. Although less hard-hit than industries like tourism, petroleum products, and aerospace (all of which have seen demand plummet during Q1 2020), venture capital investing is highly reliant on relationship building, a much more challenging task without face to face communication. For both investment professionals and firms looking to raise capital, it has been challenging to develop the trust and understanding necessary for a successful investment. According to Forbes, 93% of communication effectiveness is determined by non-verbal cues [3], none of which translate via email. However, as videoconferencing technologies become the norm, and investment monitoring technologies more accessible, we anticipate that the level of comfort securing deals remotely for both parties will grow. This gradual adjustment to a virtual environment bodes well for investors looking to diversify and pursue a range of investments across geographies. Similarly, enabled by technology and fuelled by the United State’s recent tightening on visa policies as well as high living costs in Silicon Valley, we expect to see a geographic dispersion of venture capital over the next years.
Considering the devastation that the pandemic has caused in many countries, it can be difficult to think about the crisis with a sense of optimism. However, as nations begin to stabilize and rebuild, unprecedented economic relief efforts will enable new growth areas to emerge. For example, the European Union has announced its major recovery plan, Next Generation EU, which is set to infuse the economy with €750 billion [4]. The pillars of the plan are to enable countries to emerge stronger from the Covid-19 crisis, to boost private investment and support struggling companies, to make the EU single market stronger and more resilient, and to accelerate the EU’s dual agenda for green and digital transitions. With a wave of sustainable infrastructure and clean energy projects on the horizon, we envision ample opportunity for investment in industries that will contribute to social, environmental, and economic well-being. Whether it is the development of cleaner transport and logistics, or the kick-start of a clean hydrogen economy in Europe, the post-pandemic era may be one of the greatest drivers for growth, catalyzing new opportunities in exciting impact-driven industries.
To learn more about what True North is doing to help revitalize the world post Covid-19, please contact Fund Manager Kai Chen (kai@truenorthimpact.com)