The venture capital industry is weathering the Covid-19 pandemic better than many parts of the world economy, according to researchers from Harvard University, University of British Columbia, University of Chicago, and Stanford University.
Fifty-two percent of VC investors globally told the researchers that their portfolios have had stronger performance in the pandemic or have been unaffected by it, Harvard’s Paul Gompers, UBC’s Will Gornall, University of Chicago’s Steven Kaplan, and Stanford’s Ilya Strebulaev said in a paper this month. They surveyed more than 1,000 institutional and corporate venture capitalists from June 29 to July 15, a period in which the pandemic was “controlled or slowing in Western Europe and most of Asia but was still active and growing in the United States.”
Relatively strong VC performance in the economic downturn induced by Covid-19 may be tied to the nature of the business, as venture-capital-owned companies use little debt, have large cash reserves, and are set up to more quickly pivot to remote work, according to the paper. The researchers also suggested that VC holdings benefit from disruptive environments.
“If portfolio companies are real options on innovative technologies and business models, an increase in volatility may increase the value of those options,” the authors said in the paper. “The turbulence produced by the pandemic has created winners and losers, with the winning companies offsetting the losing companies for the typical fund.”
The VCs that expected Covid-19 to increase their cash-on-cash multiples anticipated them rising them by a median of 1, with internal rates of return rising by 5 percent, according to paper. By contrast, VCs expecting a decline in cash-on-cash multiples reported they would drop by a multiple of 0.50 with IRRs falling by 5 percent.
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Venture capitalists are important to the “innovation ecosystem” of the global economy and have adapted to navigating “a great deal of uncertainty about the future,” according to the paper. “VCs are working somewhat harder in the pandemic than they did five years ago,” the researchers said.
They work an average of 58 hours a week, with VCs in the U.S. reporting working more than 60 hours, according to the paper. The single largest chunk of time — 19 hours — is spent working with their portfolio companies.
This is consistent with the typical VC holding five board seats, the researchers said, adding that institutional venture capitalists tend to spend more time than corporate VCs on helping their companies and have more board seats.
“VCs still spend an appreciable amount of time sourcing and selecting potential deals despite the difficulties of traveling and in-person meetings that the pandemic has caused,” the authors found. “Sourcing and networking are the second and fourth most important activities, at 14.4 and 6.4 hours per week.”