Why Are We Excited About Investing Now?
By Hal Callais
June 4, 2020:
During the COVID-19 pandemic, we have closed one deal and are about to close another. We are excited to be partnering with founders achieving their vision while navigating these complex market conditions. Although we are excited about actively making new investments, many founders in our markets have the perception that investors are not deploying capital.
For both deals we are doing, we have syndicated the round with other funds and have seen most of our partners choose to increase their positions through co-investments. So why do founders have the view that groups aren’t investing now?
But this is not the case with some of our peers; we are lucky to have aligned investors working with us!
In syndicating these deals, we have learned from several funds that they have had to halt new investment activity. We have also heard rhetoric from stakeholders that this is true for every investor. It is imperative that founders do not allow these pontifications and internal challenges of some investors drive how they are making capital raise decisions.
Outside of the handful of funds,, there are lots of investors who are very excited to be deploying capital now. Savvy investors are putting money to work, albeit in smaller increments and on less favorable terms to manage risk; but they are investing.
My message to founders is simple: Focus on your metrics and be realistic with your raise expectations (another post on capital raising post-COVID-19 coming soon). I cannot speak to why many investors are still actively investing today, but here are my top 5 reasons we are excited to continue to deploy capital:
Invest Across Cycles
Our investment strategy was designed to invest across market cycles. Timing the peaks and valleys of the market is hard. There is no smoking gun when predicting market cycles and by definition, the majority of the market will be surprised every time. Events like the COVID-19 pandemic are impossible to predict with precision.
Part of the reasoning to have a steady deployment strategy, is summarized in the chart to the right. Investors who missed the 10 best trading days of the S&P 500 Index from 1990-2019, made 50% less than an investor who was invested for all days during that period.(2). By reserving capital during a recession, an investor will miss out on potential high return periods when they occur. This is why it’s important to invest across economic cycles. While private markets (including VC), are much less efficient than public markets, the same theory applies.
It’s the best time to invest
Even though we shy away from timing the market, factors such as volatility, suppressed valuations, and liquidity (bid-ask spread) tend to generate better returns. This notion is the ultimate example of the adage: buy low and sell high.
This is particularly relevant in VC, where it is all about the long-term trends. When VC markets are heated, valuations increase, capital efficiency goes away, and decision making is sacrificed for speed. So dramatic pull backs in the market allow investors to make the same bets at lower prices, on more favorable terms and at a much slower pace.
As an example, please review the chart to the right. In 1Q 2020 there were 83 VC funds that closed a total of $27 billion in new funds. This is more than half of the total capital raised in 2019!(3) At an average of $325 million, these are primarily mega funds located on the East/West coasts.
Long-term Value
It takes a long time to create value when investing in long-term trends. This is a fundamental truth to understand why these ebbs and flows of the market shouldn’t drive a fund’s deployment pace.
Waiting for more clarity with the economic impacts of COVID-19 can be prudent. It could also prudent to consider increasing the deployment pace to capture cheaper asset prices if the market is to rebound, but it takes time to create long term value across all markets, the chart here shows that VC’s investing at the Series A should expect an 8-year hold period.(4) While it helps to take advantage of cheaper asset prices for financial returns, investing in privately held companies takes time to create significant value.
Founder Scrappiness
Environments like the one precipitated by COVID-19 have a way of forcing founders to hunker down and really assess how they are building their business and quick capital availability. Through this exercise, many startups become more capital efficient and scrappy and need to focus on creating a self-sustaining business.
Capital efficiency matters, as it means you will need much less money to reach your milestones. In a practical example, “Trulia co-founder Pete Flint and AppDynamics co-founder Jyoti Bansal built billion-dollar businesses the hard way, weathering the 2008 financial meltdown as young companies.”(5)
Times like this tend to define a founder’s metal and the survivability of their business.
Innovation In Hardship
“Necessity is the mother of invention; scarcity drives entrepreneurship.”(6)
While we aren’t investing in many seed rounds today, we want to help the founders who are figuring it all out today. Some of the startups founded/reborn/accelerated during a recession are: Microsoft (1975), Apple (1975+2001), Netflix (1997), Mailchimp (2001), Airbnb (2008), Square (2009), Slack (2009) Uber (2009), and Warby Parker (2010. Always remember to persevere through it, for you are in great company. We have been super excited to see what this new generation of startups are creating as they innovate in this tough environment.
About Callais Capital Management
Callais Capital Management is a Louisiana based early stage venture capital and asset management firm that operates funds focused on the growing startup ecosystem along the Third Coast and Mississippi River Valley. The Callais team leverages their background in entrepreneurship, investing expertise, and deep roots in a market underserved by institutional investors, to identify high-growth opportunities and top management teams in need of capital. They draw from four generations of business insight, a distinguished network of professionals and deep board experience across industries to source, scale mentor, and strengthen startups and founders. Callais Capital is a Louisiana Registered Investment Advisor. For more information about Callais Capital Management: www.callaiscapital.com
“Timing the Market is Impossible,” Hartford Funds, Click here
“US Venture Capital in Q1 2020,” Prequin and First Republic, Click here
“Venture Capital Exit Times,” Angel Blog, Click here
“How these Bay Area tech entrepreneurs survived the last recession to build billion-dollar companies,” Biz Journals, Click here
“6 Iconic Companies That Succeeded During a Recession,” Inc, Click here