“The world of high-tech investments is led mainly by venture capital funds, so it is important to get into the head of this world. The venture capital world has common characteristics that are true of the vast majority of funds. Unlike professional stock market investors, who see the market fall It’s just a question of timing, funds behave differently, and not without reason” – Rami Beracha
In this article, the investor Rami Beracha shares his doctrine on the world of investing during the COVID-19 raging around the world.
Venture capitalists invest with the trend and not against it. The reason is clear – the investments are made in companies that at best are still not profitable, and in most cases they have just started sales, or are in the product development stage. Such companies must continue raising about every 12 to 18 months, which are carried out by new investors. This is how the investment model of funds works, leading one round (in most cases), and participating in follow-up rounds, which are led, each round in turn, by another fund that joins the investment.
It’s like a messenger race – the first investor runs the first 12 months and he really wants to make sure that when he reaches the end of the first part, an investor who specializes in follow-on investments will wait for him and take the stick from him – or in other words, lead the next round. No investor wants to run the first leg and get to a deserted stick transfer station from investors…
The day-to-day activities of an investment fund
The day-to-day of a fund is broadly divided between two main activities: one, meetings with new companies, identifying attractive candidates for investment, and investing in them. Second, ongoing work with portfolio companies (guidance, partnership in decision-making and assistance in follow-up recruitment). Let’s imagine a fund that has invested to date in 10 companies from the current fund. They all had oxygen for about 12 months, or rather, had at the time of investment. A recruitment process takes on average between 3 and 6 months, and therefore it can be assumed that about half of those companies are in preparation for recruitment or during recruitment.
On normal days, on positive trend days, a significant portion of those companies would meet with outside investors, show significant progress and adhere to their business plan. The same companies will present the leap they will make with the help of the additional raising, will excite the imagination of new investors who are eager to invest in a growing company and will raise further raises. The least attractive companies in the portfolio, would have difficulty raising and would have to return to current investors for interim financing and some would not even succeed and close.
But the days are unusual, corona time, most companies do not have the ability to predict and prove continued growth because the entire market is in uncertainty, cash retention and cost cutting, is in isolation, focused on preserving toilet papers. Eager investors are no longer present, have cooled down, are busy helping their existing investments. This requires the fund’s partners to prepare for the new situation and do what I did as a partner in Pitango in 2008 during the subprime crisis and what did we do then? Exactly what we did in 2000 when the internet bubble burst.
We went on the defensive, significantly reducing the amount of new investments, focusing on preserving existing investments, cutting back on meat and focusing on companies that have a right to exist even in difficult times. We have increased the reserves we have reserved for powerful holding companies, at the expense of new investments and at the expense of companies shuffling their portfolios – difficult, cold but inevitable.
The world of investments during the COVID-19 times
The investment world has not gone away and has not entered a complete freeze. Quality investments that are in advanced stages are not eliminated. They may get a fix at a set value, but they happen. Even companies in the growth phase, will have to compromise on the value of the company but will be able to recruit. The main challenge will be facing hundreds of companies that raised money first, oxygen for a year. Companies of this type even without the corona are facing the most important stage in their lives – significant first recruitment. Now this task becomes even more difficult.
There is a significant difference between the current crisis and the previous ones. In the past, a bubble burst, a big boom that happened and ended in one day, with painful consequences for part of the market – Internet companies that simply disappeared in one day in 2000 and financial institutions that wiped out huge sums in 2008. In both cases a bubble burst, creating ricochets that splashed into more circles. An event that happened with certain consequences for the future.
In the present case there is no boom and we are done, the crisis is mostly psychological and its consequences are paralyzing, a rolling event. I believe the market will experience the beginning of a trend reversal in the coming months, but it may take a bit longer and be accompanied by hesitant start-up. As long as uncertainty reigns in all possible circles, cash is king … Young start-ups need to prepare for the battle of their lives, reduce costs, retain existing customers – be sensitive to the fact that they too are in distress, survive. I invest in quite a few companies, but more than that, I invest in the entrepreneurs themselves, in the young and those who were young, whose main task is to read the field, because the field speaks all the time, and make the right decisions and without delay. An entrepreneur, like a commander, is measured in moments like these – and it’s time for those entrepreneurs to prove that they and their teams were built from the right material.
The dove of peace will land in our yards for a few more months, and will hold in its mouth an olive branch, or cannabis, or an empty box of canned corn, and we will come out of our little boxes, and return to the day we knew. Almost but not exactly. For example, will the insight that one can work differently affect the market for shared workspaces? Probably yes. The current era has forced the world to make use of digital tools, and has accelerated market education, which in the days when it was repaired would have taken longer, into the inevitable future – a digital world.
Trends that would have taken longer to mature and reach the public consciousness have gained valuable screen time, and will gain access to a more attentive market. These include applications for distance learning, online financing and insurance services, platforms that enable remote collaboration and receiving freelance services via the network, blockchain technologies that enable automation in supply lines and of course digital medical applications and agricultural technologies that allow grain growing with a minimum of working hands.
Good luck to all of us in the current challenge, can testify from my experience that what does not break, strengthens.
The author is Rami Beracha, a venture capitalist who invests in startups in Israel and around the world.