For better or worse, 2020 has been a year we’ll all remember. As it comes to a close, we’re all wondering what comes next? Which of the changes that have taken place during the pandemic will be fleeting, and which ones are here to stay?
After speaking with some prominent investor friends in the Angel and Venture Space, here are some predictions for early stage startups in the year ahead.
The focus here is on the trends and changes within early-stage startups and venture capital. If the pandemic has taught us anything, technology is not just a future engine of growth, but also a bright spot that has enabled billions of people across the globe to continue working and building for the future.
Pre-seed Will Become The Hottest Stage In Venture
Over the past decade, seed rounds have become bigger and more institutionalized. Many seed funds started out focused on “first check,” but as they have seen success, they have raised bigger funds and are now leading three to five million dollar seed rounds. The seed round today looks a lot like a Series A round a decade ago in terms of both size and traction.
This shift has created a growing gap at pre-seed. And today’s pre-seed round typically isn’t just one fund raise, instead it is often a couple of rounds over the course of one to two years. Not every talented ambitious founder is able to easily pull together hundreds of thousands of dollars from friends, family and angels to get off the ground. For founders who do not come from privileged networks, the pre-seed round can take longer and be much harder to raise.
Over the past few years, seed rounds have gotten more competitive. According to Pitchbook, there were 1,162 venture funds focused on Seed in 2019 and only 126 focused on Pre-seed. More multi-stage funds are also dipping down into seed, writing small “option” checks. But this trend has happened less in pre-seed. While seed rounds have gotten incredibly competitive, pre-seed rounds rarely are.
In 2021, expect more investors to wake up to the pre-seed opportunity. It will become its own distinct stage. We’ll see many more investors focused on it. We’ll see a more institutional approach to pre-seed start to emerge, with consistent terms, valuations and platforms for founders. This will help founders to be more fully capitalized from the start so they are set up to hit venture-style inflection points. Pre-seed will come into its own in 2021. It will no longer be in Seed’s shadow.
Founders Will Choose Challenger Funds Over Large, Established Funds
Over the past few years, we’ve seen the rise of different venture fund models: micro funds, operator funds, rolling funds, syndicates and scout programs. This trend is positive in that it is giving founders a wider range of options for raising capital. Many founders are placing increased value on adding operators to their cap table who have a diverse range of experiences, from marketing to sales to product. There is growing recognition that this operational expertise can add real value.
These new venture capital models are also giving a broader range of people the ability to invest at the early stage, see returns, and re-invest bigger amounts.
In 2021, expect challenger funds to become their own established category. Founders will see the benefit of the unique expertise and networks they bring, without the signaling risk of multi-stage funds. Challenger funds will win competitive deals against established funds and will become the preference for founders.
Investment Rounds, And Venture Funds, Will Be Closed Without Lawyers
One of the things driving the trend towards the rise in challenger funds is the standardization of early-stage investments. One example of this is the YC SAFE: it has become standard at pre-seed (at least in the Bay Area), making the legal and operational work of raising a round fast and simple for both founders and investors. The biggest benefit to founders is their ability to get a round signed, closed and wired within days (instead of weeks or even months).
In a similar vein, AngelList, Carta and ExtraVallis have automated much of the fund set up, operations and reporting for emerging managers. More funds are using automation and tooling for the venture value chain: deal sourcing, investment decision making, fund and portfolio management, and continuous operations. This is enabling new entrants, as overhead becomes cheaper, and allows existing investors to focus on what they do best: working with entrepreneurs to build the future.
The automation of round documents, special purpose vehicles, syndicates and venture capital funds means early-stage investors see more standard terms. In addition, it has removed barriers to allow more people, especially rising investors and operators, to cost efficiently and quickly set up micro funds and write checks.
In 2021, I expect the standardization of early stage investing to mean that rounds and funds are closed without lawyers. This is a sign that the startup industry is maturing, and the efficiency gains will enable accelerated growth.
The Hot Tech Hubs In 2021 Will Be Online Communities, Not Physical Locations
Pre-pandemic, early-stage startup ecosystems were hyperlocal. Founders typically raised from local investors, hired local talent and learned best practices from their local networks. People thought early-stage investors needed to be on the ground to get their hands dirty and help founders.
In 2020, the perception has been shattered that you have to be in person to hire someone, collaborate, close a sale or raise a round. Doing all of this via Zoom has rapidly become the norm.
This decoupling of geography from financial and human capital is powerful. Going fully virtual means startups can hire the best people regardless of their physical location, close the ideal customers and find the optimal investors, rather than being constrained by who happens to be close by. For early-stage investors, this year has proved that location doesn’t matter so much as expertise, empathy and connection with founders.
The potential for cross pollination of ideas across markets is also powerful. Better flows of information within the investor and tech community more generally about trends, insights and opportunities makes the startup environment more efficient overall.
The thought is that the world will never go back to the inefficiency of always needing to meet in person to make a decision, close a sale or write a check. In 2021, expect to see investors and startups increasingly embrace fully remote or hybrid remote, which enables rising tech hubs to accelerate in growth across the world from Orange County to Boston to Helsinki to Singapore.
But more powerful than these physical locations are the online communities within tech: both the established ones like Twitter and new ones springing up all over. These networks, completely virtual, will be the hottest tech hubs of 2021.
Personal Brand Will Become The Most Sought After New Superpower In Tech
Now that venture capitalists can’t run into startups at conferences, in SoMa or on Sand Hill Road, where do they get their deal flow?
Investors have to rely more on online channels. This means brand, word of mouth and community matter more. Getting in front of founders through content, social media, virtual events is more important than ever. Marketing and community are the new VC superpowers for creating a deal flow engine.
The same is true for early-stage founders. When we’re all stuck in our houses, online visibility has never been more important. This trend will continue long after the pandemic ends.
There used to be the perception that brand didn’t matter in tech. But as the industry grows up, many are realizing the power of brand for both scalable customer acquisition and defensibility. With more founders and investors than ever before, the ones with powerful rising brands will be the ones to watch. They will win at attracting talent, capital and opportunities.
“Sharing our story with our customers, drivers and brands has been a rewarding way to experience the ups and downs of running a startup,” said Jermaine Sanchez, Founder and President of ADITT App. “This way, investors are able to build confidence and understand our values and how we think — some of the key investment criteria in early-stage investment.”
I’m optimistic about the year ahead and expect to see more activity than ever at the early stage. Startups built in 2021 will have the advantage of being built for a post-Covid world from day one, versus the later stage startups and incumbents that have been challenged to quickly pivot this year. The pandemic has accelerated technological adoption, and I believe some of the next decade’s iconic companies will be founded in the year ahead.