Why Investors in 2021 Need to Bet Against the Usual VC Dogma

It is now just over a year into the COVID-19 pandemic, and at a glance, early data from venture capital (VC) investing activity in 2020 paints a rosier picture than the gloom and doom that was foreshadowed during the first wave of cases. US VC investment activity totaled $156.2 billion last year, up from $138.1 billion in 2019. It was the first time funding has surpassed $150 billion, said Pitchbook. Full-year numbers for ASEAN are not in yet, but based on an August report by Cento Ventures, the first half of 2020 saw $5.6 billion invested, lower than the $6.4 billion in the first half of 2019.

- Alvin Evander

On the surface, VC activity seems to have survived the massive outflows that have affected equity markets. But drill down both reports for the US and ASEAN, and a similar theme emerges: mega deals (over $100 million) absolutely dominated total deal values, accounting for two-thirds of total VC investments. In tandem, deals have been concentrated on later-stage startups and funded by big VC firms. In short, the big have simply gotten bigger, while smaller firms and startups have seen activity dry up.

OUT WITH THE OLD DOGMA

Unless you are a massive investor or already a unicorn, this situation calls for a drastic change in the typical tenets of VC investing. For too long, VCs have thrown money at as many startups as possible ('spray and pray') in the hopes that one eventually sticks, chasing regional or local copycats of existing unicorns in the same few sectors catering to mass-market consumers. Even prior to the pandemic, experts had sounded the alarm that skyrocketing valuations, which pushed smaller VCs to jump in earlier due to the fear of missing out, only led to a class of unicorns that have billions of dollars in revenues but zero profits.

In a rush to find the next WeWork, Amazon, or Uber, investors raised larger rounds toward blitzscaling untested startups. Blitzscaling aims to rapidly build up enterprises, prioritizing speed over efficiency to pursue massive scale. Startups burn through funding, plunging money into aggressive marketing, overpaying for talent, and offering heavily-discounted pricing in the hopes of boasting large user bases. Whether the business model leads to sustainable growth or profitability, whether the users are high-value or high-repeat, is secondary.

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