How have the events of 2020 impacted the venture capital ecosystem, and what lies in store for startups post-pandemic? Peak reached out to the experts at York IE to talk about the future of pitch competitions, racial inequity in raising capital, and more. Enjoy our conversation with Joe Raczka, co-founder and managing partner of YORK IE.
Do you foresee investor-favorable trends in term sheets because of current economic uncertainty?
Are we going to see participating preferred returns, lowered valuations, mandatory cumulative dividends, or returns going to 2x or 3x?
It is hard to paint the entire investment ecosystem with a broad brush. The state of startups are so varied and depend on the stage. At York IE, we’re attracted to startups that are led by an experienced and complimentary team and that are attacking large, often antiquated, market opportunities. These companies have tended to remain strong despite the current situation. We also focused primarily on B2B software, which tends to be very reliable because it is so instrumental in companies running their business. As Robert Smith, Founder, CEO, and Chairman of Vista Equity Partners, once said, “Software contracts are better than first-lien debt. You realize a company will not pay the interest payment on their first lien until after they pay their software maintenance or subscription fee. … He can’t run his business without our software.”
It is also a good reminder to entrepreneurs to always try to fundraise from a position of strength and not a position of need, which will allow you to better weather the storms of uncertainty because you can better pick and choose the times you’re seeking funding. All of the elements you mentioned have been a part of investor favorable terms for a while now and do not see them going away anytime soon.
Many companies are embracing remote-work culture as a long-term solution to reduce overhead costs and alleviate employees’ health concerns about crowded office buildings.
Do you expect the venture ecosystems in places such as Boston to spread out as companies consider relocating to less urban areas?
Yes, I think there will always be major tech ecosystems in Silicon Valley, New York and Boston but I think
you are going to see more and more hubs popping up throughout the country. Remote work is going to
allow people to work where they want to live. Places like New Hampshire which have a high quality of
life, good schools, access to many natural amenities, and a very pro-business environment are going to
thrive. I think it is a very exciting time to be part of the NH tech ecosystem. There is a lot of work to be
done connecting the companies growing here with the tech executives and talent who live here but
work remotely. It is one of the reasons we’ve partnered with the NH Tech Alliance in a new initiative to
foster a greater community with remote workers.
Do you think the traditional pitch method – in-person, in front of a team of investors – will be replaced by virtual pitch competitions or other ways of presenting a business model for investment, even if concerns around public gatherings eventually subside?
What other aspects of the venture capital-seeking process do you see changing, either permanently or in the short-term?
I definitely think we’ll return to more in-person meetings once things settle down. Particularly in early
stage investing you’re investing in a person as much as a startup. It is nice to meet that person and be
able to look them in the eyes.
That being said, virtual meetings are never going away and the days of getting on a plane on Sunday
night and returning on Thursday night may very well be long gone. Virtual meetings are very beneficial
as well as they broaden access. In-person meetings typically impose a geographic barrier. But remote
meetings open up the playing field and allow entrepreneurs from different areas, as well as different
backgrounds, the potential to pitch. This is a very good thing.
Lastly, I would just say pitching and investing is a lot about your network. Entrepreneurs need to build
that network long before they actually need investment. That network is built both in-person and
virtually. If you build a strong network and have a long list of supporters and backers behind you then
the pitch meetings become either, whether they’re virtual or in-person.
Over the next months and years, will the portfolio companies of venture firms broaden to include more companies owned and operated by traditionally underrepresented founders, specifically women- and POC-owned businesses?
Yes, I think so. I think there has been a social awakening in America and people understand the benefits
of different perspectives and views on solving problems. How can you truly have innovation if every
founder looks and thinks the same way?
While awareness is good, there are also companies, like Mentor Spaces, that are taking action and
connecting emerging leaders in the Black and LatinX communities with mentors at some of the best tech
companies in the world. This will give these emerging leaders that network and exposure that is so
crucial in successfully launching new startups.
Lastly, within our first 13 investments at York IE, three have female founders. The success rates for
female founders should not be ignored. I think it is an exciting time for innovation, which means it is
definitely an exciting time to be investing.
POC founders typically do not receive venture financing as soon as other founders, if at all. When they do, valuations are often lower than for comparable companies.
Do you anticipate efforts by venture firms to seek out underrepresented founders and, if so, have you noticed any shifts in the demographic of founders seeking venture capital?
One point I’d like to start with is that at York IE we’ve always felt like the venture model was broken.
Traditional VCs make a lot of money off management fees. So they’re incentivized to raise bigger funds.
They have to deploy that capital and so they often make higher investments than potentially what the
entrepreneur needs. We think this diminishes entrepreneur equity and also creates high on paper
valuations that become difficult to achieve in reality. We started York IE to help reshape how startups
are built. So I think less capital could potentially be good for all entrepreneurs.
To answer the question directly though, yes, we are seeing more investors trying to actively find
underrepresented founders and new funds/investment firms popping up that solely invest in those
York IE was formed before the COVID-19 crisis, and was designed as a value-added approach to building startups beyond just financial investment.
Has that mission become easier or more difficult in the age of COVID?
I always joke with my wife that we picked perhaps one of the worst times in American history to start a
new company! So it is difficult to say whether COVID made it more difficult or easy. Really it is all we’ve
known. What I do think it has shown is that despite these trying economic times there are startups that
are out there raising funds and growing and scaling their businesses. They need help and they need
advisors in their corner who are playing the long-game and add value beyond just capital. This is the
approach we’re taking and we are seeing it working. Hopefully that will only continue as more and more
companies gain confidence in the business environment.
Many thanks to Joe for his insights! As always, if you have any questions or would like to discuss your unique business needs, email Bob at email@example.com.
Bob Baker is a founding partner of Peak Corporate Counsel. He has worked with numerous founders on a variety of issues specific to startups. When he’s not advising innovators, he can be found at networking events, playing rugby, or hiking with his kids.
This article is for informational purposes only, and may not be considered legal advice.