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VCs Say Lessons From COVID-19 May Push Funding, Dealmaking Past Political Uncertainty

From Crunchbase News:

While the nation awaits the results of the presidential election, lessons learned early in the year from the COVID-19 pandemic and the “new normal” it created could push the tech sector past any political uncertainty.

“There is ‘scar tissue,’ if you will, from March, as it caused a lot of companies to change their psychology,” Yash Patel, general partner at Telstra Ventures, told Crunchbase News.

Companies recalibrated in March and April as the world came to a standstill. Not only did many startups and venture capital-funded companies cut their cash burn, they were also advised to raise money when they could, rather than wait for the most optimal valuations as they had in the past, Patel said.

That strategy should help companies navigate any uncertainty created by the White House drama, as will the fact so much capital remains in the markets, said Ted Smith, co-founder and president of technology-focused investment bank Union Square Advisors.

With COVID-19 creating so much uncertainty—likely even more than the election—and the markets being flush with capital needing to be deployed, Smith said he sees few buyers and investors taking any pause now.

Smith said many firms are raising funds that are flush with cash, and he has seen no signals from investors pulling back in the market due to the election.

“Your job is to deploy that money,” said Smith, adding that even before the election both private and public markets already seemed to price-in a level of “indifference” as to who would occupy the White House come January.

That money has only caused VC deals to become more competitive pre-election, which is driving both faster deal cycles and higher pre-money valuations for entrepreneurs, said Don Butler, managing director at Thomvest Ventures.

Global venture funding this year has experienced an upswing despite the economic effects of the pandemic. Between the first and third quarters of 2020, investment in areas including health tech, apps, payments, education and gaming surged, according to Crunchbase data. 

Worldwide, venture investors poured $76.4 billion into startups in Q3, up 9 percent year over year. Late-stage funding in particular has shown a marked increase, with companies raising $48.1 billion in the third quarter across 452 rounds, per Crunchbase data.

“There is just so much liquidity out there right now,” said Butler. He added he saw no slowdown in pitches for funding in the weeks leading to the election and does not expect any moving forward, even as a handful of states are still counting ballots and legal challenges may await.

The third quarter saw nine venture-backed companies acquired in billion-dollar-plus deals—the highest count per quarter since the beginning of 2019, per Crunchbase data.

COVID-19 and the new normal it created also should push dealmaking through the current election unknowns, said Saad Siddiqui, a principal at Telstra Ventures.

Along with strategics having buying power through low interest rates, the pandemic also illustrated the need for older, legacy tech companies to make deals to help keep up with the digital transformation needs of their customers, he said.

While there may be a brief “election pause,” Siddiqui said buyers see both the need for these disruptive technologies, as well as a welcoming capital market to finance those deals.

However, if the political uncertainty continues, some issues could arise in the sector. Patel—whose portfolio includes mobile-gaming company Skillz, which is set to go public through a SPAC later this year—said the timing of certain liquidity events such as IPOs may have to be reevaluated. Also, some sectors that are highly regulated like health tech and fintech could see a slowdown or pause, as could government tech companies as things drag on, said Patel.

Tech companies in spaces such as digitalization, collaboration and entertainment only should continue to see significant tailwinds regardless of the next president, Siddiqui said.

So while most of America—and the world—remains transfixed on news of the 2020 election and its outcome, the tech world will likely continue to roll through the uncertainty.

“The pandemic and the digital transformation it made necessary are driving the sector right now,” said Ray Rothrock, an investor and board member at FiftySix Investments. “With the market so strong, you are not going to see fundraising or dealmaking take a pause.

“I just can’t see it having a significant impact.” he added.