2021 Trends in Venture Capital Investing

Key trends and takeaways from interviews with 31 Boston venture capitalists, industry professionals, and experts.

By Ian Mashiter, Senior Lecturer at Questrom and Curriculum Director at Innovate@BU, and Malav Sukhadia, 2021 MBA Candidate 

In the Summer of 2020, as the US was coming to terms with the pandemic, two Questrom MBA students and Professor Greg Stoller worked with the UK based research company Qodeo to co-interview 31 Boston VC, industry professionals, and experts, including partners from firms such as General Catalyst and academics such as Dr. Josh Lerner. Malav Sukhaida and David Landesman presented the trends and insights from those interviews in the report “Searching for Horses, not Unicorns.”

The investors reported that the Covid-19 pandemic was more of a speed bump for the venture capital industry compared to the devastation of the ’00 tech bubble collapse and ’08 Global Financial Crisis. Fueled by low-interest rates, excessive dry powder, and resilient public markets, the venture capital industry bounced back successfully from the momentary hit in deal flow, valuations, and exits experienced in the first half of 2020. Investors mentioned that given the 10-year lifespan of their funds, they did not alter their investment thesis in response to this black swan event and have adapted well to the virtual pitch and founder meetings. Given the virtual setting, VCs were able to meet more founders and meet with them more frequently. That said, a few investors are on the other side of the spectrum, such as Questrom Alum Charley Lax of early-stage firm GrandBanks Capital, who said they are not writing a single check without meeting the founder or team in person.

Overall, we expect VCs to continue to use virtual meetings, which will bring forth two significant changes in 2021 and beyond — firstly, shorten the average pitch-to-money timeline, and secondly, speed up the decentralization of ecosystems such as Silicon Valley, with virtual meetings reducing the need for startups and well as investors to be in the Valley. The findings from these interviews were confirmed by the recent report from US analyst firm Pitchbook. While the number of deals went down from 12,211 to 10,379, the amount of money raised was up $10B to a total of $148B. These findings seem to be due to large checks written to late-stage companies and a reduction in early-stage financings.

Here are our thoughts on trends in VC investing for 2021:

1. While the several IPOs in the second half of 2020 proved that virtual roadshows could fuel a successful IPO, 2020 was the year of the SPACs (Special Purpose Acquisition Companies). With a record-breaking 165 SPAC listings in 2020, reverse mergers with SPACs to go public have gained popularity among startups and VCs mainly because of the faster, less cumbersome process and reduced listing price volatility of the traditional IPO process. While we expect continued enthusiasm for reverse mergers with SPACs instead of IPOs, we will continue to see traditional IPO’s and direct listings for established companies with sizable revenue such as Airbnb who went public in 2020.
2. In terms of the sectors, the Boston investors interviewed are bullish on AI and Biotech. Pitchbook is expecting that as in 2020, VC investment in biotech and pharma will exceed $20B.
3. With the new Biden administration, they also foresee an uptick in investment activity in the Cleantech space.
4. Early-stage investing will recover once the investors can meet in person with the entrepreneurs. As one investor said about deals done over zoom, “That’s for the lazy, there is no substitute for looking an entrepreneur in the eye and making them sweat a little bit.”
5. We will continue to see more funds focused on black and female founders and more diversity amongst VC partners. There are compelling reasons as data is now showing the increased returns of companies with diverse founders.

One thing that remains certain is all the investors interviewed reported that deal flow remains very strong and that as one investor mentioned, “COVID has given entrepreneurs many new problems to solve.”