Venture Capital Investing in a Post-Pandemic World

With all that has changed due to the Coronavirus pandemic, we’ve chosen to revisit the Venture Capital industry to understand how, or if, it has been affected. In our final webinar of 2020, Excelsior’s founder, Brian Adams, hosted VC industry experts Hunter Hillenmeyer, Chris Mioton, and Andrew Bouldin to discuss how their firms responded to and are moving forward from 2020’s health crisis.

In this webinar, panelists discussed the following:

• How their portfolios were affected this year
• Healthcare advantages and disadvantages
• Determining and managing risk
• The Nashville VC experience compared to major tech hubs
• The importance of a good team
• Expectations for the future of VC

COVID-19’s Effects on the VC Industry

Encapsulating the theme of this webinar, Adams commented that “We’ve had an unusual year in many ways, seeing venture go in various directions depending on the focus of the market.” He asked panelists how their respective subsectors of venture capital have been affected and whether or not they think it’s a good time to be investing in the space.

• Healthcare-Specific: Bouldin answered first, offering impressive evidence behind the astounding growth in healthcare companies this year. According to a recent McKinsey study, healthcare is expected to grow from a $350B industry to a $600B industry in just the next five years. FCA Venture Partners has seen tremendous success this year, and Bouldin implied that they’ll “continue to ride that wave” of focusing on the healthcare space.
• General VC: Mioton has also had “a very active year” in VC at Shore Capital Partners. As the asset class has continued to perform well, they’ve seen a great deal of acceleration on the provider side. They expect this trend to continue into next year as well.
• Market Liquidity: As for Hillenmeyer’s firm, Next Play Capital, most of their liquidity results from the state of the public markets. So with the IPO market being healthy and the SPAC boom of this year, they’ve been able to take three of their companies public.

Unpredictable Markets: Peloton vs. Lime

To provide some insight on the unpredictability of this year, Hillenmeyer used an example with two of Next Play Capital’s portfolio companies, Peloton and Lime. While both of these companies are focused in the lifestyle/fitness space, they’ve had dramatically different outcomes as a result of the pandemic.

Lime, an electric scooter sharing program, saw nearly 95% of its revenue disappear overnight in March. As Americans quarantined at home, there was no longer a need for fun, mobile transportation across cities. Peloton, on the other hand, an exercise equipment and media company offering live at-home workouts, skyrocketed as a result of the stay-at-home mandates. Its stocks have grown over 350% this year alone. This goes to show how the pandemic has not only affected certain industries differently but even certain types of businesses within those industries.

Healthcare Companies (And the Best to Invest in Now)

“We’ve seen nearly 5 years worth of healthcare innovation just this year,” but which business models have become more or less attractive as a result of the pandemic? Panelists provided insight on the following three subsectors:

1. Telehealth: Mioton commented on the acceleration of telemedicine: “Some regulatory changes have made it easier to accomplish because we’ve all been forced to adapt to it so quickly.” While certain provider businesses did take a hit at the beginning of the pandemic, those that were able to accommodate virtual offerings have come out stronger on the other side.
2. Behavioral Psychology: Therapy-based businesses are often inversely correlated with the state of the economy as stress and anxiety levels rise in individuals. Understandably with all that has occurred this year, alongside telehealth, Bouldin believes behavioral, outpatient psych businesses to be the hottest subsector of healthcare this year. Hillenmeyer agreed, sharing that his wife is a therapist who can attest to this being true. Great programs have emerged that match individuals with therapists online, and, with the ability to leverage insurance, these businesses are sure to succeed.
3. SAAS Healthcare Companies: Bouldin shared that SAAS companies comprise nearly 80% of FCA Venture Partners’ portfolio. These are the software companies that “make things faster, better, and cheaper in the health space,” and they’ve seen huge acceleration this year with the transition to so many new virtual offerings.

The hardest decisions being made this year? “Asking how much of this acceleration is a lasting shift versus what is just current COVID-related demand.” Hillenmeyer commented that their biggest focus has been on ensuring that they invest in long-term success.

Managing Risk in a Portfolio

Adams inquired on the aspect of risk management within venture capital. “I’m reading about people taking bigger and bigger risks, but how do you underwrite risk from an institutional standpoint?”

• Risk-Aggressive: At Next Play Capital, Hillenmeyer manages a fund of funds, which are different in that their portfolio contains different underlying portfolios of other funds. They hope for high returns from just a few of their companies, and it’s a somewhat risk-aggressive way of approaching venture capital. “Counterintuitively, fund of funds end up being a relatively safe product” since you are compressed on either side by high gains or loss potential.
• Higher Batting Average: FCA Venture Partners has a less risky strategy, which Bouldin described by saying that they “aim for a higher batting average.” While they’re unlikely to invest in unicorn companies, they typically only lose money on 20-25% of their whole fund.
• Consistency: Similarly, Mioton shared that Shore Capital Partners focuses most heavily on consistency of their processes in order to avoid risk. Their strategy is very thesis-driven, and it’s rare that they act purely opportunistic. A certain sector must be well researched with a white paper before they’re willing to move forward with a deal.

The Importance of a Physical Footprint

Historically, private equity venture capital has been based in California or New York, but each of these webinar participants are located in Nashville. Adams wondered, “how important is a firm’s physical footprint for achieving higher returns?” Panelists shared three different advantages to being in Nashville, rather than a tech hub:

• The Nashville Edge: Bouldin confided that because they can’t compete with the Silicon Valley VC models, they need to be different to succeed. “We’ve branded ourselves as smart, super helpful Nashville investors that deeply understand the healthcare industry.” Having the local, personal mindset has really set them apart for companies that value an insider’s perspective to the industry.
• Healthcare: Similarly, it has been important for Mioton’s firm to have a physical presence in the heart of the healthcare industry. They’ve found great relationships with professionals in the city and really been able to increase their community involvement. Having a geographic commitment here has aided their investing across the south.
• Online Advancements: Hillenmeyer thinks that “it’s less important than ever, from a startup side, to be in a tech hub in order to be successful.” With the advancements of software, everything has gotten easier to do online. He even expects it to become a disadvantage to be in a tech hub like Silicon Valley simply due to the rising costs of attracting good team members in these markets.

Investing in a Good Team vs. a Good Product

One of the final topics discussed was the importance of investing in a good founder or a team, in addition to their product. While Bouldin’s firm may help a company eventually add to their team, he shared that they’re “definitely backing the team that’s in place.” Their order of importance when making a new investment is as follows:

1. The team
2. The market
3. The unique value they offer

For Mioton, the industry and operating model remain the most important factors, but they do augment every company’s management team “pretty heavily.” Because they don’t want the burden of having to transform a whole team, they expect it to be put in place, especially before an exit.

Hillenmeyer believes that the earlier an investment is made, the more important the team is. “You’re ultimately betting on their judgment and ability to learn from feedback and improve over time.”

Final Thoughts on VC: Past Performance and Future Expectation

Adams concluded, “venture continues to be an attractive place to allocate capital, though it’s certainly not for the faint of heart.” With all that’s occurring in the public markets, from the SPAC boom to continued low interest rates to increasing returns, venture capital is expected to continue in its popularity and success as an alternative form of investing. Industries like healthcare, lifestyle, and technology have seen the greatest growth this year, but 2021 remains full of many possibilities!