The pandemic has opened up new investment niches

Despite the introduction of lockdowns around the world, significant changes took place in the venture capital market in 2020. A well-known entrepreneur, co-founder of a number of large business companies, business angel and managing partner of The Untitled Ventures Konstantin Siniushin shared his thoughts on how the venture capital market has changed during the pandemic and what are the prospects for its development in the coming years.

The year 2020 has made adjustments to many plans of entrepreneurs and business investors. A large number of deals that were to be closed in 2020 have been delayed. And it seems to me that closed deals decreased in the past year not so much because of the pandemic itself since everyone quickly went online — both startups and investors, but because of understanding the changes in the global market that the pandemic introduced.

The result was a fundamental overhaul of the investment focus. Therefore, some projects will never be able to attract money, but others have become noticeable and thus — more expensive. For example, in our portfolio, all offline services have dropped significantly, and all online services have grown significantly. The main thing is that the pandemic has changed many consumer patterns and opened completely new investment niches, into which venture capital will head after a pause. In particular, interest in biomedical topics has grown significantly, although before that it had never been the subject of massive investor interest anywhere.

In 2020, there was a situation where investors were very cautious in the early stages and more willingly preferred projects in the later stages. Investment in them increased by 24%. What does this trend mean, should we expect it to continue?

I believe that the most underfunded stage of venture investment is the seeding stage. It is much easier to find small money at the pre-seed stage and a little more difficult, but perhaps, at the stage of scaling, proven by the growth rates and profitability of the business.

But the seeding stage sagged most noticeably. It is obvious that investors, as part of syndicates, can enter into deals at later stages, since the risk of settling on a flat section of the same classic exhibitor for five or more years is very high, even for successful projects. What then to say about unsuccessful ones? In other words, money takes lower risks and shorter investment cycles because 30x returns in 10 years doesn’t look as attractive as 3x returns in one year.

In 2020, the technological side of economic processes has changed a lot. The massive introduction of advanced technologies for managing business and government structures was more forced, but it led to qualitative changes. I seriously assume that real innovation is not just some kind of technical novelty and readiness to comply with modern consumer patterns, but the ability to significantly increase the economic effect, primarily from the introduction of a specific innovation. Wherever this effect is high, innovation is bound to change almost all business and technological processes. Otherwise, they can only be considered as a fashion accessory.

After a strong shock in the first half of 2020, the tech sector showed very good recovery. Can we conclude from this that the future of the economy is very closely linked to innovation? Undoubtedly. Now almost all sectors of the traditional economy have begun to experience a stage of rapid digitalization, so high growth rates of the corresponding technology companies can be predicted, and venture is primarily a search for such niches, where growth rates are high enough, and revenue multipliers are constantly growing.

Today, digitalization is one of the important signs of competition, so the demand for innovation is growing. Another thing is that there are quite a few real innovations even on a global scale. When they are found, all these traditional games with traffic and active sales are not even needed: today people want to buy real innovation more than it can sell. An experienced investor will first of all look for such objects for investment.