On 17 June 2022, IFT assembled a panel of experts in finance and technology to discuss how the landscape of investment must change to meet the challenges of the times. IFT PhD student Millie Deng recaps what we learned.

The Covid-19 pandemic has been a turning point for humanity, bringing world economies to a standstill and highlighted our vulnerabilities. The Russia-Ukraine conflict has further amplified uncertainty and instability. Venture capital and private equity are engines of change and growth in terms of the way we invest in businesses. But these investments, particularly of Venture Capital (VC), are vulnerable to volatility as they follow economic up and downturns.

The last three years have showcased this dynamic like perhaps no other period in history. And yet, despite the universal and potentially long-lasting economic, social, and political impacts of Covid-19, 2021 was actually a record-breaking year for VC. The International Monetary Fund was able to raise its projection for economic growth in 2021 from 5.5% to 6%, and project 4.4% growth in 2022. This was partly based on how well the pandemic continues to be controlled, and the effectiveness of global economic policies to cushion the damage to the markets. Now, we must ask how we continue to recover, while reconfiguring existing systems to be resilient to shocks.

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Ideas are never in short supply, but the funding to make them fly is often harder to come by. Venture Capitalists (VCs) have been a huge source of financing for early-stage businesses, and the impact they bring to their portfolio companies makes founders covet them. In this article, Keisi Mancellari and Muideen Abubakar evaluate the critical factors that run through the mind of a VC before making an investment, a valuation and even hiring choices. This report is based on a recent IFT seminar on “Key Drivers in Early Stage Venture Capitalism” with David Grimm, Albion VC and UCL Technology Fund.

Just as every other category of investors, VCs are seeking alpha. This means they are far from a jack-of-all-trades and will not necessarily throw money at start-ups in every industry, in their quest for superior returns. This takes us to the first question that comes to the mind of a VC approaching a founder.

What’s your playing field?

VCs tend to have industry preferences as to where they deploy capital. That way, they can demonstrate their specialised knowledge of an industry, the dynamics, and the potentials. Knowing what kind of companies are being funded by a VC should give direction to founders on which VC they should court as they jostle for cash. As David Grimm highlighted during his seminar at the UCL Institute of Finance and Technology, his VC focuses on enterprise software, deeptech, data analytics and digital healthcare. It is common for VCs to build a specialist fund for every industry that they have an interest in. For instance, Albion VC being a tech-oriented investor manages the specialist UCL Technology Fund in collaboration with UCL Business.

When a VC funds a venture, the deal doesn’t end with the handshake. They assume the role of an adviser to the management. This is another reason why they focus on a niche, as they must be able to deploy their specialist knowledge to provide critical guidance to founders, bear the torch for them on the customer acquisition path and perhaps refer them to other investors of interest.

As David also alluded to, valuation plays a key part in why a VC may ignore a pitch if the proposal doesn’t fall within their industry remit. A VC’s knowledge of an industry enables them to put an appropriate price on the table when they are approached and, most importantly, to forecast the viable exit opportunities and magnitude of multiples. After all, the end should justify the wait and the risk. (more…)