Beringea: VCs will regret overpaying during the pandemic
2020 is on track for a record year of VC investment but after a slow start followed by an avalanche of deals in September VCs should be in self-reflection mode.
Morning Wire spoke to the refreshingly honest Karen McCormick, chief investment officer of Beringea about the lessons learned from the pandemic and where VCs went wrong.
Beringea primarily invests in and around Series A and McCormick affectionately describes the firm as “total dinosaurs in some ways” given they have been around for 30 years.
The firm may well be ancient in VC terms but it’s investment strategy is far from lagging behind.
It has had an impressive year, investing in everything from esports to ESG firms, but Beringea was not immune to the impact of the pandemic.
“We did a slew of deals in Q1 … a lot of the diligence was done before we locked down… But we had a bit of a Covid shock in Q2 and we were all wringing our hands and pulling our hair out,” McCormick says.
VCs fight tough
Once restrictions started to ease and life came back into the market competition was rife.
“Most companies in Q2 and at the beginning of Q3 just didn’t raise. They either managed to trade through or they raised from the existing investors,” McCormick recalls. The companies that were raising were generally those that had done remarkably well either through Covid tailwinds or had latched onto a growing trend.
“At the same time, none of the money dried up… There was probably more money but almost no deals. We were all looking at the same 10 deals for Q2 and Q3 which meant the prices built up.”
This meant that the 10 or so companies that were well funded in this period were done at astronomical valuations.
It speaks to an underlying investment trend. The latest Atomico report into European tech showed the size of seed rounds has increased significantly across the last few years, rising from $0.7m in 2016 to $1.2m in 2020.
As well as the pandemic there is an opportunity for startups to grow faster internationally.“Companies can go international much faster than they could even five years ago so there is a genuine reason to write bigger checks for companies.”
VCs will regret overpaying for certain firms
With the benefit of hindsight McCormick looks back on where the industry as a whole went wrong amid the pandemic.
“Most of us thought in March things were going to be a car crash… a lot of us scaled back the portfolio companies. In reality, we probably should have done the opposite, because what we didn’t realise there was going to be a massive Covid boom [for certain companies],” she says.
And following on from her assessment of the fierce competition McCormick predicts “we might regret as an industry overpaying for Covid tailwind companies”.
“We don’t know how to gauge whether the gains are going to dissipate. Are we still all going to work from home two years from now? Will there be a grocery boom still? And the meal kit boom? It’s not all going to stay and we don’t really know how much of it is going to stick.”