We’re well into 2021, and although vaccination campaigns are inspiring new hope and will eventually lead the way towards a renewed sense of normalcy, the challenges of the past year are still acutely felt. In venture capital, the economic effects of the pandemic add up to a unique moment in time where opportunities and risks closely coexist. One lesson 2020 has certainly taught us beyond any doubt is that predicting the future is risky business.
Diversified portfolios can absorb market shocks
Of course, venture capital investments have always been an asset class characterized by high risk and great potential rewards. But the Covid-19 crisis demonstrates that a diversified portfolio is of utmost importance. While some sectors plummeted, others soared. The coronavirus has been a fall from innocence in a way: We learned first-hand that unexpected crises of various kinds can hit us at any moment. We don’t know the nature of the next crisis, but preparing for it means investing in various sectors and keeping portfolios well diversified.
A solid base for any investment portfolio are market sectors that will most likely persist through any crisis. These may include tech companies that improve our online experience such as messenger and cloud infrastructure services or e-commerce, both of which proved winners of the current crisis. On the level of more basic human needs, food tech and other companies involved in the production, processing, and distribution of food, as well as medical products are resilient to most crises.
Long-term strategies and endurance win out
The S&P 500 dropped over 33% in March 2020. However, the market has since recovered considerably and consistently. Driven by insecurities, many chose to freeze spending and in the stock market in particular, many investors were quick to sell underperforming assets. In hindsight, many of these decisions were unwise. A long-term view of the market, patience, and endurance – though this is understandably tough when large sums of money are involved – will almost always win out.
In venture capital, funds were largely frozen as the first wave hit. But although some firms remained cautious, talks with founders soon commenced and investment sums slowly recovered. During the first half of 2020, venture capitalists invested at 71 percent of pre-pandemic levels, a number that has been rising steadily since the second half of 2020.
Even during a crisis, well-considered investments – especially later-stage funding of proven business models – can be a good idea. Whether these are business models that thrive on the new normal, such as specific med-tech start-ups, or evergreen infrastructure ventures. The important thing is to not bury your head in the sand but to observe and acknowledge which industries are truly crisis-proof or even propelled by the new situation.
As the crisis wanes, new opportunities await
Slowly but surely, we are nearing a turning point in the coronavirus crisis. It is now time to turn towards investment fields set for considerable growth. Medical and med-tech investments will continue to be a good bet. Obvious ones such as manufacturers of personal protective equipment stand alongside less obvious winners, such as logistics companies involved in the distribution of the vaccines.
While some industries, such as the travel industry, are in for a successful recovery from the crisis, up-and-coming sectors of the past years will resume their growth. Many core technologies in banking, aviation or telecoms are outdated. Often, they are expensive, decade-old on-premise solutions. The pandemic has shone a light on various shortcomings. Providers of new, cloud-native solutions are benefitting from increasing demand.
Automation and autonomous vehicles will continue to grow. While automation has been on the rise for years, the corona crisis has shown the risks of people working tightly alongside. For production upkeep, automation will be considered even more widely. There are estimates that during the next five years, automation will add 5%, or $1.2 trillion to US GDP. And while we have been observing news on infections, restrictions and vaccines, progress has been quietly made in the field of autonomous vehicles. Between drones delivering medical equipment to remote places such as the Isle of Wight in Britain, and several announcements in the field of autonomous shipping, opportunities are immense. Autonomous driving may be a while off, but there are plenty of promising investment opportunities that help with congested public roads.
While the past months were tough in many ways, they also put a lot of things into perspective. In terms of investment strategies, the coronavirus strikingly separated crisis-proof sectors from assumed losers. But to really explore whether particular sectors are doomed or will recover beyond expectations, closer scrutiny is needed. Certainly, an important lesson has been not to panic, but to cautiously consider the opportunities among overt and less obvious crisis winners.