By Tiana Laurence, Partner at Laurence Innovation, a pre-seed investment fund focused on early-stage tech companies in the 4IR verticals.
As the Covid-19 pandemic finally recedes, many companies and investors aren’t just looking to get back to normal — they’re recognizing that they have an opportunity to fundamentally rethink a series of economic assumptions that have long gone unchallenged in the U.S. This doesn’t just mean investors have an unprecedented chance to discover innovative and profitable companies — it also has significant socioeconomic and cultural implications.
Not only has Covid-19 forced many companies to develop creative solutions to problems related to the pandemic in sectors ranging from biotechnology to cybersecurity, but it has also coincided with surging investments in the Fourth Industrial Revolution (4IR). Meanwhile, investors are increasingly devoting capital to companies focused on environmental, social and governance (ESG) issues.
As with any crisis, Covid-19 hasn’t just exposed vulnerabilities — it has also spurred innovation by forcing founders and investors to revisit received wisdom, address unforeseen problems and adapt to completely new circumstances. For investors, this doesn’t just mean considering companies that wouldn’t have been on their radar a year and a half ago — it also means looking for those companies in new places, supporting more diverse founders and investigating how emerging technologies that can help the country recover and thrive economically after the pandemic.
How Covid-19 Has Altered the Investment Landscape
There are many reasons why the pandemic has led to substantial technology investments, such as the dramatic shifts in how and where we work. For example, a PwC survey found that 83% of employers believe the shift to remote work has been successful, while 72% say they plan to invest in tools for virtual collaboration as many of their workers continue to work remotely. Company behaviors reflect this priority — according to research by KPMG, large-scale implementations of software-as-a-service (SaaS) platforms increased from 7% to 23% in 2020.
However, KPMG found that investment in 4IR technologies has also spiked — for example, almost half of IT leaders say Covid-19 has “permanently accelerated digital transformation and adoption of emerging technology,” such as AI, machine learning and blockchain. Covid-19 has also led to a renewed focus on ESG investments — a rapidly expanding market that has been catalyzed by the pandemic, climate change, massive protests for racial justice, and a heightened awareness of inequality.
A survey conducted by J.P. Morgan found that 71% of investors believe it’s “rather likely,” “likely,” or “very likely” that Covid-19 would “increase awareness and actions globally” to address other major issues such as biodiversity loss and climate change. Over the past year, assets in ESG exchange-traded funds (ETFs) more than doubled to $80 billion, while the majority of investors said Covid-19 would have a positive impact on this momentum. It’s clear that investors are seizing the opportunity to direct capital toward innovative companies that are interested in more than the bottom line.
Investors Need to Look Beyond the Coasts
The Bay Area, New York and Boston account for more than 60% of venture capital investment in the entire U.S., while accounting for only less than 26% of the GDP in 2020. Between 2006 and 2017, San Francisco alone accounted for more than 40% of total venture capitalist (VC) growth in the country. The Midwest, Mountain, Great Lakes, South and Southeast regions, on the other hand, receive a combined share of just 17% of overall VC investment.
While it makes sense for VC dollars to be funneled into dense, high-tech regions like the West Coast and the Mid-Atlantic, the disparities are far too large to merely reflect demographic variables. As a Brookings Institution article explains, the American Heartland “sees only a tiny fraction of venture capital deals, despite producing one-quarter to one-third of the nation’s research and development, new patents and top talent.” In other words, VCs are ignoring countless promising investments because they’re overwhelmingly biased toward founders and companies on the coasts.
Still, there have been signs of progress in recent years. Between 2018 and 2019, the share of West Coast VC deals fell from 62.3% to just over 50%, while the proportion increased in the Mountain, Great Lakes, South, and Southeast regions. In parallel, cities like Austin are seeing significant increases in VC activity. These are all reminders that the VC industry is capable of reorienting its focus — something creative investors should prioritize in the post-Covid era.
Leaving the Status Quo Behind
Just as investors have been slow to capture Alpha outside the coasts, they’ve allowed their preconceptions about founders to distort their investment decisions. Despite the fact that the number of women-and-minority-owned businesses has drastically increased in recent years, they face significant and disproportionate barriers in their access to capital.
For example, a report by the Ewing Marion Kauffman Foundation found that Black founders start their companies with almost three times less capital than their white counterparts. Just 4% of startups were founded by women in 2001 — a proportion that has shot up to more than 21%. However, women typically start businesses with around half as much capital as men.
Forward-looking VCs need to disrupt this status quo. At a time when the U.S. needs all the innovation it can muster to address long-standing crises like climate change and socioeconomic inequality — while at the same time recovering from a pandemic and the massive economic contraction that followed — we can’t afford to ignore huge tracts of the country and capable founders who don’t fit the traditional mold.
In his 2012 book Antifragile: Things That Gain from Disorder, Nassim Nicholas Taleb explains that certain systems aren’t just resilient in the face of crises — they actually grow stronger under pressure. As we build back after one of the worst crises we’ve faced in decades, investors can play a powerful role in proving that our economy and society are capable of being antifragile. But this will require them to question their assumptions and recognize that it’s time to stop seeking Alpha in the same old places.