Prior to the pandemic, investor Kamran Ansari spent much of his time jetting back and forth between New York City and San Francisco to meet with startup founders and management teams. Sometimes these meetings were more formal. Other times they started as 30-minute lunches that sprawled into 90-minute conversations. 

Now he rarely leaves his home in Virginia and holds most of his meetings over Zoom or Google Hangouts with the occasional masked coffee-walk thrown in for good measure. 

"It's just become more acceptable to back businesses where you're not physically meeting the CEO or management team face-to-face," said Ansari, a partner at venture capital firm Greycroft.

Still, in-person meetings need to remain a big part of the business, he said. Early stage companies offer limited hard data, leaving investors to rely on their sense of the founder's background and experience to inform their decisions. 

"The biggest thing that you miss over Zoom is the rapport-building, really understanding somebody's background," Ansari said. "When you're doing a Zoom or Hangout, it tends to be right down to brass tacks."

Remote communications have made the process more "transactional," he added, but not impossible. Last week, for instance, Ansari signed a check for a company after meeting with the founder online just a month ago. The difference now is that he's doing more background research and due diligence. 

"I think it's changed fairly significantly in that folks have gotten much more comfortable with the notion of vetting an entire deal, including management team, diligence, and everything else, remotely over Google Hangouts and Zoom," he said. 

Venture capital has made a comeback in the eight months since coronavirus stalled the global economy. In the third quarter, VC investments in U.S.-based companies were up 22 percent year-over-year, a seven-quarter high of $36.5 billion, according to PricewaterhouseCoopers' quarterly MoneyTree report on the venture space.

Despite these gains, deal activity is still down 11 percent year-over-year.

Safe Bets 

In part, this reflects how even venture capitalists took their time rising out of the doldrums of early spring. Ansari said that initially investors mostly stuck to what they knew, which meant moving forward with companies they had already invested in or developed a relationship with.

This is what's called follow-on financing: if an investor had already committed Series A funding to a company, they were willing to follow that up with a Series B round. 

As for new companies with no prior fundraising rounds, for the moment they were out of luck. 

"I think those companies that were in the market realized the timing was going to be tough and just delayed their current capital raise processes," said Sarah Foley, partner at SWAT Equity, which deals mostly with the hard-hit consumer products and services sector.

This began to change going into the second and third quarters as the economy started to recover, but not without leaving a residual effect on how startups operated.

Foley explained that many startups became more self-disciplined as funding dried up, investing less in things like marketing and focusing more on profitability. 

However, this renewed self-discipline among startups didn't necessarily begin with COVID. After years of big-name companies sustaining themselves on private capital without becoming profitable, the near-collapse of WeWork in the third quarter of 2019 set an example for newer startups. 

"From the founders' perspective, this profitability discussion was resonating in the fourth quarter of last year and now it's a reality, which I think is great for them," she said. "They need to figure out a way to rely less on continual funding to simply get to an exit and really figure out how they can make a sustainable business model at an earlier stage of evolution."  

Financial Runway

With COVID, the pressure on startups to shore up their business became even more intense. Foley said her firm has spent a lot of time working with founders to help them innovate through the rough patch, as well as cutting costs. 

"We also spent an inordinate amount of time really walking them through their cost structures and helping them decide where they could make cuts and expense reductions in order to extend their runway," she said. 

In venture capital parlance, the runway is the distance between the last fundraise and the next. 

For 305 Fitness, a dance cardio fitness studio in SWAT's portfolio, finding ways to thrive with a longer runway has defined their business model during the pandemic. 

"While we had our eye on the prize to open an additional 10 studios, that's definitely not going to be a part of the plan right now," said founder Sadie Kurzban. "Instead we really focused on these other, smaller parts of our business that either we had been thinking about and really accelerated during the pandemic or were just budding glimmers of a business possibility."

So instead of rapid physical expansion, the company built out its digital offerings, including a subscription package for trainers so they can run their own workout classes on the side. 

Kurzban said that one advantage for her company is that it's gotten only small investments from multiple investors. So no single investor is pressuring them for returns. 

"What I think is unique about our situation is we didn't have one big check," she said. "I think that's been really helpful because we've only received support. No one has so much skin in the game where they're [contacting us] every minute demanding a return."

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