2020 was a totally annus horribilis for everyone, professionally and personally speaking. As we have already stepped into 2021, we do not know what is lying ahead of us? There is even no surety whether ghosts of 2020 will be gone in 2021. That is why it is pertinent to predict a few things before entering into 2021 confidently.
Following are the predictions for early-stage start-ups in 2021. Here, the focus will be given on changes and trends within the early-stage start-up and VCs looking forward to investing in businesses having Pvt Ltd registration. Pandemic has taught us a valuable lesson, as technology has made it possible for us to continue working under these dire times.
Pre-seed would become the sought-after stage in ventures.
Recently, over time seed rounds have incrementally become grandiose and more institutionalized. Many of them focused on ‘first check,’ and as they have tasted success, they have enlarged more funds and are currently at the forefront at 3-to-5-million-dollar seed rounds. Nowadays, seed round looks similar to series A round, ten years ago concerning both traction and size.
This transition has generated a growing gap at pre-seed. And the current pre-seed round is generally not a one-raise; instead, it is often a couple of rounds for about 1 or 2 years. Not everyone can fetch millions of dollars at one go from family, friends, and angel investors. For founders coming from an impecunious background, the pre-seed round would be lengthy and much tougher to raise.
Recently, it has been very competitive. As per the pitchbook, 1162 venture funds relied on seed in 2019, and merely 126 depended on pre-seed. As more multi-stage funds are attracted towards seed, writing meager ‘option’ checks. The case is not the same when it comes to pre-seed. On the one hand, seed rounds have been more competitive, while on the other hand, pre-seed is not that competitive.
In 2021, let us expect more investors to approach the pre-seed opportunity. That would make it more distinct. Again, we would see a more institutional approach to pre-seed along with valuation, persistent terms, and founders' platforms. This would be beneficial to founders as they would get more capital from the beginning before they hit inflection points such as Seven Seven Six and Precursor etc. Pre-seed would find its way in 2021.
Founders would go after challenger funds rather than large and established ones.
Over the last few years, you might have seen the rise of various ventures fund models such as operator/micro/rolling funds, scout, and syndicate programs. This trend provides a plethora of options to founders to infuse capital. Founders are willing to put an increased value on adding operators to their cap table who possess experiences from sales to marketing to product. New venture capitalist models also offer people, ability to invest at an early stage. The NYT reported that in 2019, IPOs were making a similar group of men very affluent. Various fund models can hamper this cycle so that in the foreseeable future, a diversified set of people can invest more in early-stage start-ups, check the return, and re-invest handsome amounts. This year we expect challenger funds to be their own established category. Founders would be able to see the advantages of sui generis expertise and networking they institute without indicating the risk of multi-stage funds. Challenger funds would gain competitive deals against the established blue-chip funds, the up and comers would be given more weightage for founders.
Venture funds and investment rounds would be concluded without lawyers.
Standardization of the early-stage investment is one thing that drives the trend towards the rise of the challenger in funds. One can take an example of YC SAFE – as it has become standard pre-seed (in Bay areas), making operational and legal work of raising around with pace and straightforward for both investors and founders. Here, the founders' biggest advantage is that their ability to get the round signed will be more efficient, wired, and closed within a few days (instead of weeks and months).
Similarly, Carta and AngelList have automated major funds set up, reporting, and operations for emanating managers.
Automation of round documents, syndicates, SPV (special purpose vehicles), and VC funds means early-stage investors would look into more standard terms. Additionally, it has expelled limitations to bring more people, especially emerging operators, and investors, to cost-efficacy and quickly write checks and construct micro funds. Let us all expect that such rounds and funds can be closed without lawyers in standardization. This could indicate the maturity of the start-up industry and its efficiency in enlarging growth.
Hot tech hubs this year would be online platforms, not bricks and mortar.
Before the pandemic, early-stage start-ups were restricted to the local and small geographical areas. Founders generally infused capital from local investors, hiring local people, and adopting local practices and local networks to run the business. People used to think that early-stage investors have to be on the ground to know the situation and assist founders. And all of a sudden, this perception had changed because of the pandemic, where everything had to be shifted via virtual mode as businesses aim to fulfill the capital required to register a private company.
Geographically detachment from human capital and finance is very influential. Once you take the virtual road for your start-up, it would be able to hire the best-talented people across geographical boundaries, approaching ideal customers, and searching for potential investors. 2020 had taught us to focus on empathy, expertise, and connections.
The potential of the transnational exchange of ideas across the market is also compelling. An efficient and better flow of information for the tech community and investors in terms of insights, trends, and opportunities, would result in a more efficient start-up environment. We cannot imagine going back to inefficient ways of doing things, so this year we can expect that start-ups and investors would heavily rely on the hybrid remote or remote model, which can allow emerging tech hubs to speed up the growth across the world.
Here, these online platforms and communities are more robust within tech, both firmly established such as Twitter and emerging ones such as Transact, Alpha, and Clubhouse, these are the ones who would be the hottest tech hubs of this year.
The personal brand would be the most desired after a new superpower in tech.
Now, when VCs cannot run into start-ups’ conferences, such as in Sandhill road or SoMa, where do they get their flow of the deal?
Investors would have to depend on online channels. This eventually means word of mouth, brand, and community will matter more. Reaching out to founders via social media, content, virtual events is more crucial than ever before. Community and marketing would be the pillars critical to new VC superpowers for generating a deal flow engine. The same goes for the early-stage founders. While we all were stuck in our houses, online meetups were taking place rapidly. And this would persist this year as well.
Earlier, people used to believe that brands do not matter in tech. But as the industry flourishes, many people have come to realize the brand's power for both potential customers' defensibility and acquisition. With rising numbers of investors and founders, powerful emerging brands would be the eye-catcher. They would attract capital, talent, and more opportunities.
Let us be more optimistic this year and expect to hustle at an early stage. Start-ups emerging in 2021 will indeed have the edge over established and incumbents, as they are being built post-COVID times. On that note, let us hope that 2021 would be an annus mirabilis for all.