With over 50+ combined years experience investing in startups, Silicon Valley heavy-weights—Barry Eggers and Saeed Amidi—are no strangers to investing in tough times.

However, COVID-19 poses unique challenges. In prior downturns, lowered interest rates and quantitative easing led to an economic rebound. And while some sectors appear to be thriving, broader contraction in both supply and demand has created little demand for cheap capital as consumers and corporations brace for an uncertain future. Having stayed true to the grow-at-all costs strategy during the bull market, startups are now facing a more conservative VC landscape—with many seeing their runways running-short.

On June 3rd, 2020, Plug and Play hosted an exclusive fireside chat between our Founder and CEO, Saeed Amidi, and Barry Eggers, a Founding Partner at Lightspeed Ventures. During this conversation, they discuss their perspectives on investing in the new economic environment, what they have been advising their portfolio startups, growth sectors and opportunities that excite them, and how they are leading through times of turbulence. 

You can watch the full virtual event below:

3 pieces of advice for young professionals looking to enter the VC industry

Through Egger’s extensive experience in the venture industry, he recommends 3 pieces of advice for aspiring venture capitalists:

1. You need to get some experience with early-stage companies - understand how the business works and what kind of issues the company is trying to solve. 

2. Pick a firm with a strong platform and solid dealflow, along with finding a good mentor. If you do well, you’ll naturally rise up in the organization. Although it is difficult to find this kind of firm for a first job, it’s okay to switch companies when you’re first starting out. 

3. Most importantly, you must join a firm where you’re able to establish a personal track record of finding great companies, putting your name on great companies, and working with great companies. This establishes your own personal brand, which is essential in the VC world. 

As a young investor, how do you find good deals?  

Meet good people who are in a position to start things and try to be there when they start companies.

There are a number of ways to find dealflow, says Eggers. In regards to early-stage deals, the most common way is “to meet good people who are in a position to start things and try to be there when they start companies.” Venture capital is a collaborative environment - the more you share with your peers, the more they’ll share with you. We all learn from each other.

You must help entrepreneurs think through opportunities at an early stage. Go to universities and find out how their developing technologies are creating new opportunities in specific markets. 

4 key elements to consider when investing in early-stage startups   

In Eggers’ experience, when investors look at deals, they typically look at 4 key elements:

1. Team - Team is the most important for early-stage investments. Look for a team that has a combination of good chemistry, relevant experience, and works well together. They should have a strong combination of high IQ and EQ, which is difficult to find in Silicon Valley. It is natural for companies to go through ups and downs, and it’s important to find a team able to navigate through that smoothly. 

2. Market Opportunity - This is the second most important element. The startup must be going after a large potential market in order to grow large over time. Eggers notes that his team at Lightspeed Ventures spends an ample amount of time understanding the size of the market opportunity before investing. If the market opportunity is not large enough, the company will not be big enough. 

3. Product - The third most important element is product, and also the most likely to change throughout a startup’s journey. While markets and teams are very difficult to change after establishing, products are generally easier to pivot for product-market fit. 

4. Go-to-market & Competitive Landscape - While this is essential in growing the startup, distribution and go-to-market can take a lot of different shapes. It’s important to bring someone on to the team who has the experience to help make the right decisions. 

How CVCs play into the investment landscape

In Lightspeed Ventures, Eggers is experienced in using corporate customers for due diligence when evaluating a startup. His team will run the technology concept by corporate customers to understand how important it is to their business and determine the size of the opportunity. Eggers notes that this is incredibly valuable to Lightspeed Ventures’ investment process. 

However, Eggers recommends that early-stage startups should be careful in taking CVC money. Although there are some CVCs that are highly valuable as investors, it can sometimes be restrictive for the company to work with multiple partners and customers early on. Working with CVCs can give a huge business go-to-market leverage in the industry, but you must be careful with who you bring under your cap table. 

Challenges COVID-19 has on the investment and startup world 

“We often forget we’ve had 10 years of a bull market. After 10 years of a bull market, venture capitalists often forget the old adage: Cash is king,” says Eggers.  

“I don’t have to remind our companies to reduce costs, because they know that runway is important,” Eggers elaborates. Typically when startups reduce costs, they end up as a more efficient company. It's important for CEOs to know it’s their job to make sure that a company has enough cash to get to the next set of milestones or financing. 

We often forget we’ve had 10 years of a bull market. After 10 years of a bull market, venture capitalists often forget the old adage: Cash is king.

During this time, you’re going to see a set of CEOs that prosper in this environment and some that struggle. For those CEOs that struggle, Lightspeed Ventures will try their best to help educate them on what they can do during this time of crisis. 

However, the uncertainty of what revenue is going to look like is great for most companies. They will really have to pull back the reins and be more careful of spending for the time, which creates a stronger company in the long run.

Amidi adds that in his experience as CEO of Plug and Play, CEOs must do 99% of the work. Although Plug and Play might help with 1% through introductions or help define the business model, the CEO must take all the responsibility. 

What opportunities will COVID-19 bring to investing and startups? 

Beyond the obvious, we can learn a lot from the COVID-19 crisis, says Eggers. 

The food ecosystem has been exposed as incredibly fragile. There were points during the crisis where parts of the country couldn’t get food through the current food supply chain. “I believe sustainability will be a really important theme that will persist throughout the 2020’s,” notes Eggers.

“It’s not the same as CleanTech, it’s GreenTech.”

Technologies must overcome challenges in the food ecosystem to make it more efficient and less wasteful. How do we figure out less wasteful packaging and employ more secondary markets? The world must figure out ways to recycle, reuse, and reimagine. 

Eggers also expects to see a standard resurgence in solar, wind, and hydroelectric energy. The cost of solar will really be driven down fast and it’s absolutely part of the solution here. “It’s ready for prime time.”

Consistent themes through multiple different economic downturns

As an investor, Eggers actually prefers to operate in an economic downturn versus a frothy market. In his experience, investors get sloppy and the investments are momentum-motivated instead of building-type investing. 

In regards to entrepreneurs, the best companies are built in downturns. They are forced to do more with less. Even in frothy markets, startups must make sure you’re always doing more with less so the company is prepared for economic downturns. Eggers notes that at Lightspeed Ventures, it “feels like we’re investing in companies that will be built with better discipline from the start.” 

Does investment criteria shift during a crisis like COVID-19? 

We’re in an environment where it’s difficult to build companies, says Eggers. “We all underemphasized collaboration and didn’t know this was going to happen. Looking at the team is more important than ever. It’s not necessarily how much money they want to raise, but how thoughtfully they plan on building the company.”

In terms of valuation, it takes a while for them to adjust. “Private valuations take a lot longer than public valuations because VCs always think the prices have gone way down, while entrepreneurs think the prices have stayed the same or gone up,” notes Eggers. For early startups, it's difficult to value so you should look at how much capital the company needs to get to the next set of milestones. 

Conclusion

Entrepreneurship is something that can solve a lot of the issues that we face today. We have to create a more inclusive startup and VC environment and industry. Eggers says “2020 is going to be really interesting and we have the opportunity in front of us to really change the shape of the world with the power of technology.” Think big and change the world.