If we had a dollar for every time we read an article or attended a webinar that spoke about how the Coronavirus will change the world order, it is likely that we both would be able to retire by the end of this global pandemic and rapid economic decline. As two individuals who have been working in the entrepreneurship and innovation space for over a decade, consistently advocating for more impact-driven investing, the biggest hope that we hold on to is that this global pandemic will force investors to take a step back, pause, reflect and come to the realization that they too, must change.
Working to make this hope a reality, the MIT Legatum Center for Entrepreneurship and Development, brought together a group of venture capitalists and early stage investors from across the world to discuss the past, present and future of global investment with a focus on the role the investors community can, and should, be playing in shaping the world’s future.
Looking backwards to just a few months ago, the question seemed to be about which business would bring back the highest financial return. According to David Rose, Founder and Executive Chairman of Gust and Founder of New York Angels said: “The last couple of decades have been ambitious within a booming market. People were taking risks on things that may have been a long shot and valuations had gotten ridiculously high for startups here in the US, without fundamental changes in exits.” Some entrepreneurs seemed to believe that the more money you could raise and the faster you burned through it, the more you would grow and scale. Somehow, many investors seemed to be okay with that.
The past decade, we have also seen a rising wave of “impact investing” with pressure being put on investors to look beyond financial returns. This wave, despite the success of a number of impact investment funds globally, is still in its early days with many still working on convincing limited partners (LPs) that its returns are lucrative. The eve of the global pandemic had yet to see the rise of impact investing turn into a real movement.
Fast forward to where we are with today’s crisis, many startups are facing an early demise as a result of cash burn out, fragile business models and overinflated teams. Entrepreneurs are looking to investors to be their saviors by providing them with more cash and investors are spending sleepless nights contemplating who in their portfolio will survive and who is in fact, worth saving. According to Heather Henyon, Founding General Partner of Mindshift Capital, “we want to make sure that the companies we invested in continue to exist.” For Fadi Ghandour, Managing Partner of Wamda Capital, “investors will prioritize companies that have serious and robust business models, even if they have short term cash flow problems. Business models that are not sustainable are going to die. Cash guzzlers are not going to make it. Growth at any cost will no longer work. Reasonable growth and a clear path towards profitability is the way…”
We left that first conversation we had with investors feeling optimistic that investors were taking the time to ask the right questions. Perhaps Ghandour said it best when he said, “the world has changed and changed seriously, and we need to review how we invest, what we invest in, and what impact we create while doing that.” Investors, or at least the ones we spoke with, have been taking a moment to contemplate whether or not they had been investing in the right businesses to begin with.
Looking ahead, we know that business as usual is no longer an option. The past two months have not only revealed to us how unprepared our national healthcare systems are, they have revealed to us existing gaps across all systems. With the virtualization of our economy, sectors are rapidly transforming and new sectors are emerging. Investors are already thinking about these growing sectors — Fintech, EdTech, E-commerce, logistics, telemedicine, remote working platforms. The list could go on. While the investment engine has slowed down to digest the new reality, it hasn’t stopped — we are still seeing investment deals close in a number of emerging markets, especially for pandemic related solutions.
This perhaps brings us to our final point. We are living in a historic moment. There is no going back. The need for innovation to transform the current systems that are clearly broken could not be greater, which means the need for risk capital could not be greater. Just as we are asking policy makers, big corporates and entrepreneurs to step up and do better so that we do not once again, find ourselves where we are today, we are asking investors to also do better. Capital matters. How capital is deployed matters.
Investors have a role to play in shaping the future of every system and sector that touches our lives and we need you to take that role seriously. Don’t confine your thinking to investing in one business that will bring you high returns. Think about investing in a number of businesses that will build out a sector in a way that is resilient, inclusive and sustainable. Ask better questions. Ask more questions. Have better conversations, not just with the entrepreneurs you choose to invest in, but with your fellow investors and other ecosystem players at large. The coronavirus has forced us all to pause. Use that pause to change for the better and let that change start now.
Dina H. Sherif, Executive Director, Legatum Center
Adel Boseli, Investor in Residence, Legatum Center and CEO of VFlock
“In the past decade, investors seemed ok to invest in companies who would raise cash rapidly, scale up and grow at any cost. The ongoing COVID-19 crisis has amplified a strong call to invest in sustainable infrastructures, technologically advanced and resilient with robust and clear plans. It makes more sense financially, and more responsible socially and environmentally.” Christiane El Habre