On the podcast: How the startup ecosystem has fared in the pandemic

May 4, 2021

More than a year after Sequoia issued its "Black Swan" letter, the US startup ecosystem has rebounded, with VC exit value, deal value and fundraising setting records last year. PitchBook venture capital reporter James Thorne joins for this episode—sponsored by Ansarada—to discuss the lasting impact the pandemic had on the startup world, including the rise in valuations for fintech companies, the surge in VC investments in cryptocurrencies, the shift to remote work and his thoughts on TCV vice president Rohit Iragavarapu's breakdown of recent trends within the startup world during a PitchBook-hosted webinar.

Listen to all of Season 3, and subscribe to get future episodes of "In Visible Capital" on Apple Podcasts, Spotify, Google Podcasts or wherever you listen. For inquiries, please contact us at podcast@pitchbook.com.

Watch the full webinar with Rohit Iragavarapu and Paul Condra here, and read James Thorne's coverage of Plaid and crypto and blockchain startups, as well as data startups that may shape the future of office work.



Adam Lewis: Hello, and welcome back to PitchBook's "In Visible Capital", a podcast dedicated to exploring the inner workings of the private markets. I'm Adam Lewis, a reporter for PitchBook News. For today's show, we're going to explore recent developments within the US startup ecosystem with James Thorne, our venture capital reporter here at PitchBook. James, welcome to the show.

James Thorne: Great to be here, Adam. Thanks for having me.

Adam: Now, obviously, the startup ecosystem is an enormously broad space. We're going to focus on a few key areas. James, you've been covering VC closely for the last year-plus with COVID looming over any news within the industry. We recently hosted a conversation with Rohit Iragavarapu from Technology Crossover Ventures, and I was struck by this comment he made about the impact COVID has had on startups.

Rohit Iragavarapu: I would say if there's one thing that has surprised us more than anything else, it's that a lot of the pattern recognition from crises past has just been thrown out the window. This has been idiosyncratic across where the company or the buyer you sell to matters as much as the category that you're in, and the form factor of your product matters as much as either of those other factors. Really, it's about where your customers were, if I had pointed to one thing, where your customers were on their digital transformation journey.

We heard of a large cruise line, for example, that spent nearly $500,000 on an automation technology at a time when they had zero bookings early in the pandemic. The four categories as an overlay to that that I've seen are first, there've been COVID beneficiaries. Those are folks in telemedicine, last-mile delivery, a number of ecommerce-related startups, and then folks who help facilitate virtual selling sales and marketing.

Most of the impact for the second bucket of good businesses that were slowed by COVID has been on the new booking side. What's really telling there is, as we look across our portfolio and companies we talk to that fit into this bucket, many of them are saying that a lot of this is reversing, and Q4 is slated to be one of the best quarters from a new booking side perspective that they've ever had.

The third bucket of companies that we've seen have been [the] center of the bull's-eye, is what I'd described it as. It's a lot of companies in travel technology, for example, with the notable exception of Airbnb, as you mentioned, and pockets of sectors like restaurant and retail where just the macro challenges that overwhelmed the ability of the software to drive efficiency and gains at some level that the lack of health in the customer base has also really hurt the startups.

Then the last are companies across a number of categories, business models, who've had some underlying issues before COVID, and COVID was the straw that broke the camel's back. There have fortunately not been many of those, which is something I want to talk about in a second, but there have been some, and really it's been about your ability to execute against a competitive landscape that's moving really quickly. If you had technology debt or you were on the wrong side of some underlying trends in terms of the move to the cloud, for example, it's been pretty challenging to succeed.

Adam: Now, James, obviously, there was a lot to unpack there, but I'm wondering how that breakdown compares with your own reporting.

James: I think it's safe to say that a lot of the assumptions that we made heading into the crisis turned out to be wrong. We kicked off more than a year ago with Sequoia issuing their "Black Swan" letter putting everyone on notice. Fast forward to the end of 2020, we set records across the ecosystem. We had exit value higher than it's ever been. Same story with the amount raised by startups, the amount raised by VC funds. So far, this year, the momentum has just kept going.

I still regularly come across companies on the platform that are raising mega-rounds now that had applied for PPP loans less than a year ago. To me, I think that's a sign that very few businesses had a good idea of how this pandemic was going to affect their business, let alone the economy at large.

One thing that I hear over and over again is that when the pandemic hit, small and medium-sized businesses all the way up to large corporations, they wanted to upgrade their software. They needed a way to transact with their customers really seamlessly without really being able to meet them in person. We've seen that across the industry. This acceleration of technology has really been a benefit to maybe not all of the ecosystem, but a really large chunk of it.

Adam: You raised a really good point right there where you said that companies were applying for PPP loans last year and now they're raising mega-rounds. How much of a mega-around are we talking here?

James: $100 million or more.

Adam: By PitchBook definition I mean. Is that even legal? That seems crazy to me that they were applying for government help within the last 12 months and now they're flushed with hundreds of millions of dollars from venture capital investors.

James: Yes. I mean, I'll leave that to the taxpayers to decide how they feel about that. It does speak to the nature of that program, which was an emergency funding round. They wanted businesses to take advantage of it. They didn't want to see layoffs. The fact of the matter is, because there was so much uncertainty, we would have seen a lot more layoffs had that program not been implemented. Whether or not some of that money should now be returned that they've posted record growth for the past year.

Adam: Yes, I'm sure the NVCA will be busy over this next year. One industry that, I'm not sure if Rohit mentioned, but that you've written some about [...] fintech, which we've really seen, I guess, explode over the last year, or even going back in before the pandemic, but it seems like the pandemic accelerated the push toward fintech. Is that what you saw with your reporting?

James: It's funny. Just a couple of years ago, our colleague, Josh, wrote an article [asking] where are all the fintech IPOs—it was this open question. When were these fintech companies going to hit it big and make it on the public stage? Well, we just had Coinbase, the first cryptocurrency company to go public. We've seen just incredible growth out of companies that are in this what's being called embedded finance. Take Plaid. We all know Plaid was going to be bought by Visa for $5.3 billion a little more than a year ago. Now they've broken off that deal. They've got a new round of investment of $425 million to value them at $13.4 billion. It's an incredible jump in just a year.

Plaid is one of many infrastructure providers in this world of fintech, and it's actually hard to get your head around how ubiquitous they've become because you never hear of them. You never see them, but you or I use Mint. I'm transacting with them all the time. They have access to all this very private data or access to it directly, but they're able to connect my different banking accounts. It's this remarkable story at a time when we thought that commerce was going to come to a halt, it just accelerated really quickly in online payments, and other online financial services.

Adam: Yes, I think I deleted Mint from my phone after seeing how much a month I spent on food during the pandemic, it was so staggering that I couldn't live with myself and continue checking it. Yes, another great app. It is ubiquitous now along with Plaid and Stripe. Even existing fintech companies like PayPal, you've just seen they're on the public side now, but obviously, their stock prices has skyrocketed here over the last year.

James: It's interesting you bring up Stripe and PayPal. Stripe is another one of these infrastructure providers. They're worth $95 billion now, which is just crazy for a private company. I've been paying for things over Stripe for years without ever realizing it. I think one of the really cool things is that when a company is using Stripe for their payments processing, you have no idea that it's really Stripe.

A couple of weeks ago, a report came out that Clubhouse was going to be using Stripe for their payment processing. Now you're hosting an audio chat on Clubhouse, and you can get people to pay for it over Stripe, but it's this really close relationship that you get whether it be a content creator or some online store. You feel like you're having this transaction with them, and Stripe just takes care of everything in the background. It's almost like trading cash.

Adam: Yes, it's crazy how these companies—I don't know if they've taken advantage of the fact that we're now as our generation is just used to giving over our financial information, but that just seems to have accelerated their success. It's just this public acceptance that our data is going to be online, and they're going to have access to it. If we want to buy stuff, then we got to give it over.

James: I think that explains one of the reasons why we've seen such a big push into crypto as people are really hungry for a version of these services that is cryptographically secure, that doesn't really know much about you but is able to give you the same service.

Adam: James, you mentioned cryptocurrency. I just read your story about cryptocurrency on PitchBook News & Analysis (shameless plug). What are you seeing in terms of venture capital interest right now in the crypto space, and I guess maybe more broadly? If I'm putting this correctly, the blockchain space. I mean, it seems they're getting more money and more deals.

James: Yes. They set a record and the first quarter for deal value, and it's really driven by this rise in the price of bitcoin. This is a phenomenon that investors have been pointing to. Andreessen Horowitz has talked about it extensively. There's this bitcoin price innovation cycle phenomenon where the price of bitcoin goes up, people get really interested in it, developers flock to it, and they start building new things and they get funding.

What's interesting to me now is if you look at 2018, the last time bitcoin had a real big boom and [...], what you got out of it was a lot of these exchanges. A lot of the venture activity was going into buying and selling cryptocurrencies. What's interesting this time around is that a lot of it is still related to trading cryptocurrencies, but it's actually expanded a lot more. I think the best example of this is the rise of NFTs.

Adam: Can you explain to me what NFTs are? Not to put you on the spot.

James: Absolutely not.

Adam: [laughs] Okay. It stands for non-fungible token, right?

James: Yes, it does.

Adam: That's about the extent of my knowledge.

James: If you remember Economics 101—

Adam: Journalism major.

James: —fungible things can be freely exchanged. A $1 US bill is fungible, but an NFT is not.

Adam: I think your Econ 101 professor would be proud of that response.

James: Basically, it's not interchangeable. Every dollar is just like every other dollar functionally. Within NFT, there's not just one of them, but there might only be 100 of them. It's a limited edition thing. It's really attracted passionate collectors who think that these things are going to be worth buckets one day. I know you're a sports fan, NBA Top Shots. Highlight reels of basketball players have been selling for absolutely insane amounts.

Adam: Yes. I have a whole section of this podcast that I want to dedicate to just ranting about Top Shot and why it is ridiculous to spend thousands, sometimes hundreds of thousands of dollars to spend money on a highlight. They're selling highlights to each other that you could watch for free on Sports Center. I don't get the idea that it's a finite resource because you could easily access it, or at least to me. I don't quite understand what the value is. I'm 30 now. Maybe the game has passed me by.

People are investing millions of dollars into Top Shot. Mark Cuban's a huge NFT bull. Actually, my favorite band, Kings of Leon, they sold their latest record as an NFT, which is interesting because a lot of musicians are trying to take some power away from studios and put more money into their own pockets. I do like it from that sort as a resource there, but selling NBA highlights to each other, I don't get it, but who knows?

James: One of the things you hit on there can explain at least some of the reason why people are joining the bandwagon for NFTs, is that you get this relationship to the artist or the athlete that you don't get when you're at a match shop in the stadium. You know that your money is going directly to them and it's this way for you to transact really on a one-to-one basis. I agree with you, though. This is the existential question of the digital age. It's like, how do you create scarcity in a world where anything can be replicated ad nauseam? You put up a wall. You make it unavailable to many. That's our business model here at PitchBook. We don't make this stuff free, except for this podcast. You're free, Adam.

Adam: Right. Yes, exactly. I totally agree with not giving away content, but if the content is available everywhere, then I don't understand how you justify it, but if there's a market there that people who are smarter than me understand, then so be it. I'll never forget the story in The Wall Street Journal this past year of the kid sitting in his gym shorts and tanktop with his cat on his lap who has made millions of dollars selling highlights on Top Shot and had made just a killing during the pandemic. James, it made me question what I'm doing with my life, and why I didn't think of this as somebody who's watched thousands of hours of Sports Center. Why didn't I think, "Let's make this into a commodity and sell it."

James: It's not too late. Get laser eyes and jump in.

Adam: Yes. Diamond hands. James, as much as I could obviously rant about me missing out on my crypto Top Shot opportunity, we do need to transition. Rohit, in his conversation with PitchBook emerging tech analyst, Paul Condra, they went pretty deep into what a post-pandemic work environment is going to look like in terms of whether that's going to be in the office, whether that's going to be remote, whether it's going to be a mix of the two, and how the corporate world is going to change. Let's listen to the clip.

Rohit: I would say, we're talking about the startup ecosystem here specifically, which is quite different than maybe corporate America writ large. I think the contextual thing to note is a lot of startups were already having this debate about whether to go remote before COVID. The reasons were many of them are located in Tier 1 cities that are very expensive and getting more and more expensive, at least before COVID, from a rent and a salary and a cost of living perspective. You would literally be paying two or three times what you would in another city in America for an engineer or a salesperson just to help them make ends meet, so to speak, in those cities.

There's some interesting puts and takes here, but I would say, on the whole, there's, obviously, distribution of perspectives. The folks who've had the warmest embrace of wanting to go full remote coming out of this I think are those who were pretty strong zealots for going remote before COVID. In that sense, like anything else, COVID has been an acceleration of the conviction.

Paul Condra: Validation.

Rohit: Absolutely. Then there's a large bucket in the middle that's thinking about some hybrid setup, but I don't think anyone has a great answer for what that looks like yet. The level of specificity, even among people who are thinking about this every day, is, maybe we'll have one to two days a week where people will come in for specific events, for team building. Maybe we'll have modular and flexible office space where nobody will have an assigned desk or office anymore, but it'll just be rent as you go or check-in, check-out and basically turn commercial real estate into more of a shared working space.

Because some people need to get out of the house, they have small children, all this stuff that we're all intimately familiar with now, nine months into Zoom life. That's a big messy middle, I would say, that's trying to figure it out. No one is in a hurry I would say to go back. Then the last thing I would say is there's an incredibly small percentage that think and want to go back to the office full-time. I would say we've had thousands of conversations this year with entrepreneurs, and there's probably low double digits who are very keen on going back to the way things were and asking people to take public transit and travel the way they used to and all of that.

Adam: All right, James, what are you seeing in your reporting about how companies are looking at how we work?

James: The short answer is nobody really knows what it's going to look like for the next year, let alone beyond that. I've obviously heard, as you have, there are companies that are going to go fully remote. They're going to be companies here in Seattle. If Amazon wants to bring everyone back into the office, even PitchBook is planning to do that, I think, hopefully by the end of the year, but for most companies, it's going to be a hybrid approach. That's actually a lot harder than it sounds because it means that everyone's going to be looking for that Goldilocks situation where they've got just the right amount of flexibility and they still maintain that in-office culture without wasting a ton of real estate.

One thing that, and I reported on this recently, is that you're seeing a lot of startups trying to solve this problem of, how do we get data on what people are actually doing in the office, so that we can understand what the offices that we need going forward? A lot of these tools have been available for a while. We've got desk reservation systems, meeting room reservation systems, visitor sign-ins, package delivery systems, but now they're all being put together into a suite that sends a dashboard to the higher-ups, and they can see in real time what is actually happening in their office and how it's being utilized.

The next phase of this—and this is where it gets really interesting—is they're starting to develop sensors. These are luckily not cameras.

Adam: This can't lead to anything good.

James: There was a massive hack recently where a lot of video cameras were compromised at some major, I think, both corporations and government facilities and maybe jails. What these startups are doing is they're using sensors. They can detect bodies in space, shapes, so they can see how the space is being used at any moment in time, but they're not gathering any data on the individuals in that space, and that's an important distinction.

What it allows you to do is to really see like, oh, these are the areas that are being heavily utilized, lightly utilized. This is where we need to shift people to. The theory, and it has yet to be proven, is that you can get a lot more bang for your buck if you take this approach. You can get exactly the amount of office space that your employees want to use and not, as has been the case for millennia, one desk per head.

Adam: You'd have to think too that the open office environment, which has been so in vogue over the past decade, is going to be changed. I don't think it'll be people going back to their own office, but it's either going to have to be more spread out, or something creative is going to have to happen in order to make it work, you would think. As a writer, I would be okay with that, with more space to myself, I just have to say.

James: As the person who sat literally next to you before the pandemic hit, I take that very personally.

Adam: I apologize. You were very quiet, too, for the most part, and polite, but there is something nice. I still read print newspapers, so maybe I'm somewhat old-fashioned, but there is something nice about having your own isolated area when you're really trying to bear down and write.

James, for all of these startups that began during the pandemic in a remote environment, are you thinking that they're going to come back into the office once this is all over?

James: The thing that I'm hearing from investors for as far as their portfolio companies goes generally, if a company was started as a fully remote workforce, they're not really going to go to an in-office culture. They might have an office in the future, but I think if you have those roots as a distributed workforce, you're probably going to stick with them.

Adam: James, during the pandemic, we saw a lot of venture capital investors divert more of their capital into late-stage private companies that were more established while the younger startups were fighting for the scraps. Have we started to see that trend shift yet or is it still tough sledding for the early-stage startups?

James: We've definitely seen angel, seed, early stage all bounce back really strong after a significant dip post-March last year. I was talking to Keiretsu Forum, a big angel network. They do both early stage and late stage, but I think one thing that the early-stage folks are really looking forward to, and this is probably true across the board, but they want to get back out there, and they want to start meeting founders face-to-face, and they want to start working with founders more intimately.

I think this has definitely been a difficult year for that segment of the market, but we saw recently with Y Combinator, they were able to pull off a really successful event, totally online, really well-managed, great platform, got a lot of deals done. They've adapted really well. I think a lot of the things they've learned, they're going to bring through into the post-pandemic era. I think there are also a lot of investors, especially young investors, who don't have the network of their more established peers, who want to start getting out there and want to start making connections, having lunch with people, really connecting in a way that they can't over Zoom. I think that should all serve the early-stage world really well.

Adam: It's nice to see that it's finally bouncing back a little bit after what was really a rough few months for early-stage startups, first-time fundraisers, anybody who is just entering the game. We'll be sure to have you back on and to discuss some of those companies here in the next few months. James, thanks so much for coming on the show.

James: My pleasure. Thanks, Adam.

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