Why don’t more VCs care about good tech (yet)?

One of the VC partners in a well-established London firm told me straight out:

Venture capital is money [laughs], it is a risky asset class, perhaps the wildest asset class […] and it has the biggest possible returns.

I have detailed elsewhere how I think caring more beyond the immediate-return mentality often associated with shareholder value capitalism makes sense (financially and ethically). But the arguments I am making are normative and ideological and don’t describe the status quo of VC investing. The more VCs I speak to — so far more than 150 between Berlin and Silicon Valley — the more it becomes clear that most of them couldn’t care less about environmental, social and governance, impact, sustainability, green tech or what Nicholas Colin calls safety net 2.0. Most VC money last year went into fintech; real estate and automation continue to be big, too. Only a tiny portion of businesses in these areas are remotely “impactful.”

Why, then, have the big, supposedly much less progressive asset managers and funds — from KKR to BlackRock to JPMorgan Chase — started to announce that they do (intend to) care?

What are these institutions sitting at the heart of capitalism seeing turning to ESG guidelines, screaming for more regulation and pushing to make portfolios climate-friendly? Why is it that big CEOs want to shift their efforts away from just shareholder value to benefit all stakeholders? Obviously, it must be about money, about a new investment opportunity. Being “good” must be on the verge of becoming profitable. But why are VCs not getting into that in big waves, the investors who are usually ahead of the curve qua their forward-looking business model?

Don’t get me wrong — there is indeed a class of new VCs that has decided to specialize in impact investing and “social good.” Perhaps with the exception of DBL, most of the funds in this new class, however, have only started recently; none of them will be considered top tier funds yet. Exceptions only confirm the rule, however. While Obvious, itself a B-Corp lead among others by Twitter co-founder Ev Williams, is celebrating the Beyond Meat IPO, Greylock is struggling to recruit more than one female into its investment team and is still most keen on blitzscaling marketplaces. While in Germany, Ananda is the only self-fashioned impact investor, sector heavy-hitters such as Holtzbrinck, Earlybird and Point9 are still struggling with the future of e-commerce and SaaS and have discovered gaming as a way of making a 3x return.

Why? Why is dumb money that sits in KKR and is only supposed to strive for the biggest available profit imposing ESG guidelines on itself while hundreds of clever VC general partners are seemingly closing their eyes and path-dependably follow their old-school patterns chasing disruption everywhere but in “the good” and “impact?”

Here are six hypotheses and excuses:

1. It isn’t clear what “impact” even is. While GIIN, the OECD the UN and others are publishing new metrics for ESG and impact measures almost on a daily basis (also reinventing the language around it), the people on the ground doing the investing find it hard to keep up. As many dedicated impact investors I have spoken to, as many different ways of interpreting it I have seen. Some of the VCs I interviewed hence find a relatively easy way out: How are you supposed to aim if you don’t know what your target is?

2. In the VC world, there aren’t reliable return numbers for impact investing yet. VCs have a strong instinct for herding; while seemingly new territory should be what they are used to, when it comes to proven financial return patterns, they often turn a blind eye. As long as there are no data points to prove — also with regards to communicating with their LPs — that “good tech” makes financial sense in the VC world, many won’t move.

3. Why change when what has worked continues to work? The VC business model of doing high-risk investments into mostly technology and biotech has worked very well; in fact, the ongoing low-interest rate environment has driven increasing amounts of capital into the asset class that is looking for exactly the kind of above-average returns the traditional VC model has generated. Why change that now?

4. The others are not really investing real money into impact either. It is true — lots of asset managers and PE investors have publicized their intentions about “going ESG” or “doing impact” widely, but not too much capital has yet been deployed concretely. Bain’s Double Impact fund is $390 million (versus the approximately $30 billion of Bain’s assets under management); KKR’s Global Impact fund is $1 billion, versus around $300 billion under management.

5. The pressure on other asset managers is much higher. On the one hand, LPs have a bigger influence over big asset managers (and they can often be the ones driving change), and on the other, the KKRs and BlackStones of the world need to overcompensate even more for how bad society thinks they are. Virtue signaling — just like CSR — is a good way of doing that (particularly if there is indeed a financial opportunity).

6. Lots of people in VC self-select to not care. As a former partner in a famous SV firm put it to me recently: young people don’t become VCs today to do good, they do it to make a fortune and wield power. While the tech world might have once been run by utopians like Steve Jobs, the wheel is now in the hands of techno-libertarians building cities in the sea, buying up NZ and (at times) supporting Trump (to then make money off that connection by extending surveillance). You reap what you sow.

But even if some of the above excuses are real — for-profit impact is in fact still a tiny asset class (see latest GIIN numbers) for instance — aren’t VCs usually ahead of the game? Contrarian and looking for the next narrative violation? Isn’t it the VCs’ task to sniff up new investment opportunities and sectors first? Most importantly: How long are VCs going to ignore the massively growing consumer appetite for responsible and impactful business (and investing, as KPMG recently found)?

So, the question remains puzzling for me: When will we see the first Tier 1 VC-firm (after Kleiner Perkins in the 2000s) announce that they’ll start a ‘”good tech” fund?

Kenya’s Apollo Agriculture raises $6M Series A led by Anthemis

Apollo Agriculture believes it can attain profits by helping Kenya’s smallholder farmers maximize theirs.

That’s the mission of the Nairobi based startup that raised $6 million in Series A funding led by Anthemis.

Founded in 2016, Apollo Agriculture offers a mobile based product suit for farmers that includes working capital, data analysis for higher crop yields, and options to purchase key inputs and equipment.

“It’s everything a farmer needs to succeed. It’s the seeds and fertilizer they need to plant, the advice they need to manage that product over the course of the season. The insurance they need to protect themselves in case of a bad year…and then ultimately, the financing,” Apollo Agriculture CEO Eli Pollak told TechCrunch on a call.

Apollo’s addressable market includes the many smallholder farmers across Kenya’s population of 53 million. The problem it’s helping them solve is a lack of access to the tech and resources to achieve better results on their plots.

The startup has engineered its own app, platform and outreach program to connect with Kenya’s farmers. Apollo uses M-Pesa mobile money, machine learning and satellite data to guide the credit and products it offers them.

The company — which was a TechCrunch Startup Battlefield Africa 2018 finalist — has served over 40,000 farmers since inception, with 25,000 of those paying relationships coming in 2020, according to Pollak.

Apollo Agriculture Start

Apollo Agriculture co-founders Benjamin Njenga and Eli Pollack

Apollo Agriculture generates revenues on the sale of farm products and earning margins on financing. “The farm pays a fixed price for the package, which comes due at harvest…that includes everything and there’s no hidden fees,” said Pollak.

On deploying the $6 million in Series A financing, “It’s really about continuing to invest in growth. We feel like we’ve got a great product. We’ve got great reviews by customers and want to just keep scaling it,” he said. That means hiring, investing in Apollo’s tech, and growing the startup’s sales and marketing efforts.

“Number two is really strengthening our balance sheet to be able to continue raising the working capital that we need to lend to customers,” Pollak said.

For the moment, expansion in Africa beyond Kenya is in the cards but not in the near-term. “That’s absolutely on the roadmap,” said Pollak. “But like all businesses, everything is a bit in flux right now. So some of our plans for immediate expansion are on a temporary pause as we wait to see things shake out with with COVID.”

Apollo Agriculture’s drive to boost the output and earnings of Africa’s smallholder farmers is born out of the common interests of its co-founders.

Pollak is an American who who studied engineering at Stanford University and went to work in agronomy in the U.S. with The Climate Corporation. “That was how I got excited about Apollo. I would look at other markets and say “wow, they’re farming 20% more acres of maize, or corn across Africa but farmers are producing dramatically less than U.S. farmers,” said Pollak.

Pollak’s colleague, Benjamin Njenga, found inspiration in his experience in his upbringing. “I grew up on a farm in a Kenyan village. My mother, a smallholder farmer, used to plant with low quality seeds and no fertilizer and harvested only five bags per acre each year,” he told the audience at Startup Battlefield in Africa in Lagos in 2018.

Image Credits: Apollo Agriculture

“We knew if she’d used fertilizer and hybrid seeds her production would double, making it easier to pay my school fees.” Njenga went on to explain that she couldn’t access the credit to buy those tools, which prompted the motivation for Apollo Agriculture.

Anthemis Exponential Ventures’ Vica Manos confirmed its lead on Apollo’s latest raise. The UK based VC firm — which invests mostly in the Europe and the U.S. — has also backed South African fintech company Jumo and will continue to consider investments in African startups, Manos told TechCrunch.

Additional investors in Apollo Agriculture’s Series A round included Accion Venture Lab, Leaps by Bayer, and Flourish Ventures.

While agriculture is the leading employer in Africa, it hasn’t attracted the same attention from venture firms or founders as fintech, logistics, or e-commerce. The continent’s agtech startups lagged those sectors in investment, according to Disrupt Africa and WeeTracker’s 2019 funding reports.

Some notable agtech ventures that have gained VC include Nigeria’s Farmcrowdy, Hello Tractor — which has partnered with IBM and Twiga Foods, a Goldman backed B2B agriculture supply chain startup based in Nairobi.

On whether Apollo Agriculture sees Twiga as a competitor, CEO Eli Pollak suggested collaboration. “Twiga could be a company that in the future we could potential partner with,” he said.

“We’re partnering with farmers to produce lots of high quality crops, and they could potentially be a great partner in helping those farmers access stable prices for those…yields.”

Study launched into how startups will return to offices — will WFH continue?

A comprehensive study into how startups will work in the future, in the wake of the global COVID-9 pandemic, has been launched by UK non-profit Founders Forum. The initiative comes in the wake of a number of organizations announcing extended offices closures and ‘Work From Home’ policies.

The group hopes the COVID-19 Workplace Survey will give the startup community actionable data in order that founders can make critical decisions regarding their return to work strategy and service providers (including accelerator programmes, co-working spaces and investors) can best support startups in a “post-COVID-19” world.

The initiative was started by Brent Hoberman, co-Founder and Executive Chairman of Founders Forum, Founders Factory and firstminute capital.

Speaking to TechCrunch, Hoberman said: “Founders are having to make critical decisions about their return to work strategy in isolation”. He says the survey aims to measure “the current action being taken by founders of early-stage businesses regarding their office spaces and remote work strategies” as well as “employee sentiment about returning to the workplace”. This will then help “guide both founders and service providers on what can be done to improve the situation for these startups and their employees”.

The COVID-19 Workplace Survey is an anonymous survey designed to answer these core questions:

  • Are startups re-opening their offices?
  • If not, when do they plan to do so?
  • As soon as the UK government advises that it’s safe to do so?
  • This year? Next year?
  • What safety measures are they taking in order to do so?
  • Beyond this, how has COVID-19 changed thinking surrounding remote work policies?

Hoberman explained: “We want founders to know the answer to ‘How are other Founders changing their workplace strategy?’”.

He added that founders also need to understand how each employee’s remote work environment influences their opinion on remote work policies going forward, given there is no one-size-fits-all solution: “What do different demographics really want in the way of remote work?”.

For service providers like co-working spaces, they will also find out what startups will want from their workplaces (e.g flexible desk space, shared meeting rooms) in the post-lockdown environment.

The survey will run for the next 10 days and the results will be published on TechCrunch .

UK angels still active during lockdown, but startups need to be quick

A survey of UK angel investors regarding their investment strategies during the COVID-19 pandemic has found that over 65% of angels investors are continuing to invest in startups during Lockdown, but with predominantly new deals. Many are completing more deals and increasing their cheque size by as much as 18%.

However, the pandemic has reduced their total capital to invest in 2020 by just over 61%, while just under 60% think the effects of COVID-19 will negatively affect their ability to invest for the rest of 2020. Over 250 angels completed the full survey in the last two weeks, after TechCrunch exclusively published it.

These are the findings of new UK initiative Activate our Angels (AoA). The initiative comes just as the UK government’s “Future Fund” for startups, which has been criticized as being inadequate for the needs of Angel and Seed-stage startups, is poised to be launched some time this week.

AoA was started by Nick Thain the former CEO and co-founder of GiveMeSport, which was acquired last year and includes representatives from 7percent Ventures, Forward Partners, Portfolio Ventures, ICE, Foundrs, Punk Money, Humanity, Culture Gene, Barndance, Bindi Karia and Stakeholderz.

Activate our Angels started its campaign just under two weeks’ ago with the goal to give founders actionable data to help them make funding decisions, during and post-lockdown.

The survey shows that while angels are currently investing, founders will need to lock this funding down fast, as 59% of angels surveyed says their future investing will be negatively affected the longer the lockdown goes on.

This becomes more important if a startup has raised under £250,000.

Furthermore, the survey concluded that angels are investing 18% more per deal and have increased the frequency of deals in Lockdown by over 122% from 0.27 deals per month in 2019 to 0.6 deals per month in the last 3 months.

Angels are looking for increased runway and revenue generative businesses, and they’re seeing reduced valuations and smaller rounds.

Additionally, angels are told the survey that they have 61% of the capital to invest in 2020 compared to 2019. This suggests that angels are “making hay while the lockdown-sun is shining” said the survey.

Consequently, angels will have significantly less money for the rest of 2020.

For start-ups that have not raised yet, the findings suggest they should do their first round as soon as possible.

For start-ups who have already raised, this impending angel capital crunch makes initiatives such as the forthcoming government-backed Future Fund as important as ever, says the survey.

“If angels are not investing in Lockdown, they are holding cash and waiting to be confident that COVID-19 is over. The best way to contact them is via an introduction/recommendation, email or linkedIn, not via Social Media,” it added.

The results from the survey have been summarised below.

●  66.7% of Angel investors are still investing during Lockdown

○  77% of those are investing in new deals

○  23% of those in existing portfolio deals

●  33.3% of angels are not investing in lockdown

○  71% of those are reviewing deals
○  29% of those are not investing at all
●  17.6% more is being invested per deal during Lockdown.
○  £23,071 invested per deal in Lockdown
○  £19,620 invested per deal in 2019
●  Angels completed an average of 1.81 deals during lockdown, angels completed an average of 3.24 deals in the whole of 2019
○  1 deal every 3-4 weeks (approx.), since Lockdown on 23rd March 2020
○  1 deal approximately every 7-8 weeks (approx.), in last 1-3 months
○  1 deal every 3-4 months (approx.) in last 4-12 months
○  1 deal every 3-4 months (approx.) in 2019
●  58.1% of angels believe that Covid-19 will have a negative impact on their ability to invest in 2020, 27.2% No Change and 14.7% said it would have a positive impact
●  51.4% of angels surveyed said they would be investing Less in 2020
○ of those angels said they would invest 61% less capital in 2020 compared to
2019.
●  33.3% of angels are not investing in Lockdown
○  of those 47.6% are only going to invest again when they are confident Covid- 
19 crisis is over
○  of those 28.6% are not planning to invest again.
●  64.9% of angels are changing the business sectors they’re looking at including; Healthcare, Fintech and gaming
●  54.1% of angels have changed their investment requirements, with longer runway, revenue generative and recurring revenue being the most important factors.
○ 46.9% of angels had no change in investment requirements
●  68% of angels have seen deal terms with reduced valuations as a result of Covid-19 and 35% have seen smaller Investment rounds.
●  When it comes to getting in contact with angels, 72% want to be contacted via recommendations/introductions. 
○ 54% via email
○ 32.6% LinkedIn
○ 30.9% Angel network.
○ Facebook and Twitter being the least effective way to contact angels with 
less than 3% of respondents selecting this.
●  70% of angels said SEIS/EIS was important, very important or critical to their investment decisions, of those 58% said they would not invest more if the SEIS allowance was increased to the £200k from the current £100k cap.

Big VCs stacked billions in Q1 while smaller firms saw their haul shrink

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

After spending perhaps more time than we should have recently trying to figure out what’s going on with the public markets, let’s return to the private markets this morning, focusing in on venture capital itself. New data out today details how U.S.-based VCs fared in Q1 2020, giving us a window into how flush the financial class of startup land was heading into the COVID-19 era.

The short answer is that big funds raised lots of cash, while smaller funds appear to have put in a somewhat lackluster quarter.

That big funds performed well in Q1 shouldn’t surprise. We’ve seen NEA stack $3.6 billion in March and Founders Fund raised $3 billion for its own investing work earlier in the quarter, to pick two examples TechCrunch covered.

The impact of these mega-raises, according to a report from Prequin and First Republic Bank, was to push up the total amount of capital raised by American venture capital firms in the quarter, while the decline in the number of funds that raised $50 million or less led to a slim number of total funds raised. It’s hard to call a surge in dry powder bearish, but the fall-off on smaller funds could limit seed capital in the future.

Notably, there have been warning signs since at least 2019 that seed volume was slowing; recent data from the U.S. underscores the trend. So what we’re seeing this morning in data-form is a summation of what we’ve previously reported in a more piecemeal fashion.

Let’s pick over the data to see what we can learn about how much spare capital the venture classes are sitting on today.

The rich get richer

The whole report is worth reading if you have time. Aside from the data concerning how much money VCs are raising themselves, it includes several interesting bits of information. For example, there were just 960 venture deals closed in the U.S. in Q1 — a pace that would make 2020 the slowest year since 2009 if it held steady.

Per the listed data, 83 U.S.-based venture capitalists closed (“held a final close”) a fund in Q1 2020. This was off about 24% from the Q1 2019 result of 109. However, while the number of funds raised was lackluster, they made up for it in dollar-scale. According to Preqin and First Republic Bank, the “funds that closed raised $27 [billion], a substantial total representing over half of the capital raised in 2019 ($50 [billion]).”

Alternative assets are becoming mainstream

The way we invest is changing. Technology makes investing easy and more accessible than ever. Meanwhile, Millennials and Gen Z are gravitating away from public equity investments.

These changes have led to the rise of alternative assets. People are increasingly looking for new and innovative ways to approach investing. But are alternative assets truly the new frontier of modern investing?

What is an alternative asset?

As the name suggests, alternative assets are an alternative to traditional assets, like stock, bonds and cash. The term usually describes unconventional investments. That can include anything from a Honus Wagner baseball card to bottles of fine wine. However, it can also apply to more familiar investments, like real estate and private mortgages.

Simply put: alternative assets are the things that probably wouldn’t come up when you meet with your financial advisor. They are not easily categorizable, which makes them more difficult to manage. Often, people invest in alternative assets because of a passion for the asset rather than the immediate ROI.

What makes alternative assets an attractive investment?

Investors will go wherever there is money to be made. That includes alternative assets. In addition to higher potential returns, alternative assets have distinct characteristics from traditional assets. Here are a couple of factors to consider when looking at alternative assets:

Portfolio Diversification

Novastar Ventures becomes $200M African VC fund after $108M raise

African startups have another $100 million in VC to pitch for after Novastar Ventures’ latest raise.

The Nairobi and Lagos based investment group announced it has closed $108 million in new commitments to launch its Africa Fund II, which brings Novastar’s total capital to $200 million.

With the additional resources, the firm plans to make 12 to 14 investments across the continent, according to Managing Director Steve Beck. He spoke to TechCrunch on Novastar Ventures’ plans for the new fund.

A notable update to Novastar’s VC focus is geographic scope. The firm was originally co-founded in Kenya by Beck and British investor Andrew Carruthers and built its first portfolio largely around companies based in East Africa. Novastar Ventures made 15 investments with its first fund, including companies such as Uganda and Kenya focused energy startup SolarNow and agtech venture M-Farm.

“The second fund is basically the same strategy as the first, but…the biggest difference is that we opened up a second front in West Africa — more particularly to be in and around the entrepreneurial system in Lagos,” Beck told TechCrunch on a call.

Before closing its Africa Fund II, Novastar Ventures had already made several investments in West Africa, including leading a round in Nigerian on demand motorcycle transit startup Max.ng and backing Ghanaian health company, MPharma. Novastar opened an office Lagos in 2019.

On the types of startups Novastar will target with its new fund, the focus is more on mission than industry silos, according to co-founder Steve Beck. “We’re sector agnostic. I would describe us more as a segment fund than a sector fund,” he said.

“We really try to look for businesses called breakthrough businesses, [those] that are addressing the biggest problems in the largest markets.”

That has led Novastar Ventures to invest in digital companies in education, information access, agtech, mobility and off-grid energy.

“Essentially what we’re doing is looking for those businesses that are addressing the basic needs, basic goods and services across the true mass markets of the continent,” said Beck.

On whether the firm is a dedicated impact fund, Beck said, “The way we characterize ourselves is we’re a commercial venture fund with an impact screen.”

On investment amounts and types, Novastar Ventures is fairly flexible on ticket size, from seed to later stage.

“We’re gonna…have some portfolio companies where we put to work a million dollars or less or were going to have some where we put $8 or $9 million dollars in through capital rounds. That’s…the deployment strategy,” Beck said.

Novastar Ventures works closely with its portfolio companies, according to its co-founder.

“We’re very active investors and always take a board seat to be close to the entrepreneurs. We often are the first institutional investor that they have.”

Africa Top VC Markets 2019

Image Credits: TechCrunch

Startups who want to pitch to the company can reach out to the fund’s founders and directors via the website or LinkedIn, according to Beck. He added that Novastar Ventures is recruiting to add another member to its investor team in 2020.

The firm’s latest raise and $200 million capital amount creates another high value fund focused on African startups.

On the high end of estimates, the continent’s tech ecosystem reached $2 billion in VC to startups in 2019, compared to less than half a billion dollar five years ago.

Other large Africa focused VC shops include TLcom Capital — which closed a $71 million fund in February —  and Partech, which doubled its Africa fund to $143 million in 2019. The venture arms of major global companies have also become more active in African tech recently, including that of Goldman Sachs and Visa.

What the new VC show-and-tell means for signaling risk

A month ago, we asked several venture capitalists if they planned to change the way they invest or lead rounds during COVID-19 — most said no, but they noted that valuations were coming down and founders in their portfolio companies were responding to the crisis.

Northzone’s Paul Murphy predicted fewer FOMO rounds because investors will “take more time to get to know and diligence the business… and it might also take a bit more time to close deals,” adding that he would “continue to lead rounds and back great founders.” But, as other investors call their bluffs, firms are looking for tangible ways to show they are open for business.

First Round Capital 

At least that was the case with First Round Capital. On Thursday, the seed-stage firm announced that when it leads a first round in a company, it will always take pro rata in the next outside-led venture round with a commitment of up to $3 million.

Pro rata is a clause in an investment agreement that gives the investor a right to participate in future financings. If investors don’t invest in a company’s pro rata, that might negatively signal they don’t believe in the company’s future. I asked Brett Berson, a partner at First Round, to offer more context about the announcement.

“The question ‘is your investor taking their pro rata’ is not necessarily a checkbox answer,” Berson said. “And I think in a time of maximum uncertainty, what a given investor was doing 12 months ago might not be what he or she is doing today.”

How this startup built and exited to Twitter in 1,219 days

By the summer of 2016, Marie Outtier had spent eight years as a consultant advising media agencies and martech companies on marketing growth strategy.

Pierre-Jean “PJ” Camillieri started as a music software engineer before joining one of Apple’s consumer electronics divisions. Inspired by Siri, he left to start Timista, a smart lifestyle assistant.

When the two joined forces to co-found Aiden.ai, the combination was potent — one was a consummate marketer, the other, a specialist in machine learning. Their goal: create an AI-driven marketing analyst that offered actionable advice in real time.

Humans who manage ad campaigns must analyze vast amounts of numbers, but Outtier and Camillieri envisioned a tool that could make optimization recommendations in real time. Analytics are vast and unwieldy, so theirs was a no-brainer proposition with a market crying out for solutions.

The company’s first office was at Bloom Space in Gower Street, London. It was just a handful of hot desks and a nearby sofa shared with four other startups. That summer, they began in earnest to build the company. A few months later, they had a huge opportunity when the still 100% bootstrapped company was selected for Techcrunch Disrupt’s Startup Battlefield competition.

Interviewed by TechCrunch, they explained their proposition: Marketers wanted to know where a digital marketing campaign was getting the most traction: Twitter or Facebook. You might need to check several dashboards across multiple accounts, plus Google analytics to compile the data — and even if you conclude that one platform is outperforming the other, that might change next week as users shift attention to Instagram, potentially wasting 60% of ad spend.

Aiden was intended to feel like just another co-worker, relying on natural language processing to make the exchange feel chatty and comfortable. It queried data from multiple dashboards and quickly compiled it into flash charts, making it easy to find and digest.

Eventually, instead of managing 10 clients, marketing analysts would be able to manage 50 using dynamic predictions as well as visualizations. Aiden incorporated Outtier’s expertise into its algorithms so it could suggest how to tweak a Facebook campaign and anticipate what was going to happen.

Was appearing at Disrupt a significant moment? “It was a big deal for us,” says Outtier. “The exposure gave us ammunition to raise our first round. And being part of the Disrupt Battlefield alumni gave us many meaningful networking and PR opportunities.”

A few weeks later the company had raised a seed round of $750,000. But not without difficulty. By this time Outtier was in the latter stages of pregnancy. Raising money under these circumstances was difficult, but, she says, “it can be done. It’s tougher than ‘normal circumstances.’ It’s a bit like running a marathon, but with a fridge on your back.”

When regulation presents a (rare) opportunity

Every time we realize something new about the coronavirus, it’s always worse than we thought: maybe we don’t develop immunity to it; maybe six feet of social distancing isn’t far enough; maybe the spread won’t wane in warmer weather.

Every time we realize something new about the economy, it’s equally bleak: maybe we can’t safely reopen for months (Georgia and South Carolina notwithstanding), maybe unemployment will top Great Depression levels, maybe travel won’t resume till mid-2021, maybe most of the businesses who have shuttered their doors will never return.

But like everything in life, within all of the bad, there’s usually some good too. And for businesses who have to deal with regulation, this may be an unusually good time to get what you need.

The federal government does not have to balance its budget, which is why multi-trillion dollar legislation like the CARES Act is possible. But cities and states have to produce a budget every fiscal year that at least looks balanced on paper. In good times, that leads to lots of new spending. But in bad times, it requires a painful series of cuts, tax and fee increases and tough decisions that are normally avoided by politicians at all costs. All of that creates opportunity for startups.

Local government will desperately need new sources of revenue. Figuring out what a politician is going to do isn’t that difficult: identify the choice with the least political downside and that’s almost always the answer. That’s why controversial policy issues like legalizing mobile sports betting or recreational marijuana often stall in state legislatures when the budget is flush (disclosure, we’re investors in FanDuel) . But now, lawmakers face a very different situation: to balance the budget, they will either need to enact deep spending cuts, raise fees and taxes, or find new sources of revenue. All of a sudden, legalizing gambling and drugs doesn’t seem so risky, politically or substantively.

Any company that can offer material new tax revenues can now see their product or service legalized and permitted in a fraction of the time it would normally take. Companies who can offer direct savings to government can now secure contracts and win procurements at a rapidly faster clip. A broke government is a friendly government. This is the moment to be aggressive.
It was less than a year ago when Amazon tried to build its second headquarters in New York City.

Despite strong support from Governor Andrew Cuomo and tepid support from Mayor Bill de Blasio, the project was widely derided as an unfair corporate boondoggle and Amazon was swiftly run out of town. In good economic times, voters have the luxury of focusing on issues that aren’t critical to their own day-to-day survival and politicians have the luxury of saying no to new jobs and tax revenue to try to score points with the base.

Not anymore. Startups in blue cities and states up and down both coasts have vastly more political leverage than they’ve had in years. Issues like privacy, worker classification reform and fears of AI are all about to take a back seat to pocketbook issues like jobs, crime and access to health care. Startups who can promise to retain jobs can now drive meaningful changes on policy, regulation, permitting, zoning, licensing and everything else they need to operate.

Startups that can offer solutions to living in a pandemic (digital payments, D2C, telemedicine, teleconferencing, tele-anything) will become shiny new toys that lawmakers want to be seen with. Delivery drones, autonomous cars, at home medical testing and other concepts that seem a little edgy will now become ideas that lawmakers have to seriously consider – if a new technology could potentially save lives during a pandemic, you really don’t want to be the politician who killed the idea.

Proposals to screw with startups won’t automatically become the top priority for the San Francisco Board of Supervisors. Facebook even now has a much stronger argument to lobby for Libra (no one in this climate wants to use cash if they can help it). The power dynamic just flipped on its head. But that only works if you understand it and take advantage of it.

In the continual debate over whether tech startups should ask government for permission or beg for forgiveness over the last few years, the zeitgeist has shifted significantly towards asking for permission. The tech-lash against Facebook, Google, Amazon, Apple and Twitter created regulatory headaches for virtually every tech company, even some early stage startups.

All of that just changed. Regulators and lawmakers now have far bigger things to worry about than whether an electric scooter needs a particular type of permit. And if saying no to new ideas from new companies means turning away desperately needed jobs and tax revenue, for all of the same reasons that it was politically salient for lawmakers to reclassify all California sharing economy workers as full time employees or reject Amazon’s overtures or limit the spread of homesharing, the opposite is now true.

Now you get points for creating jobs and avoiding spending cuts. Now you’re far more reticent to tell a constituent that they can’t make a few extra bucks by renting out a room (assuming anyone ever travels again). The label of job killer will start to become politically toxic, even in the most progressive wards, districts and neighborhoods in the bluest cities on each coast. The dynamic is clearly shifting back to begging for forgiveness (don’t be stupid and do things that are clearly illegal but interpreting gray areas of regulation as friendly is now a lot easier).

Unlike the financial crisis in 2008, businesses are not the culprit here. Tech companies are actually even some of the heroes of fighting the coronavirus. But most important, being punitive towards startups is no longer a clear political winner, even in the most liberal cities and states. Even if it seems counterintuitive, now is exactly the time for startups to aggressively seek policy change and regulatory relief.

Politics is about leverage. Startups now have it. They should take advantage of it before things change again.