Special Report

‘We have come six years in six months, and there’s no going back’: Eight VCs on what to expect from venture capital in 2021

Matthew Leibowitz, general partner at Plaza Ventures; Lauren Robinson, General Partner at Highline Beta; Prashant Matta, partner at Panache Ventures; James Lochrie, capital partner at Thin Air Labs

In the tech world, the biggest story of 2020 was how the COVID-19 pandemic accelerated digital adoption across all industries, from health care to financial services to supply chain management and education. As consumers, schools and workplaces went online, the market caps of companies like Zoom, Shopify and cloud-computing provider Fastly soared. While that prompted talk of lofty valuations for forthcoming tech IPOs, it wasn’t nearly bearish enough to slow the wave. 

Talking Point

Technology stocks soared in value in 2020, a product of the pandemic which saw the acceleration of digital adoption across a swath of industries. Canadian venture capitalists who spoke to The Logic expect that digital transformation to continue in 2021, justifying what some have considered frothy valuations. They are also forecasting a bigger role for government in the innovation space, as stimulus money starts flowing into the economy.

“We have come six years in six months, and there’s no going back,” said Rich Osborn, managing partner at Telus Ventures, referring specifically to the adoption of technology across most industries in 2020. “The tech opportunity is much larger than we think,” said Boris Wertz, founder and general partner at Version One Ventures. “It is a secular growth story that is going to go on for decades.” 

The Logic spoke to eight Canadian venture capitalists who predicted that digital adoption was not just a pandemic-driven story, but one that will bleed into 2021 and beyond, potentially justifying those valuations. They also predict a higher rate of public-private partnerships, as governments are forced to address innovation head-on, targeting some of their billions in stimulus money at ventures that can provide solutions to existential issues like climate change. Here’s their forecast for the year ahead.

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Valuations will fill out 

“What we saw in 2020 is certainly not the same as the 2000 dot-com boom, where we saw incredible valuations for companies that had no value,” said James Lochrie, partner at VC firm Thin Air Labs, and the former chief product officer of the fintech startup Wave. “A company like Airbnb has hundreds of millions of customers and billions in revenue. When things go back to normal, with all the pent-up demand for travel, there’s real opportunity for valuations to fill out.” 

Airbnb was amongst numerous tech companies that went public at astounding valuations in 2020. While the short-term-rental service was grappling with a precipitous decline in revenue in the first half of the year, its stock soared 112 per cent on the first day of trading, making it the 10th-best debut in 2020 based on price gain from its IPO, and giving the company a market cap of a whopping US$86.5 billion. Similar investor euphoria played out with Snowflake, a cloud data-warehousing firm backed by Salesforce that became the biggest software IPO ever, raising nearly US$3.4 billion; its market cap is currently almost US$100 billion, about 40 per cent more than what it was worth on Day 1 of trading back in September. 

Wertz believes software companies like Snowflake still have “tremendous runway” when it comes to valuation, which will likely play out over the next few years. “Enterprise software as a service continues to do really well. Look, every single company can be a tech company, but not every single company has tools to scale their tech product. This is well understood in the private markets and the public markets,” he said. 

Matthew Leibowitz, managing general partner at Plaza Ventures, the venture firm that had a partnership called Quayside Venture Partners with Alphabet’s Sidewalk Labs before the collapse of the latter’s smart-city project in Toronto’s Quayside, observed that startup valuations have morphed into a “have and a have-not world,” and that is likely to continue in 2021. “The vast majority of our companies have been having record years, but I know others that really have not,” he said. Some of Plaza’s investments include Drop, a free mobile-rewards app, and VC Clearbanc. 

Part of the reason for tech companies’ soaring pre- and post-valuations is to the level of dry powder—cash reserves kept on hand by VCs or companies—that was available to deploy, said Christian Lassonde, managing partner at Impression Ventures. “There is still a lot of that money going into 2021, so it is going to be an interesting year, at least for us.” 

Government as a driver of innovation 

In her inaugural Fall Economic Statement, Finance Minister Chrystia Freeland promised a hefty stimulus of up to $100 billion over the next three years. Details of where exactly the stimulus money will be directed are still scant, but Canadian VCs believe at least some of that money will target the innovation economy. Freeland promised an existing program to build electric-vehicle-charging stations, for example, will receive an additional $150 million. 

“One thing getting me excited for 2021 is the government. They can be one of the biggest drivers of innovation in 2021, depending on how this stimulus is used,” said Lochrie, adding that Canada has the opportunity to not just “restart” our economy, but give it a full “reboot.” 

“Without a doubt, governments will be using the insights and challenges of 2020 to build and innovate. 2021 is the moment to do it,” said Aaron Brindle, partner at Radical Ventures, an AI-focused VC founded by AI pioneers Benji Sucher, Tomi Poutanen and Jordan Jacobs. 

Lauren Robinson, General Partner of Highline Beta, a VC that helps large corporations find and invest in innovation opportunities, believes that 2020 was a wake up call for many businesses, shaking up executive and Board complacency around technology in large companies, and was the catalyst for companies to think seriously about adoption of new business models and how to effectively work with fast-moving startups to accelerate innovation and growth in their organization. 2021 is the year where governments will continue leaning more heavily on the Canadian VC community to figure out how and where to direct innovation funding. “The $450M VCCI (Venture Capitalist Catalyst Initiative) programs were very successful, with recipient funds raising $1B from the private sector, which really helped transform the startup ecosystem in this country. The good thing is we already have these models in place,” she said. Highline Beta was a recipient of the second stream of VCCI investment back in 2018, along with VCs like BrightSpark and Garage Capital. Cumulatively, they raised over $150 million which is now being deployed to several startups.

“I’m very interested to see what comes out of infrastructure spending in the U.S. next year,” said Brindle, adding that 2021 might see the introduction of scale to existing technologies already proven in small, discrete use cases. Radical has invested in a Pittsburgh-based AI startup called RoadBotics, which helps governments administer their infrastructure by combining their data on the cloud. In South Bend, Ind.—where incoming U.S. Transportation Secretary Pete Buttigieg was mayor—RoadBotics successfully analyzed pavement conditions and highlighted cracks in roads and potholes, and prioritized repairs. Brindle believes 2020’s acceleration of technological adoption could see governments making more data-driven decisions. 

Wertz pointed out that in the climate-change arena, the last few years have showcased how government action can create real markets around which people can build companies. He specifically cited the example of carbon taxes. “Cleantech had been a dirty word in investment. We saw all these cleantech funds that didn’t perform well. But public awareness has changed, so between that and real markets created around carbon taxes, I see major breakthroughs in this space in 2021,” adding that Version One is “bullish” on climate and energy startups. 

But where the government sometimes “wrongfoots” itself, according to Telus Ventures’ Osborn, is in picking individual names to support, as opposed to a sector as a whole. “I don’t want to say the government cannot be helpful, but there are opportunities next year to support more individual funds.” 

Fintech, AI, healthtech, e-commerce, edtech will thrive 

Most of the eight VCs with whom The Logic spoke cited fintech and healthtech, in particular, as sectors that will continue to see burgeoning growth in 2021. 

“I think sectors such as e-commerce, health care, fintech and edtech will continue to see strong momentum going into 2021,” said Prashant Matta, partner at Panache Ventures. “But as entrepreneurs, investors and policymakers reflect on the long-term implications of the pandemic, I expect there will be significant interest in climate tech, govtech and cybersecurity,” he added. 

Lassonde believes that new habits formed in 2020 such as online shopping and online banking will be strengthened through 2021, elevating the investment case for fintech and e-commerce companies. “Part of the story for 2020 for fintech, in particular, was about product-market fit. You saw a bunch of companies achieve product-market fit faster that we ever expected…. If you’re in fintech, you either got product-market fit in 2020, or you never will,” he said. 

In April, Impression Ventures raised a $36-million fund to invest in fintechs that were thriving despite the pandemic. According to Lassonde, a third of the fund has been deployed to date. “We only deploy capital when we see an exceptional company…. Sometimes, we go 12 months without making a single investment,” he said. 

Telus Ventures had a particularly successful 2020 because of its focus on the healthtech sector, said Osborn. Among the firm’s investments are MindBeacon, the online mental-health-care company that recently went public on the TSX, and PatientSafe Solutions, a clinical communications tool. “We were struggling in Canada to keep pace with other countries in terms of healthtech and health IP, and now I think the game has really changed. This is a long-lasting shift,” Osborn said. In 2021, Osborn is planning to focus his attention on developments in AI that underpin the health-care sector. “I don’t even think we have envisioned all the potential ramifications for this sector with things like deep learning technology. I am really fascinated by all this, and we are going to try to get as deeply embedded in that ecosystem as possible,” he said. 

AI investment in the first three quarters of 2020 ($743 million) represented 23 per cent of the total VC investment in the country over the same period, according to data compiled by Radical. 

The firm is particularly bullish on AI in health, according to Brindle, who said it was “unlikely” that patients, providers and pharma will retreat into the pre-pandemic past when it comes to digitization efforts in the health-care sector. He cited the example of a Radical-backed Toronto-based company called PocketHealth, which allows users to receive and share medical records. “They saw a 300 per cent increase in business in 2020,” he said. 

While Wertz, too, is bullish on the telemedicine space, he is also eyeing startups that have bright ideas on communication tools. “The tools we used to communicate in the pandemic were not perfect, and often exhausting. On the one hand, it is incredible that you can have 100 people in a virtual room celebrating something. But at the same time, it does not feel truly social,” he said. “What’s the next generation of social tools that can feel more native to how we communicate, rather than transactional? That will be interesting to watch.” 

Venture debt is here to stay

Debt has been a prevailing theme in startup fundraising over the last few years. Data from PitchBook shows that in 2020, there were at least 2,600 venture-debt deals in the U.S., surpassing US$20 billion for the third consecutive year. “2021 will likely mark the fourth consecutive year to surpass US$20 billion in venture-debt value,” a PitchBook year-end outlook predicted. 

That certainly could be the case, said Panache Ventures’ Matta. “Venture debt was already growing pre-COVID. The pandemic forced entrepreneurs to strengthen balance sheets and pursue a combination of equity and debt financings, and I don’t expect that to change … but I would encourage venture-debt issuers to get more creative on how to better serve early-stage startups,” he said. 

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Wertz calls venture debt a “super important innovation in the financial system that is going to continue,” largely because of the involvement of the Big Five banks in the venture space. “The new economy does not have physical assets, and sometimes they don’t have IP, but they have sticky revenues, which reduces the risk profile of venture debt issuance.” 

Lochrie points out that as the supply of capital in the market increases in a low-interest rate environment, venture-debt issuance will continue to persist. “It’s a really nice tool for founders to avoid dilution, but I’m not a fan of it in the early stages unless there’s a sustainable business model. But if you’re in the growth phase of a business and you’re utilizing venture debt to build out, that’s a really strong play,” he said.