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Monday, Mar 20, 2023

Venture Capital Firms’ Portfolios Profit From a ‘Pandemic Bump’

When the pandemic first took hold in March, Eric Manlunas foresaw a doomsday scenario for his firm’s investments. 

Fast forward 10 months, though, and the exact opposite has transpired for Wavemaker Partners, a Santa Monica-based early stage venture capital firm. 

Some of Wavemaker’s portfolio companies in the ecommerce sector have benefited from a “pandemic bump” that tripled or quadrupled their revenues in 2020. 

Commercial milestones they expected to hit in five to 10 years have been reached in a matter of months. 

“Who would have thought?” said Manlunas, who is a founder and managing partner at Wavemaker. “When this thing first became a major catastrophe, I was convinced that our portfolio was going to get crushed. It looks like that wasn’t the case.”

“The VC world has been nothing short of a miracle,” he added.

It’s a shared sentiment across much of the Los Angeles venture capital world. Even amid a global health crisis that sparked a recession and upended life as everyone knew it, startups have announced major raises, venture firms have made bold investments, and investors are expressing optimism about the success of their portfolios in 2021.

There was a pause in activity as the pandemic began in the spring, with venture firms going into triage mode and startups reducing staff. But it has been all systems go since summer, especially in technology sectors that have taken advantage of a shift to digital sped up by the pandemic. 

“You see the pandemic accelerate the need for technology and information in so many ways, and innovation has therefore followed at a really rapid pace — unprecedented in some instances,” said Dan Wenhold, partner at Marina del Rey-based Fifth Wall, which has around $1.2 billion in commitments and capital under management. “The demand for VC dollars and scaling has been the greatest, or the highest, that we’ve seen in a long time.”

‘Bullish about LA’

Notable local VC figures say local growth in sectors such as ecommerce, AI and bioscience is a sign that the L.A. venture ecosystem has matured by expanding beyond its traditional areas like entertainment and content creation.

“I am very bullish about L.A.,” said Erik Rannala, co-founder and partner at Santa Monica-based Mucker Capital.

The list of successful 2020 financing rounds is long and includes some big numbers. The largest include a whopping $1.9 billion raised by Elon Musk’s Space Exploration Technologies Corp., $500 million for Long Beach-based rocket builder and 3D printer Relativity Space Inc., and $450 million raised by Long Beach-based online fitness platform Zwift Inc.

Smaller yet significant raises included Glendale-based AI startup Beyond Limits Inc. closing a $133 million Series C round, Santa Monica-based meditation app developer Headspace Inc. announcing an additional $47.7 million for its funding round, Culver City-based bioscience startup Kernel raising $53 million, and Culver City-based security startup Openpath Security Inc. closing on $36 million.

Meanwhile, there have been major exits. In August, Culver City-based security monitoring and management company Signal Sciences was bought by content delivery networking services provider Fastly Inc. for $775 million. In December, Torrance-based electric vehicle developer Canoo Inc. made its debut as a publicly traded company following completion of a reverse merger designed to provide $600 million in total capital.

“It’s been gangbusters,” said Andy Wilson, executive director of the Alliance for Southern California Innovation, which promotes tech and life sciences startups in the area. “These numbers are more typical of Silicon Valley.”

Wilson pointed to large funds raised by VCs as well. Westlake Village-based BioPartners Inc., which invests in life science and therapeutic companies, announced two new funds in December totaling $500 million. Greycroft, which is based in New York and L.A., closed two new funds totaling $678 million. Fifth Wall closed on its $100 million Retail Fund in February and in the fall announced a new Real Estate Technology European Fund whose amount hasn’t yet been disclosed.

Wenhold said Fifth Wall, which focuses on bringing tech to the real estate industry, has been “surprisingly active” since the pandemic began, increasing commitments to companies already in its portfolio as well as betting on new ventures.

The firm has also been effective at adapting to new ways of doing business during the pandemic, such as investing in new startups after only meeting founders on teleconference instead of in person. This shift has actually resulted in more efficiency, reducing travel time and making it easier to coordinate schedules, Wenhold said.  
“Rather than increasing the demands on their time, taking them away from their business and making them fly to L.A. from different parts of the country to present to our partnership, we were able to have them Zoom in,” he said.

Accelerating into 2021

To be sure, not every corner of the venture world has been thriving. Wilson pointed out that the travel sector and other industries negatively impacted by Covid-19 have been hurting. There was also L.A.-based mobile streaming platform Quibi, which ambitiously raised some $1.75 billion but then closed just six months after it launched.
“It’s really been a tale of two cities,” Manlunas said. 

The more successful of the two appears to be enough to continue propelling local VC firms forward. A December survey of 28 firms by Dot.LA, for instance, showed that 81% of local venture companies expected their headcount to grow over the next quarter. 

The maturation of L.A.’s venture capital industry has accelerated even during the pandemic, and that process is expected to continue into 2021 and beyond. 

“As you have more and more of those success stories over the course of the next few years, with quite a few companies still poised for big exits, I think you’re going to continue to see L.A. mature further and attract more venture dollars,” Wenhold said. 

A big part of the success is L.A.’s strong ecommerce sector, which has been surging due to the Covid-19 public health restrictions and should help fortify the area’s overall ecosystem, said Mucker Capital’s Rannala.

“L.A. was on a great trajectory before Covid and still L.A. VCs have been very active throughout this,” Rannala said. “I think they’ll continue to be.”

Keep reading the 2021 Money Issue.

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