Covid-19 highlights the merit of fundamentals and provides an opportunity for otherwise overlooked innovators – which is nothing new to Elsewhere Partners
by Dave McKenna, Editor – CREB on June 2, 2020
Covid-19 is doing in a matter of months what might have taken years and years otherwise, including loosening the hold of the bi-coastal mind share of investors. The venture world has been dominated by Silicon Valley and New York since the early days of the VC business model in the late 1960’s. But talent and vision have always existed elsewhere, and a few intrepid funds have actually begun building a business on that insight.
Elsewhere Partners was founded in 2017 specifically to make tech investments in the vast flyover territory between Silicon Valley and New York. The Austin-based VC has closed out its first fund of $70 million and is on to its second. If Covid has shown us anything it is that remote working can work and therefore many of the giants of Silicon Valley are postponing return to the office until 2021. Mark Zuckerberg recently said that half of all Facebook employees will be remote in ten years.
In other words, you really don’t have to be in Silicon Valley to do things that are done in Silicon Valley. This is a huge validation of the Elsewhere investment thesis. According to Michael Massad, Senior Associate at Elsewhere Partners, “It is expensive to start a company in the Bay Area and New York — to find space and recruit talent. Now all of the sudden with the possibility of being remote it opens up a world of possibilities.”
But the shift goes beyond just where people can work. The venture market is looking more like the Elsewhere profile in other ways. “It felt like there was a bit of a bubble in the tech sector before Covid. Valuations were propped up by growth-at-all-costs. Now that’s been tempered a bit, which will be positive for the tech sector and make it more resilient,” said Massad. “Software companies are seeing a return to managing cash and ensuring runway with a path to cashflow breakeven.”
Many VC’s are taking a more cautious approach due to the pandemic. According to data from CrunchBase, funding levels are down, particularly for early-stage rounds. It may be years before the venture market returns to pre-crisis levels of funding. In the meantime, some former high-fliers are seeing their valuations slashed. Zeus Living, a corporate housing startup backed by Airbnb, had to raise $15 million in May at a valuation half its December level.
The more sober perspective of the Covid-impacted venture space is well aligned with the Elsewhere portfolio and world view. “This is all a natural fit with our Elsewhere Outlier profile, where entrepreneurs in smaller markets like Kansas City are going to be more risk averse than in Silicon Valley and have architected their P&L accordingly,” said Massad. “A lot of darlings of Silicon Valley were revered for their super-fast growth but had no visible path to profitability. We are now seeing them coming to terms with that as they shed jobs in the thousands. All of a sudden cash is king,” Massad said.
The venture world may have gotten some religion on cash management and path-to-profitability, at least for now. But the exodus of talent and the lessened focus on the Bi-coastal world is likely to be more lasting. Tech companies may actually lead the way to a new normal across sectors in which a large portion of the workforce is remote. The pandemic created a vast, unplanned, involuntary experiment in WFH. The indications are that working from home has helped slow the spread of coronavirus. It also appears to have resulted in some surprising benefits in productivity. A number of companies have seen productivity levels at or above the levels prior to the WFH policies.
This does not surprise Massad. ActivTrak is an Elsewhere portfolio company that provides workforce analytics, “and just happens to be darn good at providing productivity measures for distributed teams,” said Massad. The ActivTrak data is finding that many newly remote teams are often more productive than they were when office-based. The reasons for the uptick in productivity are yet to be understood. “It may be the elimination inefficient in-person meetings that don’t generate meaningful results, as well as allowing people the flexibility to work in the way that is best for them,” observed Massad.
Interest in a workforce management technology has spiked during the mandatory lockdowns and WFH improvisations. Many managers are still trying to figure out how to best lead and support their teams remotely, and tools like ActivTrak have seen a big boost over the past few months. Again, confirming the Elsewhere thesis, which emphasized enterprise software like ActivTrak. “Enterprise software will be less affected than consumer tech, retail, and hospitality,” said Massad.
Bootstrapped startups, outside the traditional coastal enclaves, that have won market share the hard way and are tuned for capital efficiency are the rare game Elsewhere hunts. And the venture market may be following their example in the post-Covid world — at least for a while. In the meantime, Elsewhere Partners has found itself out in front in the “new normal” for venture funds.