VC cash is adding rocket fuel to startups and disruptive businesses

Making the last steps of the home delivery process more customer-friendly. Finding a parking space in a large lot more easily. Using 3D-printing technology to create safer rocket fuel. What do all of these have in common? They represent the work of new businesses seeking to disrupt an existing market with a better idea — and all are being helped by an infusion of cash by venture capital (VC) firms.

While the COVID-19 pandemic caused massive worldwide economic distress in early 2020, there was a sense of optimism early on that it would be a short-term disruption. As conditions eased in the summer of 2020, investors looking to deploy capital (and thinking of the fiduciary obligation to put that capital to work) had almost a sense of panic about how to work through the deal flow backlog. At the same time, visionary entrepreneurs and VC firms have seen the past two years as a time of fantastic opportunities due to the way the pandemic reframed how multiple industries interact and serve their clients, and individuals changed the way they worked, shopped, went to school and socialized.

Firms involved in information technology have been the focus of most merger and acquisition activity in 2021. (See, for example, California regional M&A update: H1 2021 and Texas regional M&A update: H1 2021.) VC firms are intrigued by companies driven by innovation, disruption and evolution and are looking to invest in businesses that are launching disruptive products and services in multiple sectors of the economy, targeting a variety of customers.

From the perspective of the business owner or entrepreneur, all types of investors are looking to get involved at every stage of a business life cycle — startup and angel investors; friends and family; seed round investors; all the way through to more mature and sophisticated VC funds looking to help a company go public. VC firms are ready to participate in fundraisings from $1 million to more than $100 million.

Conclusion

The fundamentals of trying to get a transaction done are still similar to what they were before the pandemic. There has to be a desired partnership between capital sources and the business. Company valuations are still based on some multiple of EBITDA.

VC investors are cognizant of possible corporate and capital gains tax law changes, which could impact the timing of deals. But investors should never let the tax tail wag the deal dog; if a deal isn't otherwise a good deal or imminent on the horizon, a new deal shouldn’t be rushed into merely for the tax benefit.

Homogenizing ecosystems of VC firms, disruptive companies and professional services firms, like what has existed in Silicon Valley, New York and Boston and has been developing in Texas, will continue to be powerful for the next generation of startups, entrepreneurs and investors, allowing for more consistent deal flow and better exits for business owners.

The way we live, work and interact in 2021 is dramatically different from how we lived our lives in early 2020. People can run so much of their lives just from their smartphones. The startup ecosystems that exist and are developing in different parts of the country are helping to fuel this innovation.

The pandemic has seemingly poured gasoline on the startup fire and has created a sense of excitement around the innovation ecosystem like never before. We could be in for a wild ride for years to come.