3 Investment Principles for Life After the Pandemic

Predicting the future is risky business. That’s why VCs should diversify, follow a long-term strategy and seek less obvious opportunities.
Headshot of author Thomas Falk
Thomas Falk
Expert Contributor
March 30, 2021
Updated: July 13, 2021
Headshot of author Thomas Falk
Thomas Falk
Expert Contributor
March 30, 2021
Updated: July 13, 2021

We’re well into 2021, and although vaccination campaigns are inspiring new hope and will eventually lead the way toward a renewed sense of normalcy, we’re going to be acutely feeling challenges of the past year for a long time to come.

In venture capital, the economic effects of the pandemic add up to a unique moment in time where opportunities and risks closely coexist. One lesson 2020 has certainly taught us beyond any doubt is that predicting the future is risky business.

Related Reading7 Predictions for the Future of Financial Services in 2021

 

Diversified Portfolios Can Absorb Market Shocks

Of course, venture capital investments have always been an asset class characterized by high risk — and high potential rewards. But the health crisis of the past year demonstrates that a diversified portfolio is of utmost importance. While some sectors plummeted, others soared.

In a way, the coronavirus has precipitated a fall from innocence: We learned firsthand that unexpected crises of various kinds can hit us at any moment. We don’t know the nature of the next one, but preparing for it means investing in various sectors and keeping portfolios well diversified.

A solid base for any investment portfolio are market sectors that will most likely persist through any crisis. These may include tech companies that improve our online experience such as messaging cloud infrastructure services or e-commerce — all of which proved winners of the current crisis. On the level of more basic human needs, food tech and other companies involved in the production, processing and distribution of food as well as medical products are resilient to most crises.

 

Long-Term Strategies and Endurance Win Out

The S&P 500 dropped more than 33 percent in March of 2020. The market has since recovered considerably and consistently, however. Driven by insecurities, many chose to freeze spending, and on the stock market in particular, many investors were quick to sell underperforming assets. In hindsight, many of these decisions were unwise. Holding firm in the face of fear, uncertainty and doubt is understandably tough when large sums of money are involved, but patience, endurance, and a will almost always make up the winning strategy.

In venture capital, funds were largely frozen as the first wave of cases hit. But although some firms remained cautious, talks with founders soon resumed, and investment sums slowly recovered. During the first half of 2020, venture capitalists invested at 71 percent compared to pre-pandemic levels, a number that has been rising steadily since the second half of 2020.

Even during a crisis, well-considered investments — especially later-stage funding of proven business models — can be a good idea. These might center around business models that thrive on the new normal, such as specific healthtech startups or evergreen infrastructure ventures. The important thing is to not bury your head in the sand but to observe and acknowledge which industries are truly crisis-proof or even propelled to new heights by the new situation.

 

As the Crisis Wanes, New Opportunities Await

Slowly but surely, we are nearing a turning point. It is now time to turn toward investment fields set for considerable growth. Investments into medical technology will continue to be a good bet. Obvious industries such as manufacturers of personal protective equipment stand alongside less obvious winners, such as logistics companies involved in the distribution of vaccines.

Some industries, such as the travel sector, are in for a successful recovery from the crisis. And up-and-comers of the past years will resume their growth. Many core technologies in banking, aviation or telecoms have proved that they are outdated. Often, they are expensive, decades-old, on-premise solutions — and the pandemic has shone a light on their shortcomings. In contrast, providers of new, cloud-native solutions are benefitting from increasing demand.

Automation and autonomous vehicles will thrive. While automation has been on the rise for years, the pandemic has shown the risks of people working alongside each other in close quarters. For production upkeep, automation will be considered even more widely. In its Big Ideas report for 2021, ARK Invest estimates that, during the next five years, automation will add 5 percent — or $1.2 trillion — to the United States’ GDP. And while we have been observing news on infections, restrictions and vaccines, progress has been quietly made in the field of autonomous vehicles. Between drones delivering medical equipment to remote places such as the Isle of Wight in Britain and several announcements in the field of autonomous shipping, opportunities are immense.

While the past months have been exceedingly difficult, they also put a lot of things into perspective. In terms of investment strategies, the coronavirus strikingly separated crisis-proof sectors from assumed losers. But to really explore whether particular sectors are doomed or will recover beyond expectations, it’s essential to look a little closer. Certainly, an important lesson has been not to panic — but to cautiously consider the opportunities among both safe and less obvious crisis winners.

Read More From Thomas Falk5 Ways SaaS Companies Can Succeed in an Era of Radical Change

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