For VCs And Their Portfolios, Team Culture Now Matters More Than Ever Before
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In April, the world saw another sad chapter roll out in the ongoing WeWork saga. After the failed IPO attempt in September, many rank-and-file employees otherwise left out of pocket were banking on their only backup: a promised rescue deal from the co-working company’s biggest investor, Softbank. But then Softbank announced it would no longer be buying up WeWork’s shares, leaving shareholders –many of whom were its employees– stranded at the height of the global COVID-19 pandemic.
The timing matters. WeWork’s dependents now find themselves without their last financial lifeline during a global health crisis that is decimating the industry in which they work. Look to London, last month named the world’s second biggest tech hub by KPMG. Venture capital (VC) investors are rapidly pulling out of deals at the last minute. According to data from Pitchbook, the first months of 2020 have seen just 280 completed deals, about half as many as the same period last year.
In the Middle East and North Africa (MENA) region, we have been watching these developments closely. Across the region, governments have been racing to build startup ecosystems and VC communities from scratch, as they seek to diversify their hitherto hydrocarbon-reliant economies. The Al Waha Fund of Funds (Al Waha), for example, was established in Bahrain to kickstart a VC community across the region, by investing in and partnering with local and international VC firms.
And the region is not without success. 2019 was a record-breaking year for the MENA’s startups. We saw 564 deals made, which amounted to more than $700M of investment. But the pandemic will cause a sharp decline here too.
However, there is an advantage to being a region of late adopters. We are able to learn from the successes, and leapfrog the mistakes of others. At Al Waha, we have paid close attention to the reckless culture characterized by WeWork and others that pervaded the booming tech startup and VC scene of the 2010’s. Towards the end of the decade, attitudes had begun to turn decisively against that “move-fast-break-everything” culture. But as the shareholders of what was once the most valuable company in the US can attest, its effects are still being felt today.
And now, one of the most significant public health emergencies of the last century is upending working lives. Culture, governance, and team dynamics are more important for VCs than ever before. Around the globe, people are working from home at unprecedented levels. Some of the disruption will be eased by technology- online video conferencing, and so on. But teams that haven’t built a strong culture of trust and transparency will find it hard to make this shift seamlessly. The ability of VC funds to ensure continuity at this difficult time will be down to the strength of their culture.
There is no longer room for outsized egos and “brilliant jerk” personalities. Managers that need to control and micromanage will be unable to do so. This applies to both funds and the teams they invest in. Teams will need to adjust to unfamiliar and constrained working spaces, with the added distractions of children and spouses. When and how they can be productive will change. Ultimately there needs to be a strong foundation of trust in place.
But this goes beyond environment. How a team’s productivity can be measured from an investment point of view will also change. At Al Waha, we’ve been watching the teams we’ve invested in, how they are addressing the situation, how they are supporting their portfolio companies, and how they are working as a team. Did we choose the right funds and startups to weather these storms? Companies that now aren’t doing so well due to the current circumstances- how transparent will they be? For instance, shares in China’s top coffee chain Luckin Coffee dropped more than 80% in premarket trading as news emerged that nearly half its sales were fictional. London is not an anomaly; valuations are going to be reset around the globe. But this doesn’t mean investments will stop.
Investors will, however, need to adapt to vertiginous change– not only in the startups in their portfolios, but in how they will support them. During this time, VC fund managers must be accessible. Investors will be more hesitant with their money. There will be a heightened focus on the terms of an investment; the quality of investment, rather than on how much capital is deployed. They will focus now more on how the teams they invest in work together, and the chemistry that they have.
Because at the end of the day, it is the teams that trust each other and can work well together who can survive a crisis together. Their investors will be the investors that survive a crisis. Money will increasingly flow towards quality, as more care and scrutiny is taken in investments It is true that this will mean some opportunities are missed, perhaps even the next global unicorn. But those quality VCs carefully searching for quality investments will still be finding the gems at this time of necessity.
It was, after all, from the rubble of the global financial crisis that the likes of WhatsApp and Uber emerged. Any global crisis will reveal which startups and VCs have the culture in place to succeed, and which don’t. I am confident, looking at the caliber of VCs in MENA today, that it is only a matter of time before we unearth the next Careem.