Doing Deals from the Basement: VC during Covid
by Sally Sorte
Sandwiched between a punching bag and a Peloton, Liam Pisano is going on month nine of doing deals from his basement. Pisano is the Boston-based Managing Partner and Co-founder of EduLab Capital Partners (ECP), with counterparts in Tokyo and Singapore.
EduLab Capital is an early stage, EdTech venture capital firm that seeks to fill the gap for entrepreneurs looking for an institutionalized investor, at a stage in development where their product/market fit or ARR are not yet suited for a larger fund.
ECP invests in learning technologies, spanning K-12, Higher Education, and corporate learning. Covid-19 has only increased the relevance of and user reliance on these education tools and platforms.
Pisano observes, “Since coronavirus, a majority of our portfolio companies have found a way to touch more lives and increase their own impact on the education ecosystem.”
For example, Riipen, a two-sided marketplace that connects employers and students for project-based, industry-driven learning experiences, adapted its product to provide virtual internships. Covid has led to a spike in demand and expansion opportunities in Canada and the U.S.
The remote work lifestyle forces us to pause and prioritize
Pisano recalls his previous pace of life in one word “movement”. He was always on the move, traveling to visit existing or prospective portfolio companies, traveling to meet with international partners, traveling to develop the fund.
“We are an international platform; there was a constant state of movement just to exist. It was fundamental to our business model,” said Pisano.
With the arrival of coronavirus and shutdown, “I went from being on a treadmill to sitting in a chair.”
Now, Pisano alternates between the porch overlooking his backyard and his basement slash home gym.
“For better or for worse, Covid has forced us to hold still, to prioritize items, to see things that were perhaps unseen before,” says Pisano.
EduLab Capital’s CFO, Edwin Derecho is a ‘Million Miler’ on American Airlines so he is feeling grounded in more ways than one.
“Covid has brought much more time for reflection on your own terms.”
Yet, Derecho notes, “Traditional office culture affords a focus and separation of worlds” that can be difficult to attain when your home becomes your workspace, “particularly if you have young children.”
Pisano has two sons, four and seven years old, who keep things lively. Even so, the removal of travel has given Pisano the time and space to think
“Instead of catching up on an airplane — with a 3–12 hour chunk of time to focus on a memo or build out industry theses — you’re given the entire day to sit in the office, which is not something I’ve had since we started.”
This freedom has allowed Pisano to be more introspective.
“This [change of pace] has given me the time to plan, instead of running off and doing 20 things at once… this has forced us to reevaluate our processes in a totally new situation and to be honest about a lot of things.”
In addition, Pisano has had more time to analyze the market.
“Instead of focusing so much on the supply side, I am able to think about the demand side of the equation… where and why that demand happens. As the world shifted and the demand shifted, we have really spent time on why buyers buy, why certain products are more successful than others in the procurement process.”
The EduLab team has also used this time to listen to district leaders, educators, and industry leaders.
“This highlights why it is so important to be sector focused. If we were a general VC, we would not be able to do that, if we were thinking about 12 different end users,” says Pisano. “Here, the constituencies are fewer, so we are really able to dig in to what their buying patterns look like.”
Conducting Due Diligence via Zoom
With three active deals underway, business may not be as usual for ECP, but it has certainly not slowed down since the onset of coronavirus in March.
Conducting due diligence virtually is uniquely challenging. While the typical investment memo categories can be completed — including financial analyses, competitor landscapes, and business model investigation — pieces of the process are difficult to replicate on a screen.
“It is nearly impossible to get someone’s full attention for longer than a few hours on Zoom,” says Pisano.
“In normal circumstances, I would go to an office and visit a founder, spend the day with them. Walk around the physical facility. Go out to lunch. Meet a few of the team members. That’s why I do this job; you get a lot from those interactions. Now we are at a disadvantage for knowing how a company really works.”
Derecho compares company due diligence to enjoying a meal. “You use all of your senses, not just sight and sound, to determine if a meal is great or not.”
“A lot of this is subjective — we don’t have access to crystal balls — we are trying to assess future outcomes based upon a variety of instincts… A lot is communicated through body language and subtle tells. We don’t have that as much when we’re in Hollywood Squares Zoom calls,” explains Derecho.
While Derecho says that Zoom is a great substitute, it is not a total replacement.
Zoom may also be more conducive to keeping existing relationships alive than facilitating new ones.
Pisano notes, “It is difficult to build a relationship from scratch.”
Derecho points out, “Even if all of this is true, does this [remote process for relationship-building] change outcomes? It is too soon to tell. It is new for everyone in the industry.”
We do know that global start-up investing has slowed down. According to Crunchbase, in Q2, the first full quarter affected by the pandemic, startup funding in the U.S. and Canada dropped 12% to just under $30 billion from the first quarter, down 18% from the same time last year. This trajectory continued through Q3, with early-stage funding down to $19.3B, still down 18% year over year. Seed funding was down 32% year over year.
Further, while the number of large deals ($100M+) has remained relatively consistent, the number of small deals has dropped dramatically, down almost 50% as compared to Q3 2019. From Q1 to Q3 2020, small deal volume declined by almost 40%.
Later stage funding was up in Q3, with 452 rounds accounting for $48.1B, up 24% year over year and comprising 71% of global funding share.
As such, early-stage and therefore higher risk companies are finding funding much more difficult to come by than their more mature competitors.
“The benefit is that people are really accessible,” says Pisano, “so for reference checks or other things, chances are that you will get on someone’s calendar, because people are sitting at home.”
From an internal perspective, remote work has reshaped the team environment as well.
“Look, we’re a young fund, a newly formed team, there is a camaraderie and a lot of good things that come with those characteristics. We don’t do the things we used to do — go out to lunch or out for drinks,” says Pisano.
Pisano is candid that it is a loss to miss out on this team bonding that typically occurs.
“Working with a small team that you have technically hand-chosen for a reason is supposed to be the good part about being a small company. Now you have to set up a call to ask questions, things have to be really scripted as opposed to spontaneous.”
Pisano says this lack of unstructured opportunities can be detrimental, especially to more junior team members.
On the flip side, Derecho highlights the autonomy allowed for in this new normal. “We have done away completely with this notion of face time — people feeling that they should be at work while their supervisor is there.”
Of course, with this shift to a less structured and largely invisible workweek, self-motivation is key.
“If you want to goof off all day you can… You are tremendously advantaged to set goals for yourself each day,” says Derecho.
The results are trending positively for the EduLab Capital team.
“Our productivity in a certain way has increased since Covid started,” reflects Pisano. “Hiring four summer interns has been a part of that equation, plus the need to find ways to structure your day.”
“When I told people I was hiring four interns I had never met they told me I was crazy.”
When asked what he would like to take back from this experience, Pisano underscores the autonomy and resilience.
“This is a moment in time that we are all going to remember. We will have worked through a very difficult situation together. There is a tighter bond and a trust with people that I hope our team will take out of this.”
Less Serendipity, More Humanity
Conducting business remotely has its pros and cons. On the one hand, chance encounters have been eliminated.
“Every conversation has a purpose,” says Pisano. “It is difficult to get the in-between times that generate conversations. If you rely on the random to generate for you, the luck of the universe, right place at the right time doesn’t happen.
And yet, working from home has also unpeeled a layer of humanity as you get a glimpse inside colleagues and companies’ kitchens and meet their pets and children.
A summer highlight from the EduLab Capital team was the most adorable 4-year-old shirtless Zoom bomber, sneaking up behind his dad in the basement, hiding behind the punching bag with his feet poking out below.
Some reactions are even better when they are on mute.
All in all, the EduLab Capital team is feeling excited about the year ahead, because learning technologies have never been more relevant than they are today.
About the Author: Sally Sorte joined EduLab Capital as a virtual summer MBA intern in June of 2020. She loved the team, the learning, and the opportunity to create impact in EdTech at this critical time. Because it was such a great fit and Harvard Business School was going mostly online, Sally decided to defer for the school year in order to continue on with EduLab Capital as a Principal. She has held the Principal title before, as the Founder and leader of a charter school serving a historically disadvantaged community in Denver, Colorado. In her role with EduLab, Sally also draws on her experience as a Teach for America corps member, Google account strategist, and McKinsey consultant.