Last Chance: Register for Transform, VB's AI event of the year, hosted online July 15-17.

Recently, Marc Andreessen, a partner at Andreessen Horowitz, one of the largest venture capital funds, called on the whole world to start building. To build in the broadest sense: from new cities and industries, to new educational programs that will enable millions to study at Harvard, or the learning institutions of their choice.

According to Marc, the cause of the catastrophic consequences of the spread of COVID-19, on one hand is the lack of imagination: we all simply could not foresee such a thing, nor how governments worldwide would respond. On the other hand, the fact that we did not act proactively is because we lived and did business by inertia, which meant that we lost the ability to build and create truly new things.

“It’s time for full-throated, unapologetic, uncompromised  aggressive investment in new products, in new industries, in new factories, in new science, in big leaps forward,” writes Marc Andreessen.

And I totally agree, but I’m worried about what venture investments have been turning into over the past few years and whether the industry can shake itself up enough to remember that “funding the future” is the primary objective of venture capital.

Risk appetite has fallen

Last fall, I caught myself thinking that I no longer see a significant difference between the investment strategies of top venture capital funds and private equity funds. Venture investors who manage big money for obvious reasons prefer increasingly mature companies with established business models, and often choose to make a round-by-round contribution to already-proven portfolio companies. The crisis has only reinforced this trend.

Large venture capital firms raise multibillion dollar funds. It is difficult to raise this amount of funding without attracting the money of conservative institutional investors. When you have corporate or pension funds among LPs, the desire to take risks and earn more is replaced by the fear of losing. The average portfolio IRR is already more than enough, and it is physically impossible to distribute billions of dollars to early stage startups with smaller cheques of $1-5 million each.

But Investors come to VC funds to diversify their portfolios, trying not only to make multiple growth plays, but to protect their capital from short-term market volatility. Today the assets of large VCs suffer from the current crisis situation — coronavirus, oil, political rhetoric — no less, and sometimes more, than investments in traditional listed companies. Investments of the leading VC funds in many cases do not differ in risk profile from investments in private equity and, to some extent, even in the stock market.

Remember your name

In the word “venture” Europeans often hear the French “aventure,” or the English “adventure”, and for some, the word “adventure” when it comes to business can have a negative connotation. I prefer the American perception of venture, which is that when you find something new and exciting, well – if it doesn’t turn the world upside down with positive disruption, it will certainly have an impact! Tesla, which no one believed in except a small group of investors, has opened up a whole new market for batteries, electric cars, home battery power walls and more. Tesla has soared and while one wonders if Musk sometimes flies too close to the Sun, it is clear that he has not yet finished fundamentally changing the industry.

This, in fact, is what Andreessen spoke about. For comparison, earlier this year I was at a conference. There was a question from the stage: “Who is the real VC here? I think  the real VCs should invest in a retail mobile payments bank.” The hall erupted with laughter. It’s clear that for a venture capital fund, the b2c-neobank is no longer an innovation unless it’s in Latin America or Africa, where there is still a lot of uncertainty, and there is an opportunity to change something fundamental for the people in those regions. In general, investing in this kind of bank in the West is now the task for strategic investors and private equity funds.

However, the reaction from the hall does not correlate with what is really happening today. Venture media headlines are dominated by Revolut, N26, and Monzo with billions of dollars in value. We see less and less news that a large fund invested in a startup on Round A, when a company is just starting a fully-fledged entry into the market.

The right time and place

Venture is primarily an investment in the early stages, with a cycle of 7-10 years. A temporary economic downturn, even if it drags on for one or two years, does not seriously affect a VC’s investments which is primarily aimed in changing the future.

Now we see that the volume of investments in the first quarter of 2020, according to CB Insights, fell to $28 billion (-7% compared to the previous year), and the number of transactions decreased by 16% to 552. If we compare that with the fourth quarter of 2019, the figures can be discouraging: -30% in terms of investment and -25% in the number of transactions. However, we must remember that at the end of the year all previously reached agreements are closed, so the fourth quarter is always the most successful, and is followed by a drawdown.

I spoke with many investors: venture capital investments  do not stop, no matter what. In Europe, 86% of investors are considering new projects. In the US it’s a similar story, even if you change your perspective and look from the viewpoint  of startups: only 15% of the founders complain that investors have stopped responding to them; but almost 42% noticed that the written responses became much longer. This means the funds can devote more time to each startup and give them better, more considered advice.

As noted by Richard Gendal Brown, CTO of the R3 blockchain consortium, the coronavirus pandemic has shown that the impossible is not only possible, but is quickly becoming commonplace. Hospitals are being built in a few weeks, top universities are becoming the fastest growing segment in online education, doctors and patients are overcoming mistrust of telemedicine, 3D printing is used to produce lung ventilation machines, and Universal Pictures films are premiered on streaming platforms. Six months ago, this would be unimaginable!

Today these are new trends that in one way or another will remain with us for a long time. It is the right time for LPs to support the early stage VCs and venture funds to make bolder investments, and more of them. In infrastructure, logistics, medical care and finance which is still dominated by the old players  in real need for a breakthrough, especially considering the realities of the post-COVID era.

No matter how trivial  it may sound, a crisis is the real time of opportunity. It’s time for venture capitalists to come to their senses, to once again feel the risk appetite in order to invest and to build the future together with the founders. The next time you decide whether to invest in a fund as an LP or to support a startup as a VC, think about what foundation you are laying. Real returns are only possible if you invest in the real, fundamental change and not a multibillion established company, which simply doesn’t have the right financial metrics for a proper IPO.

Alan Vaksman is chairman and co-founder of Digital Horizon, an early stage VC and venture builder, and director at YesGrowth, a UK-based business loans platform for SMBs.