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Summary
). Funding to startups trended downwards, and founders are adjusting to the new realties of longer wait times (
). Valuations at the early stage remained more robust (
).
). Dry-powder remains in the system (
). Governments are taking action by building Fund-of-Funds or injecting directly into startups (
).
)
)
), and on the other hand, LPs need to think about liquidity management (
). VCs need to show off their abilities (
) and can differentiate themselves through their operating experience (
) or by becoming less biased (
)
This month's ‘All Things VC’ edition focuses on topics relevant to VC GPs & LPs on a strategic level, i.e., overall valuations, market dynamics, fundraising, D&I, portfolio construction & more. Individual investment areas like ClimateTech are not covered in this collection.
VC Tweets
Vijen Patel - 2023 will be the best VC seed vintages
Eric Bahn - Top red flags to watch out for in LPs
Samir Kaji - on LPs moving to risk-off in VC
Mike Walsh - on importance of VC operating experience
Gil Dibner - Huge explosion coming
VC bias and herding
Henry Pierre-Jacques on how they are seeing the market right now
Pranay Srinivasan - What to ask a VC before they write you a check
Del Johnson on diversity in VC topic and change required in the VC industry
Increased competition, greater access to information about business formation and a shift out of high-barrier-to-entry markets like chip manufacturing into lower-barrier markets like software, he wrote, has made it more difficult for venture capitalists to sustain their past level of performance. What’s required is a new approach to investing, one that’s more diversified and less reliant on a small number of big hits.
Too often, VC reformers push for "community rooted" solutions that inflame the problem rather than solve it.
What's worse is the new data which suggests relationship-based models are themselves holding back the introduction of talented, diverse investors and entrepreneurs from entering the ecosystem.
Maren Bannon - What are founders looking for in an investor in 2023?
CalPERS performance on VC investments
To be fair, this is more on CalPERS than on venture as an asset class. Other large LPs, like Yale and Princeton, have made very good returns in venture over the same period.
CalPERS, once an early pioneer in venture investing, has had a very inconsistent approach the past 10+ years. They got out of the market completely in a very good performing period, before getting back in once the market had overheated. And they overallocated to big brand name firms, and missed out on emerging managers who outperformed. LPs: If you want to make money in venture, be consistent - invest year in, year out - and be sure to reserve some allocation to emerging managers. Easy peasy.
VC focused Reports
CB Insights - Tech Valuations 2022 Report
Juniper Square - Q1 2023: The State of Venture Capital
US VC Exit activity: The was down 14%. Deal value dropped 30%. U.S. VC exit activity was valued at just $71.4B, down an astonishing 90% YoY. Indeed, was the least active quarter in the last ten years.
Venture isn’t alone: This decline in VC activity is no exception. Zooming further out, it is clear that 2022 was a challenging year for many asset classes. A land war in Europe, spiraling inflation, an aggressive rise of interest rates, and the ongoing geopolitical and supply chain aftereffects of COVID-19 saw .
Conclusion: .....However, in our conversations with venture GPs, there is an increasing sense of stability. Macro indicators are overall flat or improving, and, relative to the last few months of 2022, we’ve seen a higher pace of venture managers successfully completing their fundraises in January 2023. It’s too soon to call a bottom on these trends, but absent future shocks, we expect activity to begin to rise slowly in the early part of this year.
Carta - State of Private Markets: Q4 and 2022 in review
VC Lab - NextGen Manager Report
These three prominent trends emerged from the data on next generation managers:
IMPACT 29.7% of all VC firms in this report have incorporated a positive societal impact into their investment thesis, including Sustainability, CleanTech, and Diversity. This represents the most prominent focus of the firms in this report.
DIVERSITY The next generation managers come from an increasingly diverse range of backgrounds, specialties and geographies. The focus on diversity also extends to their investments: 9.8% of the funds are set up to back diverse teams, including women and minorities.
EMERGING MARKETS Next generation managers are focusing on markets both inside and outside of the traditional innovation hubs in North America and Europe. 14.4% of managers are focusing on Africa, and 8.3% are focused on South America, with multiple countries having the first venture capital firms started.
J.P. Morgan - 2023 Long-Term Capital Market Assumptions
Our 2023 return forecast calls for venture capital to deliver annual returns of 8.50% over our 10–15 year investment horizon.
A return to a low interest rate environment, as seen in the expansion following the financial crisis, would support venture capital returns – a scenario that is implicit in our macroeconomic forecast.
NGP Capital - Nordics VC Funding
Nordic startups raised the second highest year ever for VC funding, despite the economic downturn. Nordic startups raised $11.7B total in 2022. This figure represents a 36% decrease from the all-time high in 2021 but is still over 50% higher than pre-pandemic numbers.
Articles
WSJ - Venture Fundraising Hits Nine-Year Low
Europe - Funding to Fund of Funds and DeepTech
European Tech Champions Initiative (ETCI) will back high-tech companies in their late-stage growth phase.
ETCI will help plug financing gaps and thus reinforce Europe’s strategic autonomy and competitiveness.
The new Fund of Funds has secured initial commitments of €3.75 billion from EIB Group, Spain, Germany, France, Italy and Belgium.
The size of the fund is expected to grow further with future commitments.
Since the appointment of an external fund manager in September 2022, the EIC Fund has taken a total of 77 investment decisions for deep-tech companies, worth over €521 million, supporting high-risk start-ups to bring their innovative technologies to market and scale up in strategic areas for Europe.
The EIC Fund, the investment component of the , is an important source of funding for start-ups and small businesses in Europe. The equity investments, ranging from €500,000 to €15 million per company (more in justified cases), complement EIC Accelerator grant financing of up to €2.5 million.
TechCrunch - Dry powder versus wet powder: The numbers have spoken
One month ago, I that it would be a mistake to assume that the record levels of dry powder we kept hearing about would automatically go to new startups. While it is true that VCs in the U.S. alone are sitting on , they might have to dedicate a large share of this capital to supporting ailing startups that are already part of their portfolio.
CNBC - Rise of ‘zombie’ VCs
Faced with a backdrop of higher interest rates and fears of an oncoming recession, VCs expect there will be hundreds of firms that gain zombie status in the next few years.
“We expect there’s going to be an increasing number of zombie VCs; VCs that are still existing because they need to manage the investment they did from their previous fund but are incapable of raising their next fund,” ...
The presence of VC zombies won’t be obvious, and it will likely take years before they eventually close shop.
Sifted EU - VC diversity needs to change and white men need to take responsibility
The startup and VC funding numbers for 2022 are out — and when it comes to diversity, they are devastating:
- In the US, the funding for female founders () as well as for black founders () went down again last year.
- The same decline is apparent in Europe (from with a slight increase from 10% to 12% for mixed teams).
- And when the pie of available funding grew, women didn’t actually get any more of it, according to Atomico’s State of European Tech Report.
For VC decision-makers (GPs/partners), the stats are also abysmal:
- fund teams, while 84% went to male-only teams in Europe.
- Last year’s concluded that 91% of the total VC assets, ie. capital, in Europe are managed by men.
Francesco Farina - Right size of VC portfolio and portfolio simulator tool
Determining the optimal size and strategy of an early-stage VC portfolio is an art, with as many answers as there are firms.
That said, there are two main camps: 1) a small, concentrated portfolio, betting on the best companies you can find, or 2) as large a portfolio as possible, acting like a sort of index of the market. And there are plenty of successful examples from both ends of the spectrum.
But it’s hard to find a general formula because the optimal portfolio is a function of many factors, and it largely depends on your goal. What do you want to prioritise? No losses? 2x returns? 10x returns?
We decided to dig into the question and math it out.
Jan Voss - Why LPs shouldn't underestimate the importance of liquidity management
From a liquidity standpoint, angel investing is easy: You sign, you wire the money, you wait for your money to come back to you down the line. Investing in venture capital funds is a more tricky, and I've seen many investors stumble.....
If you want to build a fund portfolio the right way, make sure to properly size your commitments.
Podcasts and Videos
Origins Podcast : Episode with Kanyi Maqubela of Kindred Ventures
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