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.
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.
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.
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.
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.
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.
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.