Earlier this month, Zetta Venture Partners, a B2B, AI-focused venture outfit, announced a new $180 million fund.
As new VC funds are anecdotally a bit thinner on the ground these days — and because we’re in the midst of economic upheaval, which is changing investing patterns and shaking up startup verticals — I got on the phone with Zetta’s Jocelyn Goldfein (a TechCrunch regular) to chat about what her firm is doing and what’s up with AI investing.
The fund
Zetta’s new fund is about 50% larger than its preceding capital pool, which was roughly double its first fund. If you don’t want to do the math, Zetta’s first fund was worth $60 million, and its second $125 million.
Zetta will invest in B2B-focused, AI-powered seed-stage startups like it has before, but with more capital. I was curious about cadence: Would the firm write more checks more quickly now that it has more capital? Per Goldfein, the firm is keeping its pace and strategy pretty much the same with preceding funds, though it has promoted a principal from within who will begin to lead deals from the new fund.
Why more money if things are mostly looking the same? Zetta wants the capability to write larger checks and take a bit more ownership, so it needs more capital. In turn, defending those percentages requires more capital; you get the idea.
Pace, pricing
Early in our chat with Goldfein it became obvious that it’s an active time for AI-focused startups to raise, thanks to COVID-19-driven uncertainty. According to Goldfein, founders who have yet to raise their first capital are “looking at the funding window and thinking, oh, boy, if we thought we might raise three months from now, maybe we should just try now.” Even more, some companies that have already raised are going back to the market for top-ups. Goldfein said those startups are looking for “a little extra runway.”
In light of that dynamic, TechCrunch was curious if valuations are slipping for AI startups thanks to raised competition for VC attention; if startups are entering the funding market earlier than they might have, or are returning sooner than they would have a year ago, could their presence tip the supply-demand balance that helps set valuations against them? Goldfein isn’t so sure. The sorts of founders that her firm is interested in, she said, are always able to drive interest from more than a single firm, implying that there’s plenty of investor competition for deals. And venture competition for deal flow means comfortable prices for startups, at least from their perspective.
Still, Goldfein is seeing some pressure on pricing, but not from more deals hunting for flat capital. Instead, uncertainty in future macro conditions and later appetite of Series A investors (which follow her firm’s seed deals) for deals is adding risk to investments; and more return risk means lower prices.
Margins
Earlier in 2020, a16z wrote about AI startups and their long-term revenue quality profile. We’ve dug into the matter since, with the venture community a little bit split as to whether software as a service (SaaS) startups or AI (ML) centered startups will have the best margin profile in time.
But it might be a somewhat moot question. According to Goldfein, the most popular business model in her AI portfolio is SaaS; so perhaps we’ve been discussing (here, and here, if you want more) a nuance (quirk?) to a portion of the SaaS space instead of a useful difference between different categories of startups. One could simply then segment AI-focused SaaS firms from other SaaS startups, and see if there was some gross margin differential, but I’d hazard that the difference isn’t huge.
“I think you will find more variations between SaaS companies than you’ll find between SaaS and AI categorically,” she added.
Anyhoo, there’s capital out there for AI-focused startups. See? Not everything in the world is bad for business. Just most things.
