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15 investors lift the lid on the biggest surprises of H1 2023

Karan Bhasin 10 months

The first half of 2023 hasn’t been kind to startups, but venture capital investors weren’t spared migraines either. Some VCs had a tough time of it, with their portfolio companies finding it hard to fundraise, while others dialed back their investment cadence to match the current investment climate. But what would they have done differently if they had a crystal ball? To find out, we asked 15 investors what they found to be the most unexpected trends of the year so far.

Rather unsurprisingly, the biggest surprises all seem to be related to AI in one way or another. Several investors said while they were caught unawares by how quickly generative AI took off, the real eyebrow-raiser was VC funds going from a conservative stance to jumping headfirst into AI-related companies’ cap tables seemingly overnight.

“The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But it really is a tale of ‘haves and have-nots’ in fundraising right now,” said Matt Murphy, partner at Menlo Ventures.

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Jenny He, founder and general partner at Position Ventures, had a similar take: “I was surprised at how quickly the AI boom happened in 2023 and how many top tier firms went from a wait and see approach at the end of 2022 to becoming very active in 2023. Some of our portfolio companies went from quiet insider rounds to very hot competitive rounds at a rapid markup at the beginning of 2023, spurred by the AI boom.”

Not all AI-related surprises were positive, though. John Tough, managing partner at Energize Ventures, was baffled by how readily some firms cannibalized their climate funds to buy into AI. “We knew generalist investor interest in climate was fleeting, but it has still been surprising to see how many household names planned to launch a climate focus area and then moved along to LLMs and AI instead,” he said.

For Rajeev Dham, partner at Sapphire Ventures, this rapid increase in AI investment also brought some worries. “There’s no question that advancements in AI will spawn an incredible set of companies, disrupt industries and be the transformative technology that drives far more productivity within existing companies, but my concern is that we’re still in the very first inning, which will lead to a lot of lost capital,” he said.

It wasn’t all about AI, though. Mark Grace, an investor at M13, was surprised by the range of early-stage valuations: “Valuation ranges are all over the place, especially at the Series A stage. We all know how quiet the later stages have been, and the seed market has seemed strangely resilient. However it has been interesting to see the wide variance in Series A pricing.”

As for what investors wish they’d done differently, several felt they should have been faster on the uptake and more active than they were. “In macro environments like this one you always regret not being more active while everyone else was fearful,” said Logan Allin, managing partner and founder at Fin Capital. “These cycles only come around so often and are a boon for net-new investments in portfolios.”

Jason Lemkin, CEO and founder of SaaStr, wishes he had taken the time to meet with more founders. “I slowed down in 2022 as did many, and should have picked it up more. Multiples are still relatively low in SaaS but great companies are being formed as often as ever.”

But our favorite answer to this question by far came from Howie Diamond, managing director and general partner at Pure Ventures: “Not have personally invested in First Republic Bank stock!”

Read on for more about what investors felt were the biggest surprises and what they learned from the first half of 2023.

We spoke with:

Matt Murphy, partner, Menlo Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But, it really is a tale of “haves” and “have-nots” in fundraising right now.

The No. 2 surprise is the scarcity of later-stage companies raising. It’s not that surprising, but behind the scenes, companies are still getting their houses in order, and it’s really difficult to sell right now, so companies are grinding through things until they find more predictability.

No. 3 would be the amount of M&A and companies trying to be acquired. We’re only going to see that accelerate.

In hindsight, what do you wish you had done differently in the first six months of 2023?

We mobilized the entire firm around GenAI and it paid off. We’ve got a strong portfolio and continue to invest. We’ve even got a handful of investors who are attending hackathons and coding in their free time. I only wish we’d started building that pipeline more purposefully in 2022. So many of these businesses are being started by founders leaving companies with pockets of AI talent, so you really need to be focused upstream on founders before there is even a full twinkle in the eye. We have been doing a great job of this so far, and really doubled down on Menlo’s Future Founders program this year.

Sheila Gulati, managing director, Tola Capital

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Startup investing in 2023 has been defined by difficult macroeconomic headwinds on one hand and accelerating AI tailwinds on the other. The dichotomy has created a startup investing environment of haves and have-nots that has been quite interesting and, to some extent, surprising.

I’m surprised that the AI conversation is not centered more on the potential of AI for good. There are intractable problems that society has yet to solve where AI could offer a breakthrough. Technology has a history of presenting these types of breakthroughs and thus has been a harbinger of optimism.

AI is no different, and I see education as a prime example of where AI could offer every child individualized instruction that addresses their style of learning, pacing needs, and adaptive modalities. This could advance education practices for all learners and provide the inalienable right to education for all offered by a good society.

I’m obsessed with thinking through these types of scenarios and working on them, as AI will offer many breakthroughs for the world.

In hindsight, what do you wish you had done differently in the first six months of 2023?

While we spent time on it, we wish we had spent even more time with academics and researchers at top-tier institutions focused on AI. We believe a good subset of the AI generation’s decacorns will originate from deep technical research, much of which is in academic research labs today.

Gen Tsuchikawa, CEO, Sony Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

In 1H 2023, many companies put generative AI on their cover page, but many lack substance with a few exceptions. However, over the last six months, we have seen promise in areas like fintech, entertainment and health tech. In fintech, we saw privacy, data governance and overall cybersecurity in AI becoming central topics, especially when considering the enterprise adoption of generative AI in regulated industries such as financial services.

In entertainment, we have seen great traction around technologies that extend creative experiences or connect fandoms with artists outside of physical events. In health tech, while a great deal of investment in the space is largely focused on pharmaceuticals, there have been some interesting trends in the digital therapeutics space that we’re keeping our eye on.

Logan Allin, managing partner and founder, Fin Capital

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Vertical AI. We have been investing in AI since the inception of the firm, but the incredible increase in the number of vertical AI companies coming to market has been a big surprise and [has had a] massive impact [on] perceived pipeline priorities. Furthermore, the valuations assigned to companies that are pre-revenue, pre use-case or product-market fit, with very young but talented teams in some cases, are concerning in terms of the long-term durability of this space from an investment return and transformational impact perspective.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Though we have been deploying aggressively into attractive valuation entry points and high-quality founding teams, in macro environments like this one, you always regret not being more active while everyone else was fearful. These cycles only come around so often and are a boon for net-new investments in portfolios.

Jason Lemkin, CEO and founder, SaaStr

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

The surprise is how sentiment is creeping back positively. For “very good” investments, VCs remain measured and want to invest at valuations consistent with public multiples. But for top investments, sentiment is strong. You see this in AI, but it’s also in the hottest areas of security, mobile, and analytics.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Met with more founders. I slowed down in 2022, as did many, and should have picked it up more. Multiples are still relatively low in SaaS, but great companies are being formed as often as ever.

Kaitlyn Doyle, vice president, venture, TechNexus Venture Collaborative

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

I’m surprised by how many companies are still trying to raise on uncapped notes. It seems to be a tactic to avoid having a conversation around valuations, but it’s not investor friendly.

Rajeev Dham, partner, Sapphire Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

The generative AI buzz resulted in a flurry of unexpected startup financings. I think while VCs are traumatized from the overpriced deals we all made for several years, the generative AI frenzy is resulting in an uptick of deals being made. There’s no question that advancements in AI will spawn an incredible set of companies, disrupt industries and be the transformative technology that drives far more productivity within existing companies, but my concern is that we’re still in the very first inning, which will lead to a lot of lost capital.

The generative AI startups that I’m seeing are either not fully ready (no moat, no traction, etc.) or if they are, they are being priced far too high to grow into — a more dangerous situation to be in. If you look at every technological or platform shift, most of the best companies and current market leaders were not born in the very first fraction of the first inning.

In hindsight, what do you wish you had done differently in the first six months of 2023?

I’m proud to say that we’ve been disciplined and patient. We’ve made a few investments in the first half of the year and have purchased more shares in another handful of existing portfolio companies. We’ve also been extremely focused on supporting our portfolio companies throughout the market turbulence.

Jenny He, founder and general partner, Position Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

I was surprised at how quickly the AI boom happened in 2023 and how many top-tier firms went from a wait-and-see approach at the end of 2022 to becoming very active in 2023. Some of our portfolio companies went from quiet insider rounds to very hot competitive rounds at a rapid markup at the beginning of 2023, spurred by the AI boom.

In hindsight, what do you wish you had done differently in the first six months of 2023?

I’m sure everyone wishes they had more time to dig into all of the AI tools that are popping up to be able to get more hands-on experience and deeper understanding.

Oliver Keown, managing director, Intuitive Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

High-quality companies with traction and strong fundamental economics are still raising at strong valuations. On the other hand, those without a stellar story are seeing a resurgence of investor-favorable terms and preferences that have been absent from the market for several years.

Rex Salisbury, founder and general partner, Cambrian Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Two surprises:

  1. Large multistage firms have largely pulled out of seed and retrenched to focus on Series As and later after a frenzy of seed bets in 2021 and early 2022.
  2. Prices have continued to fall at the pre-seed and seed stages.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Too early to say! Hindsight is 20/20 but venture is a long-term game — it takes more than eight years for your mistakes to become apparent.

John Tough, managing partner, Energize Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

We knew generalist investor interest in climate was fleeting, but it has still been surprising to see how many household names planned to launch a climate focus area and then moved along to LLMs and AI instead. Our opinion is that vertical investment strategies are likely the winners in the long run.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Nothing we would change about how we executed our strategy in the first half of the year. But in hindsight, it becomes clearer that 2023 represents a correction year — a difficult but healthy return to “normal” after the pace and hype of the past five years. Though the last six months have seen a slowdown, I’ve been proud of our team’s ability to remain focused through cycles, and we’re now seeing silver linings as the market thins out and the climate segment proves resilient.

John Henderson, partner, AirTree

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Given what happened to the growth market, I’m surprised how well seed valuations have held up in 2023. Anecdotally, I think a few factors are contributing to this.

First, GPs at growth funds feel gun-shy and want to reduce their pacing, but they also want to remain “in-market” and have junior investors in their teams who think their career prospects rely on continuing to write checks. The result is mega-funds coming down into the seed and Series A stages, paying inflated valuations. I worry about the signaling effect in 12 to 24 months for companies that have taken growth funds as their lead seed-stage investor.

In hindsight, what do you wish you had done differently in the first six months of 2023?

We’ve got some battle scars from the last couple of years, so we welcomed the return to the pre-2021 norms at the start of this year. That’s meant that the past six months have been less of a roller coaster and more steady as she goes.

Christopher Day, CEO, Elevate Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

We are seeing more and more companies suffering from the lack of clean structure and cap tables. One example of this is the proliferation, misuse and misunderstanding of simple agreements for future equity (SAFEs). Companies are using them as a phase of investing over several years versus their original intended purpose — for an investment event.

SAFEs have also taken on other forms. When the companies obtain priced rounds, they run into surprises at conversion and find that SAFEs are not necessarily founder-friendly or more cost-effective. We are even seeing investors not realize how SAFEs work and being surprised and upset once they understand the realities.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Looking back, what we needed was to educate the ecosystem and portfolio companies on the importance of embracing new AI capabilities: How to defend against new AI startups? How to disrupt existing juggernauts? How to recruit the necessary talent? How to embrace AI to avoid even bigger pivots in the future?

These are existential questions that companies must ask, and they require cross-sector collaboration beyond founders’ own areas of expertise. Today, the discussion is about AI, and it’s tough to predict what wave will break next. We’re bringing people with disparate skill sets together to tackle these challenges.

Mark Grace, investor, M13

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Valuation ranges are all over the place, especially at the Series A stage. We all know how quiet the later stages have been, and the seed market has seemed strangely resilient. However, it has been interesting to see the wide variance in Series A pricing.

In hindsight, what do you wish you had done differently in the first six months of 2023?

It took a few months to realize how much more proactive everybody has needed to become in order to get deals done. This applies to both sides. Investors have had to become more active to find companies and structure deals instead of relying on traditional channels. Similarly, founders have had to both rework their original fundraising plans and do more diligence to understand which funds are truly deploying right now.

Howie Diamond, managing director and general partner, Pure Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

One unexpected phenomenon was witnessing our portfolio companies raise stealth/insider rounds from legacy investors at the same terms as their prior round six months to a year ago instead of going to market and raising from new investors. These companies were not distressed; they were simply adapting to the market realities.

Companies have investors who already believe in them and have had a front-row seat for the past two years, watching the team operate and grow the business. The goal is to incentivize these folks by accelerating their pro rata at a great price, truncating the due diligence process and bringing in some safety capital quickly. We participated in a handful of these. I think the strategy worked and it was a win-win for both the investor and company.

In hindsight, what do you wish you had done differently in the first six months of 2023?

Not have personally invested in First Republic Bank stock!