When public market pressure started to affect venture capital in the spring of 2022, companies and VC firms weren’t prepared. Companies couldn’t justify their valuations, and investors had to step in to keep their portfolio businesses afloat.
But this focus on triaging wasn’t sustainable. VCs were spending all of their attention and capital on helping their existing portfolio companies ride out the tougher fundraising market. Funds aren’t set up to support that strategy, and venture firms’ fiduciary duties to their investors means they can’t put resources toward companies that they know won’t produce a return.
Some firms also likely spent time triaging to prop up their portfolios a bit heading into 2023, perhaps before an LP annual meeting or before launching a roadshow for a new fund.
But a year into this market slowdown, the time to triage is over.
This shift right now back to normalcy makes sense, said Michael Yang, senior managing partner at OMERS Ventures. Enough time has passed to see whether companies have adjusted to the current market or if they need to put any extension capital they raised to use. It’s much more clear now which companies were propped up for good reason and which ones might not survive, he said.
“You give [startups] more runway to see how far they can flip a few more cards on the proverbial table,” Yang told TechCrunch+. “At the end of it, you have more to analyze and see, where are we really? Did it get better, stay the same, did it get worse? That’s what you are seeing.”
As firms turn away from tending their own gardens, many companies will run out of cash, and options, heading into 2024. But for VCs, this isn’t necessarily a bad thing.
The world of startups is rooted in failure — which many forgot during the last few years of the prior bull market. Because the majority of startups tend to fail, firms are not designed to support portfolios this big. There isn’t enough capital.
Firms like M13, for example, that have a sizable platform team, can’t continuously help every company the firm has ever backed, said Latif Peracha, a general partner at the firm.
If a company sells or shuts down, it not only frees up resources for firms but it also allows that talent to start working on something else. Peracha said that firms like his love to back second-time founders who didn’t find success the first time around and want to give it another go.
“A great founder profile is one where they have had limited success but are very hungry for their next company,” Peracha said. “They can’t wait to get back to building something. We love that profile. Absolutely, we think that mortality and soft landings, all these things, are features not bugs.”
Not just founders, either. Company shutdowns also free up the early hires and the other strong talent that could be helping build elsewhere — and seeing the upside from their work at a more successful company.
“We have one life, and one career; it’s good for people to make a switch even if there is a hard intermediate,” said Aydin Senkut, the founder and managing partner of Felicis Ventures. “Now they are forced to look and say, ‘Where can I deploy my talents somewhere that is more productive?’ I don’t think it is a bad thing that the money and talent should follow where there is higher promise.”
Moving on from focusing on triaging allows firms to spend their funds on what they raised them for: new deals and follow-on investments. Senkut said that while Felicis continued making new deals throughout this period of triage, they are doing less triaging now and focusing more on new opportunities.
“Our responsibility to our LPs is to treat the follow-on investments like a new investment,” Senkut said. “The resources and people should go to the companies that are working, where results are possible, and that’s not a bad thing.”
Investors said they aren’t abandoning these companies, either. Peracha said that M13 is there to support companies looking to find a soft landing by either an acquisition or by winding down the company.
But while expecting companies to fail may seem jarring, it’s a healthy reset for the market. The past few years weren’t sustainable for individual firms or the ecosystem. While there may be a really rough period of startup shutdowns next year, the market will come out stronger in the end.
“Anyone who thinks this isn’t a healthy environment is mistaken,” Peracha said. “I really believe you look at the investments we made in 2023, and the vintage for next year, they are going to be incredible vintages of venture capital. Other than a small pocket of generative AI companies, this is a very rational market.”