Michael Fertik
As the summer winds down, American venture capital is enjoying a new spring.
Though venture investment remains depressed compared to recent heights, green shoots are emerging quickly for those paying attention. Good deals are back. And from inside the world of venture capital, a pervasive, privately acknowledged sense of “investment thesis” disarray among experienced investors is a counterintuitive signal of an impending massive startup dawn.
This is the moment when not just new companies are born but also entire new venture-backable categories.
Readers will be familiar with reports that the pace of venture capital investment has plummeted by up to 75% over the past couple of years, not only in the United States but also across the world.
Sources like EY and Crunchbase confirm that venture allocation has declined over this period in virtually every geography and every stage of company.
The ecosystem now understands that the heady investment velocity seen in private venture from spring 2020 until spring 2022 effectively mirrored those produced by federal pandemic stimulus in nearly every market.
Then, in March of last year, as the fed began its heavy interest rate increase for the first time in a generation, air started to leak from the risk-on balloon. One visible result was allocation away from growth-first public companies. Another outcome was similar disinvestment from high-tech venture capital, where the whipsaw is nearly always more violent. It makes sense: If the government is giving you a risk-free 5% return, why would you prioritize long-hold, high-risk VC?
All of the professional venture capitalist pals I’ve polled have acknowledged that they now have more bonds in their personal portfolios than they can easily recall. My guess is, if you’re reading this, so do you. By May 2022, the writing on the wall was clear: I wrote a letter to the sixty-odd CEOs in my venture portfolio saying that “VC winter” had arrived and urging them to slash burn.
VC winter is now over. Over the past six months, I have seen a trickle of early-stage financings turn into a river, and I predict we will soon see a gush. With the notable exception of AI entrepreneurs, founders’ early-stage valuation expectations have broadly come back down to levels we haven’t seen for the better part of a decade.
Entry points are attractive again. Follow-on financings — the classic Series A or B rounds — remain more elusive than they were in the go-go years, but they will return rapidly enough. We will probably no longer see funding for companies of the “real estate brokerage is technology, too!” variety. But those investments were never venture. When the world is awash in cash, everything can look like a VC opportunity.
Today, the venture capital reset is basically complete. There will be further ructions, but the future is once again very bright.
The biggest tell-tale sign for me — a “first-money” investor who typically funds PowerPoints — is not exactly the number of deals getting done or their valuations or the volume of dollars they represent. Instead, the most significant signal is the absolute disarray that my self-aware venture investor pals acknowledge feeling and that the perhaps less brave ones profess to observe in others.
To outsiders, venture capitalists often appear to be self-assured captains of the industrial future. But most of them know they are men and women without a single idea, hoping not to be left behind by souls more courageous, innovative, and perceptive than they. In good times, they will loudly share their “thesis” that animates “investment themes” and the type of “founder-market fit” they must see to invest. But not now, not in private.
These days, my most capable peers secretly admit they do not know what the future will look like and that they don’t even have a good guess. The pace of change in artificial intelligence, in software development, in computer chips, and even in regulation is throwing them for a loop.
In my field, this is what spring looks like. When innovation and company formation outpace the capacity of the investing class to make sense of them, you are witnessing the arrival of new high-tech categories, each of which can be worth hundreds of billions to future shareholders.
These new fields will soon have names. We might shortly see wide discussion about multimodal AI, general game generation, automated code modernization, or tailored language models. Then, as surely as the flowers follow the rain, the broader VC herd will articulate new “theses” and pile into more startups. As your kids might say: This is the way.
Comment