We have spent the past two years trying to raise a Deep Tech focused venture funds. To put it mildly, the past two years were not the best time to raise a venture fund.
In light of this, we cast a broad net and have lately been speaking to everyone we can in the venture industry. These have not been happy conversations.
There are many reasons for this – rising interest rates, the glut of funds raised in 2021/22, the collapse of Silicon Valley Bank – but the end result is that Limited Partners (LP’s) – the pension funds, sovereign wealth offices and family offices which invest in venture funds – have ample reasons for becoming very cautious and overly deliberate in how they invest – no matter how big the opportunity.
Venture has been changing for years. At its simplest, the number of investors has grown sharply over the past ten years, but at the same time, the largest firms have come to command a growing share of investible dollars. This was most pronounced in those recent heydays during the pandemic when several large firms raised massive funds, plowed those resources into some incredibly high-priced deals, which left very little oxygen in the room. Then interest rates started going up, the IPO went slammed shut and the whole edifice got logjammed.
Today many LPs are over-allocated to venture on paper. But many of the funds they invested in have not marked down their portfolios. VCs do not like to mark down their portfolios, but from secondary shares of private companies being circulated and the many down-rounds taking place, we know that many of those portfolios are currently held at double or triple their current, true valuation. So LPs are actually heavily under-allocated to venture now, but no one is in a big hurry to force the issue.
This leaves the whole industry adrift at sea with no land in sight.
This has a heavy impact on private companies. The start-ups we speak to lately are entering dire straits. Many are doing well, the overall economy is strong and their business is improving, but they still need investment to keep achieve ‘escape velocity’. Others have stumbled already and are heading towards zombie status. Many VCs, especially the larger funds, have their mythical “dry powder” of uninvested dollars, but are hoarding those for a shrinking roster of their very top companies, leaving little room for the middle ground of good businesses that might be great somewhere down the road.
Of course, if the start-up in question has AI in their name the situation is very different. These companies remain hot topics for VCs. Everyone wants to tap into the wave of the moment, even if that wave is already crowded with lifeboat escapees trying to keep their head above water.
We have been noting this overly narrow focus for years, but the only thing that seems to have changed is that venture investors have shifted from over investing in SaaS to over investing in “AI” (with the occasional stop in crypto along the way). Like drinking ocean water when the Fiji bottles all have been empty for days, this is not healthy for investors or the broader industry.
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