For this deep dive, we spoke to Tom Costin, Managing Director of Owl Ventures.
For this deep dive, we spoke to Harold Callais, Managing Partner + CIO of Callais Capital.
NVCA successfully hosted its sixth annual Strategic Operations and Policy Summit in Washington, D.C., earlier this month. The 1.5-day conference, developed in collaboration with NVCA’s CFO Taskforce, attracted 110+ senior operators from North American venture firms.
The big picture: According to Jim Stewart, CFO of True Ventures, the event is “unparalleled in terms of its focus on technical topics, best practices, and industry-related policy updates” for this unique stakeholder group.
The program culminated with a veteran CFO and COO panel moderated by Pacific Western Bank’s Kay Parry. The discussion focused on giving senior operators impactful advice to enhance their partnerships.
Three takeaways:
Why it matters: These lessons play a helpful role for senior operators of varying skill sets. We hope the 110+ senior operations professionals at the event all left Washington feeling inspired with new skills, best practices, and ideas to bring back to their venture firms.
What’s next: Stay tuned for more information on our next program iteration, tentatively scheduled for Q4 2023.
The Q3 2022 Pitchbook-NVCA Venture Monitor report highlighted some of the changes the venture capital marketplace is undergoing. Tightening monetary policy at home combined with war and economic instability abroad are expected to have near to medium-term impacts on the availability of capital, talent, commodities, and productive capacity across the world economy. The U.S. venture capital industry is subject to the same economic winds, but while the market has contracted somewhat from the heights of 2021, it is still performing well above historical norms.
However, there are potential challenges facing the venture capital industry on other fronts. Particularly domestic government action, monetary policy and investment trends, and foreign geopolitics.
Domestic Government Action
Over the past year, Congress has passed three significant pieces of legislation to modernize the U.S. economy — the Bipartisan Infrastructure Package, the CHIPS and Science Act, and the Inflation Reduction Act. These bills all provide incentives for VC participation, and if authorizing language and appropriated funds are managed effectively in the upcoming Congress, they could be transformative for various U.S. industries, including cleantech, semiconductors, and life sciences. More troublingly, there are a variety of regulations currently under consideration by the Executive Branch which could saddle venture-backed companies with uniquely onerous regulations when compared with larger companies in the market. Hopefully, Washington will prioritize strengthening the nation’s innovation ecosystem.
Monetary Policy and Investment Trends
As the Federal Reserve has sought to bring post-pandemic inflation under control by raising interest rates, there has been extensive anxiety by the VC community about the impact higher interest rates will have on the ability of managers to raise funds. In the short term, this has contrasted with the industry nearing an all-time fundraising record at the end of Q3 and being almost sure to surpass it by the end of the calendar year. This success has helped build up an industry-wide dry powder reserve, which totals just under $300 billion as of quarter-end. While impressive, fund managers warn that deal-making will not likely reach 2021 levels in the short term. Rather the tighter monetary environment is expected to result in increased deployment schedules and a flight to quality, with initial deals being subject to more scrutiny. Portfolio company founders will be pressed to manage their balance sheets tightly and get to revenue generation earlier to limit the need for future rounds while capital remains tight.
Foreign Geopolitics
In 2022, history returned with a vengeance. Between the war in Ukraine, China’s transition back to autocracy, and extreme political instability in the United Kingdom, the articles of faith which drove foreign investment for the last several decades look increasingly like nostrums. This uncertainty also upends the relationships which underlay the global economy. It forces new capital expenditures on everything from commodity supply chains to manufacturing facilities. While not immune from the shocks being sent through the system right now, the size and diversity of the U.S. economy, combined with its incredibly robust capital markets and rule of law, means that the U.S. is perhaps better positioned to weather any impending storms than other economies.
Looking Ahead
Q3 2022 was a relatively good quarter for the VC industry. However, looking ahead, most of the investors we spoke with referenced the potential intersection of crisis and opportunity. When given a choice, people prefer to operate in a stable monetary environment and a world at peace. However, lacking that, most agreed that they, and the broader industry, are doing everything they can to prepare for the world as it is in hopes of pushing it toward what it could be.
For this deep dive, we spoke to Tamara Steffens, Managing Director of Thomson Reuters Ventures.
For this deep dive, we spoke with James Wang, General Partner at Creative Ventures.
All VCs know that investing in a startup goes well beyond writing a check. To help a portfolio company succeed requires the investment of a VC’s time. Young companies need advice and leadership, which is why many VCs sit on the boards of their portfolio companies. And it’s also why NVCA held its first-ever Board Service Excellence Forum on September 15 in Austin, TX.
This one-day learning seminar provided 80+ VC investors with actionable insight on how to become more effective leaders. The audience heard from accomplished CEOs within the Austin community and their board members with panels covering how to guide a challenged company led by Latham & Watkin’s Scott Craig and the CEO’s perspective moderated by SVB’s Dax Williamson. Rounding out the event were discussions on paths to exits and navigating diversity, equity, and inclusion (DE&I).
For this deep dive, we spoke with Alberto Yépez, Co-founder and Managing Director at Forgepoint Capital.
Welcome to our Member Spotlight series where we profile the exciting work of our member firms. For this deep dive, we spoke to Janine Sickmeyer of Overlooked Ventures.
The second quarter of 2022 brought a series of new stories to the U.S. venture capital (VC) ecosystem. The initial narratives around the quarter revolved around inflation concerns and the tightening monetary environment. However, as the first half of the year came to an end, insights garnered from the Q2 2022 PitchBook-NVCA Venture Monitor data and interviews with members of the VC community have painted a more nuanced picture.
Q2 2022 deal value and count are down from Q1 as well as the all-time records of 2021. However, both metrics are at or above quarterly medians when compared to the last five years. Furthermore, as the market becomes more diverse – with record numbers of new managers, corporate venture capital funds, and crossover investors – it is now easier for capital to flow in and out of the market than ever before. This means that with an uncertain market environment, investors and founders will need to focus on value creation and capital efficiency to continue to fuel the nation’s innovation ecosystem.
Key Takeaways
2021 Was A Remarkable Year and Perhaps an Unsustainable Benchmark: While year-on-year quarterly deal activity is down across most sectors in Q2 2022, it is up across most sectors when compared to the Q2 median over the last five years. While the VC market is undergoing a correction, it’s clear that the record-setting numbers of 2021 are not the new normal.
The Exit Environment Is Mixed: With 8 VC-backed IPOs completed over the course of Q2, public listings are at a five-year low. In comparison, buyout and acquisition numbers are down somewhat from the heights of 2021 but are on par with the three-year historical median. The closure of the IPO window is concerning because valuation readjustments are already impacting the private markets, and venture-backed companies are important to the health of U.S. public markets given their historical outsized proportion of market capitalization and R&D spending.
The Environment for Seed Funding Remains Strong: Q2 saw 1,104 seed deals with an overall value of $3.9 billion. While the number of deals is slightly below the five-year quarterly median, that number is buoyed by the exceptionally strong activity of 2021 (which averaged over 1,200 deals per quarter). When 2021 is excluded as an outlier, Q2 2022 is well above the quarterly average of 972 deals. While numerous investors interviewed agreed that allocations to seed deals were most likely made over the prior quarters before they closed in Q2 2022, there was broad agreement that the tightening monetary environment has had a limited effect on seed stage deals thus far.
Corporate Venture Capital (CVC) and Crossover Investors are an increasingly Significant Presence in the Venture Ecosystem: While there has been modest pull-back, CVC and crossover investor activity from Q1 it is up compared to the three-year mean with a 10% increase in the number of deals and a 34% increase in the total investment value. CVCs and crossover investors have significant diversity in the strategies available to them and there’s uncertainty regarding the impact their continued participation in the venture ecosystem will have.
Investors and Founders Are Focusing on Value: The prospect of a tighter money environment has investors focusing on their most promising portfolio companies and making sure they are funded through to profitability. Hiring is becoming increasingly tight, with review of new job listings by multiple levels of management, or outright freezes and retracted offers happening in companies of all sizes. Investors are pushing founders to cut costs and optimize for cash inside portfolio companies.
Overall Deal Activity Remains Robust: Much has been made of the challenges facing the VC industry, but when compared to historical trends, the first half of 2022 resembles a reversion to the historical mean rather than an epochal shift. In addition, the ecosystem of investors, now including established funds, first-time funds, CVCs, and crossover investors, has expanded rapidly in recent years. This more diverse ecosystem has also had several years of strong fundraising and has amassed a record $290 billion to help withstand potential headwinds.
Q2 2022 brought a variety of changes and challenges to the U.S. venture capital ecosystem. Investors and founders are going to need to work together to build the next generation of innovative companies in a financial and geopolitical environment which is unprecedented in the careers of most current market participants. We will be spending the quarter tracking how the industry is adjusting to these changes and how venture capital is working to strengthen the nation’s innovation ecosystem.
If you have any tips about surprising venture-backed companies flourishing in unusual places, let us know at research@NVCA.org
