As the summer winds down, American venture capital is experiencing a new spring. Despite the current state of depressed venture investment compared to recent heights, green shoots are emerging quickly for those paying attention. Good deals are back on the table, and from within 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 only 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 Post-Pandemic VC Bubble
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?
A Change in Venture Investor Behavior
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.
The Return of Venture Capital
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 Significance of Disarray
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 pervasive sense of disarray among experienced investors.
A privately acknowledged sense of ‘investment thesis’ disarray among experienced investors is a counterintuitive signal of an impending massive startup dawn. This suggests that investors are no longer relying on traditional assumptions and are instead embracing new opportunities and strategies.
Conclusion
The resurgence of venture capital is not just a return to the past but a new beginning. With green shoots emerging in various sectors, it’s clear that the venture capital landscape is shifting towards more innovative and adaptable approaches.
As investors and entrepreneurs alike navigate this changing landscape, it’s essential to be aware of the signs and trends that indicate a new spring for venture capital. By doing so, we can capitalize on the opportunities that arise from this shift and create a brighter future for startups and innovation.
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