Trends Watch: The Future of Venture Capital

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Peter Mathias, Partner, Alumni Ventures.

What is your outlook for VC investing?

Creativity and entrepreneurship are timeless, everlasting human attributes. Innovation never, ever sleeps. Backing visionary ideas -- or venture capital – is a pillar of power and progress. So, I will always be optimistic on VC investing.

Still, there are noticeable, structural shifts in the asset class. These result in great opportunities to “double down” with better valuations, “investor-friendly” terms, and a deepened focus on intrinsics (e.g., profitability). What proof points are there for this window of opportunity?

First, Q3 2023 saw the highest number of startup bankruptcies in years. More restructurings, down rounds and shutdowns loom. 

Second, software startups are struggling on sales and profitability metrics with surging customer acquisition costs (CACs) and declining customer lifetime values (CLVs). 

Third, timid capital -- or "dry powder" -- abounds. 

Fourth, venture capital seems to be transitioning to a new innovation paradigm. Every generation, innovation "cycles" through the home. Innovation waves start with foundational technologies (e.g., "basement" or infrastructure technology). Gradually, these technologies work their way up the innovation ladder -- from the basement to other areas of our lives, other rooms in the home.

In 2023, we seem to be nearing the end of an innovation cycle that began in 1946, the birth of venture capital (VC). Pioneering firms like the American Research Development Company (ARDC) invested in the foundation of transformative technology, serving as the hidden but essential support for advancements in computing, telecommunications, and the technology revolution.

Over the past 77 years, innovation has progressed throughout the home. Investments in the 1950s-1970s in semiconductors and personal computing enabled software applications to impact other rooms: the bathroom (pharma and biotech), the couch (apps), the garage (mobility and ride-sharing), the kitchen (foodtech), the backyard (sports and leisure tech), the closet (beauty tech), the mailbox (marketplace, e-commerce, and direct-to-consumer), the bedroom (dating) and beyond. These are familiar investment theses for my venture capital peers. 

When you look at that picture, it is clear: Software has eaten the world. But by now, software has had its breakfast, its lunch and its dinner. It may very well be "stuffed" -- and ready for a new frontier, novel applications.

The question is: Where will those ideas come from?

Where do you see the greatest opportunities and why?

Where do I see opportunities?  While the venture landscape is often categorized by buzzwords like "fintech," "B2B SaaS," and "consumer social," I don't see these buckets. I see tech-driven solutions to essential needs that matter, particularly in today's world. I identify five significant use cases throughout human history: Building, Movement, Power, Productivity, and Protection.

- Protection (health care and security),

- Power (especially nuclear energy),

- Productivity (AI, semiconductors, Quantum),

- Movement (spacetech and marinetech), and

- Building (hard and soft infrastructure). 

I see the greatest opportunities for innovation focusing more on "country" rather than "consumer" technologies. The areas that quietly power our lives, often "out of sight" -- even hidden in the basement, walls, and infrastructure of our homes, businesses, government buildings.  For major powers like the United States, Germany, Russia, and China, these areas are critical. 

What are the greatest challenges you face and why?

My job -- the job of any venture capitalist -- is not to predict the future. I am not an oracle; I am not a prophet. My job more closely resembles a journalist who turns over rocks, who tries to get a beat on things others don't see yet and to see the future before most other people do. I developed a knack for scouting technology in emerging moments in my days as a touring drummer and record label founder-- my band Filligar was an early tester for iTunes, Uber, Square, bitcoin, even TikTok. 

The greatest challenge is therefore maintaining that persistent curiosity and resourcefulness to stay ahead of the curve. 

What keeps you up at night?

For me, venture investing is not a job. It's not a career. It's a calling. Like any calling, like any passion, there is a relentless passion. A 24/7/365, lifetime pursuit. So: It's typically excitement that burns the midnight oil for me. My issue is not waking up at night, it's going to sleep in the first place. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper or Alumni Ventures.