Venture Capital State of the Industry

By Joe Penabaz

Introduction

Following the market swings at the end of last year, the top-of-mind issue for every founder was whether they would have access to capital. This theme was prevalent at the 2023 Florida Venture Capital Conference, which took place last month. On a panel titled “Venture Capital State of the Industry,” speakers provided recommendations on how founders can best position themselves to get access to the available capital.

Panelists included:

• Frank Dalton, founder and partner, Fulcrum Equity Partners;
• Wayne Hunter, managing partner, Harbert Venture Partners;
• Paul Johan, partner, Ballast Point Ventures;
• Mary Beth Brosnihan, senior associate, McCarthy Capital; and
• Brian Model, managing partner, Topmark Partners.

The following themes were discussed:

Current State of the Industry

Venture capital activity peaked in 2021; it was a record-setting year in terms of dollars invested and deals closed. However, during 2022, the capital raised, the number of deals, the number of companies, and the number of investors in the deals decreased. Despite that, 2022 was still a good year, except when compared to 2021. Most of the activity in 2022 was in the first half, accounting for 64% of the total early-stage deals value.^[1] There was also a rise in insider rounds and rounds earlier in the life cycle. 2022 seemed to be a reset period in the market. Therefore, a rebound is a matter of time. VC funds have raised a significant amount of capital in the past two years, which is still sitting on the sidelines. What it means to founders is that the VC funds will be looking at benchmarks more closely. However, firms should continue to have access to capital.

Shift in the Market

When the economic activity cools down, the company is usually behind in its business plan, and the sector is not growing, and the founders need to consider options to extend the runway. Options include insider rounds, down rounds, convertible debt and other short-term debt instruments.  

Founders should reach out to the investor, be transparent and let them know how much runway is left. Through challenging times is when founders get to know their investors, their character, and their integrity.

Should Companies Raise Capital from Existing Investors or New Investors?

The panelists agreed the decision should be on a case-by-case basis. Existing investors know the quirks and the opportunities of the business, which come up when approaching new investors. They also can help refine what will be presented to potential investors. Further, it is more reassuring when existing investors join deals with new investors even if in a small part.

And another consideration: Are existing investors providing the resources the firm needs, or would it be useful to bring in new investors with different sets of resources that can be pooled together with the existing investors?  

In addition, it can take a significant amount of time and focus to bring in new capital. That is time and focus that will not be invested in managing the firm. Existing investors have an incentive to keep founders focused on executing their plans.

Corporate Investors

Corporate investment, mainly financial institutions, slowed down in 2022. They are now more cautious because their valuations have been radically adjusted and they are still figuring out the new fair values. They are more likely to invest in companies with a high growth potential.

Attracting and Retaining Talent

One of the major components as the focus shifts from growth to profitability is talent acquisition and compensation. Even after significant layoffs by major technology companies, there are still high salary expectations in the labor market. However, there is now a wider pool of candidates, since most highly skilled, highly compensated positions can now be done remotely. In addition, firms can make stronger offers by including stock-based compensation and avoiding using the available cash. On the other end is lower-skilled labor which will remain tight since they are usually on-site and have geographic constraints.

Making the Connection

Founders should research VC funds, their sectors and the sizes of the companies they invest in. Once founders have contacted the VC fund, they should keep in touch, try to build a relationship over time, and provide progress reports. Investors like to know what is going on with prospects. It is also very important to be careful with projections provided to investors as they will benchmark the progress against the projections they received.

To add weight to a prospect, it is good to make the connection through a “warm lead.” A warm lead is a trusted advisor that is normally the company’s public accountant or attorney.

If the deal cannot be made, never be afraid to ask, “who else can you connect me with?” Investors have significant networks and could potentially refer you to a better fit.

1 PitchBook. (2023). PitchBook-NVCA Venture Monitor Q4 2022.