As part of our continuing coverage of venture capital performance in the first half of 2023, businessroundups.org+ surveyed 15 investors about their investment cadence and their plans for the second half of the year.
As expected, it appears that a good mix of investors wrote checks at the rate they had been targeting, while others came up a little short. However, there is a sense that a slower pace of investment is set to become the new normal. Rajeev Dham, partner at Sapphire Ventures, and Mark Grace, investor at M13, both noted that the rapid investment cadence of the pandemic years is over and the adjustment period has been a bumpy ride for some.
However, those who worked at a slower cadence seem to prefer a more cautious approach. Gen Tsuchikawa, CEO of Sony Ventures, said: “We have always been selective in our investments and we are keeping the cadence of those investments flexible for now.”
Dham also calls for caution for the coming period. “Once we understand what the new business cadence of companies is and then apply the right price, which we now all know what it is (which it always has been!), then we can act accordingly. The other huge shoe to drop is a further pullback from the most active investors in the 2018-2021 era. The more they pull back, the more likely there is less capital in the system chasing startups, which also equals the price.”
Grace has his eyes firmly fixed on the full half of the glass: “I think the cadence of closing deals will continue to pick up. You have to be an optimist in this industry!”
Logan Allin, managing partner and founder of Fin Capital, stated that his company was the most active fintech investor in the world in the first quarter thanks to its focus on early stage startups founded by returning founders.
He gave us some insight into his company’s confidence: “This accelerated pace of new company formation is a function of (a) management teams handing over the reins to professional management to take the company public or exit through mergers and acquisitions or buyout, and (b) seasoned entrepreneurs with underwater options not worth sticking around to further establish.
Read on to learn more about the investment climate over the past six months and how these investors plan to handle the months ahead.
We spoke with:
Matt Murphypartner, Menlo Ventures
Sheila Gulatidirector, Tola capital
General TsuchikawaDIRECTOR, Sony Venture Corporation
Logan Allinmanaging partner and founder, Finnish capital
Jason LemkinCEO and Founder, SaaStr
Kaitlyn Doylevice president, company, TechNexus Venture Collaboration
Rajev Dhampartner, Sapphire companies
Jenny Hefounder and managing partner, Position companies
Oliver Keowndirector, Intuitive enterprises
Rex Salisburyfounder and managing partner, Cambrian Enterprises
John Stoermanaging partner, Giving energy to companies
John Hendersonpartner, AirTree
Christopher dayDIRECTOR, Raise enterprises
Mark Graceinvestor, M13
Why diamondmanaging director and managing partner, Pure enterprises
Matt Murphy, Partner, Menlo Ventures
Did your pace of investment meet your expectations? Have you exceeded or fallen short of your goals?
The back half of 2022 was dead. Things suddenly got better at the end of February and we felt that across the board. We invested in Anthropic and Typeface and have been moving forward fairly quickly since then. In the second quarter, we made several commitments, including two life sciences companies, a digital health company, a hard tech company and some SaaS companies. So the end of Q1 kicked in and Q2 really accelerated. We even had a term sheet on a company and we won the deal, but it was acquired.
Does your company plan to close deals faster in the second half of 2023? Why or why not?
Q2 was already busy and active for us, but especially in the early stages. We have three funds: an incubation fund (Menlo Labs), which is stable; our Venture Fund, which picked up significantly in the second quarter; and our Inflection Fund (defined as early growth in $3 million to $10 million ARR companies), which continued to be sluggish in the second quarter.
We expect Labs and the Venture Fund to continue to be as busy as they have been from a pace standpoint, but [we] expects the Inflection Fund to accelerate significantly in the second half of the year. About 80% of companies in our sweet spot have not raised in more than two years and many will need to return to market in 2H 2023. We’re excited about that segment of the market, where there’s early but predictable scale and where valuations have stabilized substantially.
There will be a lot of flat and downward rounds, and there shouldn’t be any stigma around that. The multiples VCs will use to value companies will differ, but that doesn’t change whether a company is good or not. So we’ll all get past valuation and focus on building great companies.
Sheila Gulati, Managing Director, Tola Capital
Did your pace of investment meet your expectations? Have you exceeded or fallen short of your goals?
Our current focus is on AI, mainly on domain-specific base models, AI/ML tooling, AI SaaS applications, AI compliance and governance, and AI security tools.
We’ve made deals in these spaces in 2023, but the frenzy around AI has definitely led to a lot of capital flowing into this market. As a result, we’ve reversed certain deals based on valuation, and we expect that to continue in the AI world. It meant fewer deals overall.
Does your company plan to close deals faster in the second half of 2023? Why or why not?
We are focused on doing the right deals. Generation companies will emerge from this transformative period defined by AI, but there will also be many losers.
