Venture capital is cyclical, which is why headlines say, “Venture capital is dead” every seven to ten years. This time, only 15 were needed.
I started my career right when we were going through the last recession. We closed a $400 million fund the week Lehman collapsed the global currency crisis. This fund has proven to be a huge success among portfolio companies, adding Doximity (DOCS), Lending Club (LC), and Check (acquired through Intuit). At the time, it was the iPhone and the disappearance of walled lawns that was a strong accelerant, creating opportunities for new corporations and incumbents. Now it’s generative AI.
I think this is the most exciting time to invest in venture capital in over a decade, since the last economic downturn. For one thing, it’s not easy there. The macroeconomic environment of emerging market rates, economic uncertainty and global instability is causing investors to pause. Initial investment has fallen 48% year-over-year, and as a result, corporations want to be more selective with their scarce resources. As in 2009, venture capital firms have a record amount of money to invest, but they’re not using it. in new agreements. Almost part of 2023’s A and B cycles were conducted through overheated 2021 valuations that protected insiders. We will see this trend continue as the market for the later stages remains frozen.
On the other hand, the most productive corporations thrive in an environment where founders have to make difficult and considered decisions about where to spend their time and money. For corporations that can secure funding, the festival of skills and investment in advertising has declined. AI is giving rise to new businesses and advancing existing ones.
With all the benefit of hindsight, here are six trends I predict we’ll see in the coming year.
Few technological inventions have allowed ecosystems to grow as temporarily as AI. ChatGPT wasn’t widely available until November 2022. However, 1 out of every four dollars invested in startups in 2023 went to AI. The open source of many AI models and the relative ease of creating new use cases of those models means that we will continue to see an explosion of AI startups. It’s true that the AI innovation we’re seeing is significant and cool!But let’s also face it: compute capacity and pricing may not be easy to scale to meet demand. And incumbents with an existing visitor base and unique knowledge will likely be the biggest beneficiaries.
Most AI startups don’t even have access to the computing power to scale their applications, let alone in a competitive market. Even big tech companies are struggling to find successful use cases, but at least they have the cash flow drivers to help in the long run. experimentation and development. Google, Amazon, and Microsoft carry out some of the most significant checks on OpenAI and Anthropic’s core models, in exchange for contracted cloud spending on those FAANG platforms. Some have started talking about “cloud money laundering,” which everyone denies. For smaller startups, all of this adds up to unfair merit and puts more pressure on access to this ever-valuable computing.
Growing up as a first-generation student and attending school in Missouri, I felt a deep connection to the other people who make up the geographic center of the country. I’ve also lived in Europe where, unlike in the United States, industry vocational schools are a popular choice for earning a four-year school degree. These professional systems offer graduates a career path and a popular way of life, while school graduates in the United States occasionally find themselves in debt and unemployed. Vocational systems deserve to be a strong and viable option for America, and we deserve to prevent us from pressuring everyone to move into school. Instead, we deserve to focus on providing education and education for academics to gain skills and earn a productive living.
Knowledge is beginning to verify my bias in favor of non-traditional education. Enrollment in four-year schools has declined across the board, while vocational systems in trades such as structure are seeing double-digit increases in enrollment. It’s not just a question of white collar versus blue collar, because professional apprenticeships are also growing. Apprenticeships can take a variety of forms, but they tend to come with a combination of a small salary and on-the-spot apprenticeships, and other people complement this. with courses at a network university, which are rarely also paid for through the company. The Wall Street Journal reported that Aon, a professional facilities consulting firm, last year attracted 1,100 applicants for 90 positions in its apprenticeship program. This year, there were 1,500 for every hundred positions, making the program “as selective as Cornell University and Dartmouth College. “
This educational option provides monetary independence (often through crippling lifetime loans) and specialized skills sought through employers. As the AP reported earlier this year, mechanical and repair systems saw an 11. 5% increase in enrollment between spring 2021 and 2022, according to the National Student Clearinghouse.
What does this have to do with venture capital investing?If those trends continue in 2024, and I hope they do, I think we’ll see a healthier economic ecosystem that 1) offer new avenues of entrepreneurship to more people. whereas they are naturally sensitive to products and are of the utmost importance to the average citizen; and 2) provides the highly professional workforce needed to execute new innovations. Their contributions have the potential to unlock the price and distribute it more equitably than in the past, offering a much-needed stimulus to the American middle class.
There was no shortage of obituaries for San Francisco as a technological and cultural hub in 2023, but it will bounce back again, like it always does—and it will be advanced by an increasing movement to get back into the office.
The city of San Francisco has been an indicator of overall attitudes toward technology, whether it’s the percentage of investments, the physical area of the workplace, or IPOs. Despite the city’s challenging trajectory since the pandemic, 2024 will see San Francisco’s resurgence as a magnet for builders. The rise of AI, just as an example, will highlight the positive effects of partying between wise people and mutual learning in close proximity. OpenAI just moved into 487,000 square feet of prime workspace in Mission Bay, subleased to Uber. Anthropic plans to gain more than 250,000 square feet in SoMa, where Slack once resided.
Builders and the overall startup ecosystem around them generate energy, conversation, and more building. While the collective expectation coming out of COVID was for a quick “return to office” post-lockdown, it has not occurred in full force—yet. But it’s just about here. Employees will lose their ability to slide under the radar working from home. (Even the companies I have invested in that have passionately advocated for distributed work are finding that their people want to come together regularly, and setting up these on-sites is an expensive, time-consuming exercise. Why not just work together all the time?!) The days of distributed work are numbered as people remember the joy and benefits of bringing together smart, ambitious people in person to bring products to market faster, cut red tape, improve coordination time, and ultimately, solve big problems.
There are few places where this procedure can pick up as temporarily as San Francisco. We’ll see a lot more of that in the coming year, as a new generation of startups sublease some of San Francisco’s underutilized area, once occupied by larger, recently downsized corporations, at a discounted rate.
In recent years, startups have brandished the prestige of unicorns as a source of pride. Now we see that inflated valuations would possibly be a problem. Private valuations are arbitrary until a directory is published or they go out, and startups use their (inflated) valuations to bear costs Debt can be risky.
We have observed that several giant corporations have gone bankrupt in recent months, facing liquidity problems as their lenders clamor for their debt. Convoy, a virtual freight broker, went from a valuation of $3. 6 billion to close in no time when a debt line called. Similarly, WeWork revealed in October that it didn’t have enough money to pay its interest. I think this is just the tip of the iceberg, as new spending will expire in 2024. Debt continues to flow, but it is no longer free. given the higher interest rates and tighter conditions.
Savvy startups will read the scenario and downplay valuation conversations about new investment rounds, or even note the benefits of keeping them low, adding expectations of scale when it comes to expanding the next round. Ultimately, I’m sure to be transparent and comparable again. basic concepts (i. e. , a path to successful expansion during the time a company is in a position to create a Series B) as a key driving force of investment decisions. And I’m looking for meeting founders who care more about sales than status. .
Free cash hasn’t just led to too many overvalued startups. Many investment managers were formed—or hired extensively—over the past few years to deploy this influx of capital. In 2007, there were 987 VC firms; by 2021, there were nearly three times that number at 2,889, according to the National Venture Capital Association.
Emerging managers, or those who have announced fewer than four budgets (according to the PitchBook), are likely to hit hardest and expect their worst fundraising cycles in the past seven years. By the end of the third quarter of this year in 2018, U. S. emerging-market managers had raised just $2. 3 billion, the first time since 2016 that the figure had fallen below $20 billion (in 2021, the same organization raised a whopping $57 billion).
Emerging managers play an important role in the VC ecosystem, making up a disproportionate number of firms outside the usual SF/NYC epicenters. They can be uniquely suited to drive diversity around where and to whom investment dollars flow.
In addition, many giant corporations have only one or two partners who have generated genuine returns for their limited partners over the past decade. With this in mind, I hope that corporations will consolidate. In other words, partners in corporations that have generated returns will come in combination to shape new entities. We’ve noticed this in the future with the creation of corporations like Benchmark, Redpoint, and Trinity. We’ll also see incumbents hire emerging managers, who will add to the diversity of the ecosystem in the future.
There’s a new generation of young female executives sitting at the head of the table, and we’ll see more and more of them in the coming years in the Fortune 100. The time has come for a woman like Bill Gates, Steve Jobs or Elon Musk. What excites me the most is that the existing organization of successful women in marketing is not limited to customer products and dating apps. We see small businesses, public and private, led by women in cutting-edge, SaaS businesses. , fintech, fitness technology, therapeutics and much more. I’m thinking of Gwynne Shotwell (SpaceX), Melanie Perkins (Canva), Julia Hartz (Eventbrite), Jennifer Doudna (Crispr), Adi Tatarko (Houzz), Christina Cacioppo (Vanta), Cristina Junqueira (Nubank), Daphne Koller (Coursera), to name a few. At a time when it’s even more vital for today’s art tech marketers to make tough and considered decisions, I think we’re going to see even more women rise to the occasion. Call me biased, but I think it’s a very clever thing to do.
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