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.
Looking back, here are six trends I hope to see next year.
Few technological inventions have allowed ecosystems to grow as fast as AI. ChatGPT didn’t become widely available until November 2022. However, one out of every four dollars invested in startups in 2023 went into AI. The open source of many AI models and the relative ease of finding new instances of use from 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: computing power and pricing may not be easy to adapt 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 college student and attending school in Missouri, I’ve always felt a deep connection to the people that make up the geographic middle of the country. I’ve also lived in Europe, where, unlike in the U.S., vocational trade schools are popular alternatives to a four-year college degree. These vocational programs provide graduates with a professional career and standard of living, whereas college graduates in the U.S. often find themselves saddled with debt and unemployable. Vocational programs should be a strong and viable alternative in the U.S., and we should stop pushing everyone to go to college. We should instead ensure that we provide training and education for students to acquire 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 rise in alternative education paths offers both financial independence (often bypassing crippling lifelong loans) and hard skills that employers are looking for. As reported by the AP earlier this year, mechanic and repair trade programs saw an enrollment increase of 11.5% from spring 2021 to 2022, per data from 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 believe we will see a healthier economic ecosystem that 1) offers new avenues of entrepreneurship to more people. that are naturally sensitive to products and that are of utmost importance to the average citizen; and 2) provides the highly professional workforce necessary to execute new innovations. Your 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 general attitudes toward technology, whether it’s the percentage of investments, the physical area of work, 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 the festival among 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 global startup ecosystem that surrounds them generate energy, conversations, and even more construction. While the collective expectation stemming from COVID was for an immediate “return to power” after the lockdown, this has yet to fully occur. But that’s the way it is. Right here. Employees will lose their ability to go unnoticed as they run away from home. (Even the companies I’ve invested in that have passionately advocated distributed painting are realizing that their painters need to meet regularly, and organizing those activities on-site is an expensive and time-consuming exercise. Why not just work together all the time?!) The days of distributed hard work are numbered as other people don’t forget the joy and benefits of bringing other smart and ambitious people together in the world.
There are few places where this procedure can be revived as temporarily as San Francisco. We’ll see a lot more of that in the coming year, as a new class of startups sublease some of the underutilized area of San Francisco, once occupied by larger areas, recently. small corporations, at a reduced price.
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 disruptions as their lenders collected their debts. Convoy, a virtual freight broker, went from a valuation of $3. 6 billion to closing in no time when a line of debt arrived. 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 is due in 2024. Debt continues to flow, but it is no longer free, given 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 have been trained – or widely hired – in recent years to deploy this influx of capital. In 2007, there were 987 venture capital firms; in 2021, there were nearly three times as many, or 2,889, according to the National Venture Capital Association.
Emerging managers, or those who have launched fewer than four funds (per PitchBook), will likely take the brunt of the impact and are anticipating their worst fundraising cycles in the past seven years. By the end of the third quarter of this year, emerging U.S. managers secured only $2.3 billion, the first time since 2016 that number has dropped below $20 billion (in 2021, this same group raised a whopping $57 billion).
Emerging managers play a vital role in the venture capital ecosystem, representing a disproportionate number of corporations outside of the same old SF/NYC epicenters. They can be particularly well-suited to fostering diversity in where and where investments are directed.
Further, many large firms have only one or two partners who have generated real returns for their limited partners in the past decade. With that in mind, I expect to see consolidation of firms. That is, the partners at firms who have generated returns will combine to form new entities. We’ve seen this in the past with the formation of firms including Benchmark, Redpoint, and Trinity. We will also see legacy firms scoop up the best emerging managers, and this will add to the diversity of the ecosystem going forward.
There’s a new generation of younger women executives sitting at the head of the table, and we’ll see more and more of this in the coming years in the Fortune 100. The time is right for a female Bill Gates, Steve Jobs, or Elon Musk. What most excites me is that today’s cast of successful women entrepreneurs is not limited to consumer products and dating apps. We’re seeing breakout companies, public and private, being led by women across edge tech, enterprise SaaS, fintech, health tech, 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), just to name a few. At a time when it’s all the more important for today’s creative tech entrepreneurs to make tough, thoughtful decisions, I think we’ll see even more women rising to the occasion. Call me biased, but I think this is a very good thing.
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