Comments on the State of the Venture Industry

I’ll be moderating a discussion on VC, innovation, and entrepreneurship in 2023 at the Milken Global Conference on May 1st.

The bottom line is that we are in the midst of a reset, and things may get worse before they get better. In 2022, US inflation reached a 40-year high, the Nasdaq posted its worst year of returns since 2008, global IT spend contracted, and US IPO volumes were the lowest since 1990. US macroeconomic factors always have a rippling effect in the financial sector, and VC isn’t spared from that.

However, Venture Capital has been and will continue to play a critical role in stimulating innovation in the US economy. Among public companies founded within the last fifty years, VC-backed companies account for half in number and three quarters by value. By the end of 2022, VC-backed companies accounted for seven of the ten largest publicly traded companies by market capitalization in the US: Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and NVIDIA. And all seven of these companies launched following an economic reset.

The venture industry can and must adjust. Total investment into venture funds was down by 88% in 2022. The current annualized value of commitments has dropped an additional ~70%, bringing investment into new funds back to 2001 levels.

Venture investors and founders alike will both feel increased pressure from this reset. Dollars deployed in 2022 by venture investors declined to 2018 levels and the value of many portfolios are ripe for a major valuation reset. The first quarter of 2023 saw only half as many Series C financings as Q1 2022 and Pitchbook reveals that only 13 Series C rounds occurred so far this quarter, even after an estimate 25-50% average price reduction.

Unsurprisingly, the vast majority of capital deployed has gone to existing investments.

Exit values in 2022 also decreased precipitously – with a 91% drop in exit consideration from 2021 to 2022 (the lowest since 2011). Investors anticipate that the next wave of companies to IPO could be another 24 months away.

All this may sound worrisome and again, it may get worse, but this cycle happens every decade in the venture industry and VC outperforms the market consistently following economic downturns.

Great companies will emerge from this reset just as they have in cycles past. Our view is that the next wave of value creation will be driven by intelligent automation in the private sector. The funds that survive this correction will invest in this next wave of IT Automation through long-horizon categories including AI, cloud infrastructure, cyber security, and software for climate change.

Tune into our panel at the Milken Global Conference for a further exploration of this subject with my esteemed colleagues Ibrahim Ajami, Anu Duggal, Raj Ganguly, Arif Janmohamed, and Lo Toney, and let me know what you think.