However the numbers are sliced, it’s been a quiet year for venture capitalists. Despite sitting on a lot of cash – around $271 billion of dry powder by some estimates – the number of investment checks cashed by startups is down 53% year-over-year and are even down below pre-pandemic levels.
Newly-minted unicorns are hard to come by. The tech IPO market is still bone dry and the number of Series B and later rounds are scarce. After raising rounds at sky-high valuations, many startups are bracing for down rounds.
Macroeconomic factors like interest rates and employment numbers certainly factor into a VC’s investment decision. But even in quieter times, investors are hunting for deals and looking for the next startup to back.
So what is the state of venture capital these days? And, more importantly, are local VCs seeing deals they are interested in right now? We went straight to the source to better understand how investors are thinking about writing checks during the rest of 2023.
What’s Deal Flow Like?
The number of pitch decks coming onto a VC’s desk is an important indicator into the overall state of the venture market, as it shows how many startups are ready to take on new capital for the next stage of growth.
We asked David Jones, GP at Bull City Venture Partners in Durham, about what deal flow looks like right now for seed and early-stage companies.
He said the firm’s deal flow KPIs are “holding fairly steady” this year.
“That being said, certainly a lot of deal flow is companies that were overvalued in financing in 2021-22 and are now doing flat rounds or down rounds. Another category of deal flow are companies where growth/other metrics has slowed dramatically (primarily enterprise software). If you exclude those two categories of deal flow, then I guesstimate there are 10%-15% fewer deals meeting the normal criteria VC’s are looking for. If you look at the raw data (Census) of new business formation, it continues to show consistent and steady increases, and antidotally feel like we are seeing the same or more entrepreneurs choosing to start new companies,” Jones added.
Elizabeth Stephens, Principal at Noro-Moseley Partners in Atlanta, said deal flow volume is up slightly from earlier this year, though numbers haven’t completely rebounded. But she told Hypepotamus that enterprise demand is starting to grow, which could be a positive sign for the B2B venture world moving forward.
“Many venture-backed companies have encountered elongated buying cycles, particularly at the enterprise level over the last 12 months, although we are starting to see early signs of this turning,” Stephens added. “Several of our portfolio companies have recently raised outlooks for the year, citing stronger demand coming back. With respect to our healthcare investments, demand for healthcare services remains robust and we are watching indicators like health system profitability and new clinical trial starts.”
Emery Waddell, Principal at Atlanta/FL-based firm Vocap Partners, said that while their total deal flow is “roughly the same” as late last year and earlier this year, the quality of companies raising rounds has notably improved.
“Solid companies are re-entering the equity market for two reasons: i) they are fully internalizing that VC markets aren’t returning to 2021 conditions anytime soon so they can’t “wait it out”, and ii) they have already pulled all the levers to extend cash runway (debt, bridge rounds, cost reductions, etc.),” Waddell added.
What VCs Want To See
The bar remains high for startups searching for new investors. With that in mind, how can startup teams stand out?
Waddell said that companies that can show 90%+ renewal rates and authentic customer reference-ability are leaving a particularly positive impression in the current market.
For Jones over at Bull City Capital, startups should be able to show that their customer base is turning into a referral source and that they have developed a low-friction sales process. Jones said he also looks for startups that show they are “a step-function (10x) better, stronger, faster than the existing solution” and have created a “need-to-have” product ready for their customers.
Now, Jones added that he’s “optimistic” that the VC market will stabilize in the back half of 2023 as inflation comes down, though there are a lot of external factors at play.
“Most of this is out of our control, so we try to stay focused on what we can control: spending time in different markets with entrepreneurs,” he added.
