A Chilling Wind For Innovation: VCs Participation Freeze

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TOP NEWS

1. Boston-based OpenView Suspends All Investments Out Of Newly Closed $570M Fund: OpenView Venture Partners shocked the venture world by announcing it would suspend all new investments and lay off half its staff - only months after closing its brand new $570M fund. Two of its three leaders Mackey Craven and Ricky Pelletier left the firm (Link)
2. Anthropic In Talks To Raise $750M In Menlo-Ventures Deal: Anthropic is in rumored talks with Menlo-Ventures in regards to a financing round that would value the two-year-old startup at $15BN as Artificial Intelligence continues its funding hot streak (Link)
3. Why Stripe's Recent Investors Are Smiling Now: The payments darling is enjoying a rebound this year from its $50BN down round. For the third quarter, the Company booked a reported $150M in operating profit on 35% revenue growth (Link)

TODAY'S CHART: VC Participation Down 38% in 2023

The US VC industry is has come back to earth in 2023 in a major way.

Capital deployment and fundraising have taken significant hits. Limited Partners who are over-allocated to the 2021-2022 VC investment vintage are reviewing managers and revisiting their commitment to the VC asset class.

With the drop in activity and fundraising, we are seeing a number of funds in market fail to continue to deploy capital or close their doors:

1. A staggering 38% (2,725 fewer firms) of active US VC investors dropped from dealmaking in the first 9 months of 2023 compared to 2022.
2. "Party rounds" in general are down, with the average number of VC funds in a capital raise at 3.0 funds versus in 2021 when there was closer to 4.5 - 5.0 funds in each investment round. Rounds are smaller and include trusted partners looking for quality investments in a down market.
3. The pullback of crossover capital funds as investors return to focus on early-stage or late-stage traditional investment mandates to focus on core investment strategies

TODAY'S NEWS STORY: Micro Venture Capital Funds (Sub $50M)

Micro VC Funds And Syndicates, defined by Pitchbook as those with under $50M in AUM, exploded in the boom run. There have been over 1,400 micro-funds raised since 2020. A number have since left the market or failed to continue investing. About 1/3 of the 1,400 are first time funds or vehicles.

Micro VC Funds and Syndicates can win and secure allocations in competitive deals (1) by demonstrating strategic value to founders and others in the cap table and (2) writing smaller check sizes that can fit alongside larger Tier 1 VC funds.

We work with several specialized micro VC funds with definitive skillsets across marketing, product, engineering, social media and distribution.

Our partner firms work to bring a specific defined value to early founding teams (Ex: "How do I run a digital marketing campaign?").

Often these emerging GPs are run by an industry experts, or former founders that have exited their business.

While "party rounds" are down, on the early stage side the collaboration amongst strategic investors has only grown. We have are meeting very interesting investment groups during our conversations.

For capital - Micro VC Funds primarily raise from High-Net-Worth Individuals and Family Offices. Relying solely on HNW Individuals and Family Offices can leave emerging funds and Micro VCs susceptible to liquidity issues in down markets.

In a down market, Limited Partners will usually stay focused on large funds in the VC space and ignore the new manager commitments despite small funds' outperformance overall versus large funds.

Now that venture capital funding has slowed in a rising rate environment, Limited Partners will begin to pull back from emerging VCs.

However, amidst the challenges, investment interest in new talented VC managers is higher than ever. Micro-funds with differentiated strategies and strong track records can still attract capital.

The future of VC will include small, nimble players alongside the Tier 1 established funds. In a more selective landscape, it is key that Micro-funds establish a differentiation.

Micro-funds that adapt to the changing landscape, demonstrate strong performance, and offer unique value propositions through niche expertise or exceptional operational guidance are best positioned to weather the storm and carve out their place in the evolving VC ecosystem.

Please visit our website at?www.privateventuresgroup.com for more information

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