Venture Capital 2023: A Tale of Two Realities

By David Conrod

Last week I caught up with the Managing Partner of a Venture Capital firm formed in 2016 after his 20-year history at two of the most well-respected Venture firms in Silicon Valley. He had some interesting observations on the brand destruction that has occurred. This individual had been investing in high school, and after engineering degrees he worked at Bell Labs, MIT, and a Baby Bell before landing in Silicon Valley to start his highly successful venture capital career.

The tale of two realities consists of the “Great Harvest Phase” as he termed it, where an entire generation of companies during 2019/2020/2021 were able to access public markets at very high multiples, delivering record capital formation. Limited Partners in funds were feeding off the work done by people, in most cases, that were not around anymore at the sponsoring Venture Capital firms. The average age of companies at IPO during this timeframe was 12.5 years, meaning they were formed during 2008/2009 up through 2012. Venture investors at that time had worked at large companies and small companies, obtaining tangible experience at high growth companies that scaled to the next generation in an operational manner.

Something changed. Venture Capital had “dumbed down” during this recent momentum period. It became fashionable for people in business school to work in Venture Capital. Instead of bringing something to offer, the industry was flooded with people that had never actually worked in start-ups. How were these individuals able to provide useful guidance to a CEO and talented management teams or be able to understand or distinguish between “successful and unsuccessful.” These new entrants thought venture capital was all about picking winners, identifying real trailing indications of outside growth and momentum, and figure out a way to buy into cap tables. It was a pretty weak field, only trying to raise the next round at a higher price, sitting on boards populated with more people like them from other venture firms raising larger and larger sums of capital. Looking back, tens of billions of dollars were bonfired by private bankers. It's almost unimaginable the level of losses achieved by private bankers dumping more and more into these groups (it would be interesting to see the diligence on these allocations, probably Madoff-like, in terms of detail). Firms were super aggressive with momentum, jacking up valuations, Legendary brand names joined the party. Soon, they all were at the front line telling the world things that defied logic.

This is not what successful investors in Venture Capital had done previously. This younger group of venture investors were removed from the discipline that came before them as their disciples were no longer around. These individuals were people that built these world class brands and were focused on fundamentals and cut to the critical thing which was most important to the business. An elite team would not have made an investment such as Bird, for example. This company went public, has littered cities with bikes and bike-related products and it never fit the venture model to build and sell at a high gross margin.

So, where are we now? Many venture firms that veered from the page are looking inward, but the big pops always happen in the shadow of a steep decline. Venture investors are licking their wounds, worried about holding on to their existing portfolio as productivity comes to a screeching halt. However, firms that lived through 2000/2001 and 2008/2009 and remained patient during ‘19’-’21 are likely to have a feeding frenzy. Golden handcuffs for the best talent are coming undone. Options are underwater for distinguished engineers as they’re being asked to cut costs, layoff people, and reduce expenses. A large tech firm, we’ve heard, is no longer paying for staplers! Something like 150 masseuses are being let go, no more laundry service being provided, 200 chefs may also be on the way out, and the cafeteria will have lower quality food. Companies are entering an area of frugality. We’re about to see a separation of the cremes from the milks and the next couple years could be one of the greatest opportunities to invest in venture capital since 2008-2012, provided the team has not only the proven experience and accomplishments, but also the required discipline and professionalism Limited Partners will demand once again.