Navigating the evolving VC landscape

Transcript

I am Peter Ackerson, and I'm a general partner at Audere Capital.

Hi, I'm Maggie Springer. I'm a general partner at Audere Capital.

Audere Capital is an early-stage venture company focused on investing in five areas of critical technology that are on the cusp of what we think will be a significant multi-decade long run of impact. We invest into early-stage technology companies focused on the intersection of national security and priority, deep tech and easy, of course.

Historically, venture has been a very small and closed ecosystem or asset class and largely in deploying capital into a few geographies and into a few specific use cases. And that aperture is expanding widely. We're seeing a lot of different regions now beginning to embrace venture capital around the world. We're seeing a lot of different types of investors with different professional backgrounds coming into the market. And while many of them will prove to be tourists or not necessarily enjoy the experience or be effective within it, there will be, I think, in the future a lot more diverse investors, and there will be a lot more geographically diverse strategies in capital deployment, particularly post-COVID, and a much broader set of problems that are being solved through the deployment of venture capital into new company formation, all of which I think will be very beneficial for the market.

We've seen a significant reset in terms of valuations. And while I would say trying to time the market is a fool's errand, certainly, this makes it a very compelling time for entry. Now, the flip side of this, of course, is that there is less liquidity in the market overall. Interest rates are higher, inflation continues to be a major factor. That said, we're seeing a proliferation of really incredible companies and tied to valuations that are actually driven by fundamentals. This is almost a return to value investing. Venture is very highly correlated in the short term with interest rates and venture capital flows, which were really pronounced and really high levels of capital being raised and deployed over the last couple of years; that has completely changed. And one of the consequences is, of course, that money just becomes fundamentally more scarce in the market. And I think that includes across a number of asset classes, not just venture. And that's a short-term phenomenon, but one of the disciplines that that brings is that a lot of startups are coming into it grounded in much more fundamental valuation metrics. The pricing across the venture spectrum has reset, and that is, generally speaking, a good thing, both for founders and for investors, because from the founding perspective, it creates a lot more rigor on capital efficiency, and from the investing perspective, it creates a lot more longevity. Companies that are raising a realistic prices can then be valued, and you can have a more efficient market when it's not filled with sort of these frothy valuations.

For early-stage venture and certainly other asset classes, if inflation rates stay elevated, it's going to impact both on the allocator's side as well as on the founder and startup side. With regards to the founders and startups, what I think will happen is that we'll see only the best founders starting a company. These are going to be the people propelled either by an incredibly gritty attitude, and they just feel like they have to go do this or the ones who feel incredibly mission-driven because they have a solution that they feel the world has to have. On the allocators side, it's a tougher environment in which to raise money. And so I think this is going to lead to a couple of things. On the one hand, I think a lot of the tourist VCs that we've seen form firms and funds in the last few years are going to go out of business. This is going to further constrain capital available for founders. But what's nice is that for the firms that remain, it's going to be a moat of competitive advantage. It means that those firms will be able to participate in a bigger way in these outsized founders. And it means that for the years ahead, there's going to be a disproportionate advantage.

Venture is a ten-year asset class typically. And I think that's a good thing. You know, timing market cycles in general is not an effective strategy broadly described, but it's certainly not an effective strategy in venture. You really have to understand the markets and the technologies that you are investing into. And the earlier you go as an investor, whether it's mid-stage or seed stage, the more important the actual founders become and understanding the team and the determination. In many ways, I think of early-stage startups as kayaks. You know, they need to be prepared to weather a lot of different environments and rapids. So it doesn't really matter as much what the global macro title shifts are. One way or another, when every day you are in the waves trying to do early business formation and capture an opportunity. And so the expertise of whomever is in that seat or whichever team is in that role and the collection of investors and advisors that are surrounding them becomes critically important. And I think we're seeing all of that come together right now, which is, you know, is again, is a really fun thing to see in the market. I think it's a healthy thing. And I think if you look back at 2001, if you look back at 2008-2009, any time you come off of these sort of two or three-year peaks in valuation in an activity, there is a substantial number of companies that are fit for purpose and built for durability that end up becoming transformative over a longer period of time. And I would expect the same thing to happen here.