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7 VCs explain why the creator economy still has legs

The White House is briefing TikTokers about the war in Ukraine. A Twitch streamer’s PS5 giveaway sparks a bonafide riot. A 25-year-old YouTuber from North Carolina is one of Time Magazine’s 100 most influential people in the world.

If you underestimate the power of internet personalities, you’re not paying attention.

In Silicon Valley, “creator economy” used to be nearly as hot a buzzword as “AI” is right now. But even as content creators remain at the forefront of culture, the numbers behind venture capital investments tell a different story: Last year, the amount of money invested in creator economy companies dropped around 68% from the first to third quarter.

But creator economy investors remain unphased by what may seem like a steep decline. Several investors told TechCrunch+ that they knew that the entertainment industry would weather some twists and turns as the world exits pandemic-era lockdowns, and that trends in venture can be cyclical. Some investors even said that the creator economy has yet to reach full maturity.

To learn more about the state of the creator economy industry and how investors are thinking, we surveyed seven VCs about where the industry is headed, the rise of short form video, the shifting role of influencer marketing, and what the launch of new platforms portends.

We spoke with:

Brian Harwitt, partner, Coventure

Is the accelerated launch of new Twitter competitors a boon or an impediment to creator success?

Competition is good for creators since the platforms will have to compete for the creators’ time, which is a limited resource. To attract and keep creators, platforms will have to continue to offer monetization opportunities, which will spur potential bidding wars — as we saw with Kick and Twitch.

The creator economy has seen a slowdown in venture funding over the last few years. Did you anticipate this, and how are you preparing your portfolio companies to navigate a crowded market with less available capital?

The growth in the creator space was fueled in two parts: by COVID and the boom in e-commerce (the primary advertiser in the creator economy). People have largely returned to their ordinary lives and e-commerce has reverted to its usual pace, so the slower growth of the creator space is not surprising.

Despite this, we still expect significant growth over the next few years, and believe the market has yet to reach maturity. The best companies still have access to capital, while slower-growing businesses are preserving the cash they have.

Many VCs backed long-tail creator businesses or ones with a web3 focus, which have largely struggled to gain traction, so their attention has shifted to other areas such as AI.

What do you see as differentiated business models in this space given the intense competition?

Differentiated business models are ones that can either service the largest creators or service the long-tail with minimal human touch required.

What kinds of creator economy companies are you most excited to invest in right now?

We are excited about companies that are providing access to capital or some form of predictable monetization. We anticipate that predictable monetization and monetization infrastructure will continue to make the creator economy more investable for debt and equity investors alike.

Will the economics of the digital economy be better for creators and creator-focused startups in the back half of 2023 than the first was? How will 2024 compare to 2023?

A rising tide raises all ships, so what’s good for the creator is good for the creator-focused startup. With all of the changes in the last 12 months, many creators are just catching their breath.

This year continues to be a challenging one for the ecosystem, as brands have pulled back ad budgets, capital markets have frozen and many fear a slowing economy. Looking towards 2024, we will hopefully see a reversal in those three trends and allow for a more confident creator economy.

Social platforms have yet to figure out how to share ad revenue from short-form video. Where do you see platform-creator economics shaking out in the next few quarters?

YouTube’s 55%-45% model is a good paradigm for the platforms to mirror, but ultimately, the economic split will depend on competition and scale.

The introduction of Kick has forced Twitch’s hand to improve its payouts, so the competitiveness of platforms will hopefully be a benefit to the creators as they continue to seek the best monetization opportunities.

How can companies protect their creators in the event that they might shut down?

It depends on the company and whether or not they are genuinely creator-first. But, companies interested in protecting creators are likely to merge or sell rather than completely go under, as this would create a better outcome for their investors and customers.

How is an uneven economy affecting consumer spend on creator products?

Creator products is a nascent category, and there is likely some pent up demand to purchase their products, at least in the short term. Creators who offer lower average order value (AOV) products will likely see maintained demand, while higher AOV items may see a slowdown.

Consumers are almost through their excess savings from COVID, so the next six months will be telling for the state of consumer demand.

Do you think influencer marketing is becoming more or less powerful? How does this stack up against traditional avenues of marketing?

Micro influencers have the highest ROI for advertisers, but obviously, the least amount of scale. So CMOs and ad buyers will be significantly more ROI-focused as they approach creators and influencer campaigns.

What trends in the creator economy do you think are being overlooked?

Access to capital and predictable monetization. These are the underpinnings of a stable and mature industry.

Many social platforms have developed creator programs over the last several years. What are the different metrics you look at to gauge the success of a creator program? Which one is leading the pack?

Predictability and consistency of monetization are the most important.

TikTok is an interesting case study, because it launched a monetization platform for its creators, but the viewership and the revenue per thousand impressions (RPM) vary widely from video to video, meaning that a creator can predict how much money they will make each month even if they produce 10 videos a month.

Sasha Kaletsky, co-founder and managing partner, Creator Ventures

Is the accelerated launch of new Twitter competitors a boon or an impediment to creator success?

Despite its pervasiveness among VCs and other professional wordsmiths, Twitter is pretty much irrelevant to most creators. Word-based platforms are difficult to monetize (for both creators and platforms… just ask Twitter creditors), so Twitter and the like work best as a tool to amplify messages rather than make money or truly engage audiences.

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5 founders discuss why SAFEs are better for early-stage and bridge rounds

Fundraising is hard, so it’s no wonder that SAFE (simple agreement for future equity) rounds are popular. Conceived by Y Combinator as an alternative to convertible notes, SAFEs have long been considered a founder-friendly way to wrap a venture deal. But, as with most things, the reality is that SAFEs are only an ideal fit for founders sometimes.

To find out how the startup ecosystem is doing deals right now, TechCrunch+ recently surveyed five founders about how they’re thinking about less structured rounds like SAFEs. And it appears SAFEs are still a popular choice, except only for pre-seed and seed rounds — plus fundraising between rounds. After that, though, it appears most founders would prefer priced rounds.

“SAFEs continue to be an exceptionally appealing mechanism for fundraising, particularly from a founder’s perspective,” said Amy Divaraniya, founder and CEO of Oova. “The ease of setup, flexibility in determining terms, and absence of a formal close date make them highly advantageous. Additionally, the streamlined nature of SAFE agreements eliminates the need for extensive legal intervention, resulting in a remarkably cost-effective process.”

While several founders echoed Divaraniya, saying they liked the speed and flexibility of a SAFE round, most had a caveat: By the time a startup reaches the Series A stage, this mechanism is less attractive for a variety of reasons.

Vishwas Prabhakara, the co-founder and CEO of Honey Homes, said that he’s glad his startup raised a SAFE note for its pre-seed round, but for its recent Series A round, he didn’t even consider it.

“Due to how dilution works, it usually doesn’t make sense to stack rounds using SAFEs, in my opinion,” he added.

Both Tory Reiss, the co-founder and CEO of Equi, and Zach Blank, the founder of Hurry, agreed with that sentiment, saying founders have to pay close attention to how different investor equity stakes will convert down the line.

“There’s a significant downside for a company (and founders/employees) with a SAFE,” Blank said. “While it’s great to get investment when price can’t be determined, you need to watch out for ‘gotchas’ at the next round.”

Read on to find out how founders today are using SAFEs, what these rounds look like in today’s less founder-friendly market, and if investor-friendly terms are making inroads into early-stage fundraising.

We spoke with:

Zach Blank, founder, Hurry

Was a SAFE the option that made the most sense for your last round?

We raised a seed round ($2.5 million at a $15 million post-money valuation) in November 2021, the height of the bubble. We had a product in the market with revenue but were still very early. We had been in the market for maybe 30 days at the time we closed the round.

When speaking to investors, a SAFE seemed to be the default option, because there is no real way to price a round this early. So for investors and for us, at the time, a SAFE made the most sense.

Will you use a SAFE in your next fundraising event?

No. There’s a significant downside for a company (and founders/employees) with a SAFE. While it’s great for getting investments when the price can’t be determined, you need to watch out for “gotchas” at the next round.

For example, let’s say you raise on a SAFE at a $15 million post-money valuation and a 20% discount. If your next round is priced at $50 million (good for you!), then all your SAFE investors convert at that price from a dilution perspective. They don’t get diluted at all. That’s the upside for them for being early, but it then leaves less room for new investors down the line.

The most ideal scenario is that you raise at $15 million in the round subsequent to a SAFE with the same cap.

Would you say SAFEs are as attractive to you as they might have been a few years ago? Why or why not?

No. Ideally, as a founder, you’re able to bootstrap to a business that can be priced. And if you can’t, you should raise a very small amount (more than $500,000) from angels at a reasonable price, say $2.5 million.

Massive seed/pre-seed rounds are a thing of the past and were just a result of ZIRP [zero interest-rate policy] and the bubble we were in.

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Can Europe’s cannabis market avoid the US’ mistakes? Investors chime in

When it comes to Europe’s cannabis market, the biggest piece of news this year is what didn’t happen. Contrary to what a lot of people expected, Germany isn’t on the way to legalizing recreational use of marijuana. Instead, the EU’s most populated country watered down its law reform plans after liaising with regulators.

Is Germany’s decision and the precedent it has set bad news for VCs who invest in cannabis startups in Europe? Not necessarily, and it could even be good news for some. According to Oliver Lamb, co-founder of Óskare Capital, Germany’s “push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical market.”

“The hybrid recreational-medical experiment has already been played out in North America, and there were a painful amount of lessons learned that it would be reckless to ignore,” he said.

Lamb, like other investors, is wary of the mistakes they’ve seen being made in the U.S.: “The blurred line between the medical and recreational sectors has undoubtedly been to the detriment of targeted medication development,” he said.

“It is crucial to use lessons from paths that others have laid before you. In New York, we’ve seen a failure to do this, with just a handful of dispensaries up and running alongside lax law enforcement, which led to an overt and booming illicit market,” said Matt Hawkins, founder and managing partner at Entourage Effect Capital.

However, some funds are worried that the total addressable market for legal cannabis on the continent is limited and has been affected by Germany’s decision. “The scaling back by Germany has made us more hesitant to deploy capital in Europe,” Hawkins said. “Germany’s process has indicated the entire continent will struggle to create a commercial adult-use market in the coming years and have a limited TAM.”

Similarly, like other private businesses looking to raise venture capital, cannabis startups aren’t immune to the global repricing that investors are pushing for. “European cannabis companies are still overvalued,” said Emily Paxhia, co-founder and managing partner at Poseidon Investment Management.

For founders of cannabis-related startups hoping to weather the slowdown, the advice isn’t very different from what all entrepreneurs are being told at the moment: survive and advance. That’s Poseidon’s motto, Paxhia said.

For cannabis companies that know they won’t survive, finding a buyer seems to be a viable option, as consolidation is expected in the coming months. But whether we are talking about investments or M&A, we are in a strong buyer’s market, Lamb warned.

Read on to find out where these investors see the next opportunity, how they plan to tackle the market following Germany’s decision, and how to best pitch them.

We spoke with:

Oliver Lamb, co-founder, Óskare Capital

Is cannabis more legally accessible in Europe this year than it was when we conducted our previous survey last year? Have there been any key regulatory changes at play?

On the medical side, cannabinoid therapeutics and non-cannabinoid therapeutics (i.e., therapeutics that modulate the endocannabinoid system but do so without cannabinoids) are notably increasing in availability.

There are many factors at play that explain this shift, amongst them [being] increases in tailwinds and reductions in headwinds. Today we have more, higher quality clinical data demonstrating the efficacy of these medications for various conditions, coupled with an uptick in highly qualified teams that are bringing these medications to market.

As for the tailwinds, difficulties in patient access have long hindered prescriptions of medications that target the endocannabinoid system (the mammalian regulatory system that reacts to cannabinoids and cannabinoid-like molecules, similar to the central nervous system).

However, we are excited to see a number of technologies and platforms linking specialized doctors with patients in need of these medications. One such example is Leva, whose digital clinic is tackling the vastly underserved chronic pain market in the U.K.

Alongside this, there is a growing acceptance within medical communities of the suitability of ECS-modulating medications for certain pathologies. At a conference in Berlin this month, a founder happily relayed that a recent meeting of general practitioners dedicated two hours to talk about medical cannabinoids. This is a clear indicator of the increasing understanding and adoption of these medications by doctors across Europe.

Aside from watered-down plans to legalize recreational use, Germany imported a record amount of marijuana for medical and scientific use in 2022. Is this taking focus away from the fact that imports are slowing?

Although Germany’s decision was undoubtedly unpopular at companies that bet on the legislation going in the opposite direction, this push to slow down the legalization of recreational cannabis is positive for the medical and pharmaceutical market.

The hybrid recreational-medical experiment has already been played out in North America, and there were a painful amount of lessons learned that it would be reckless to ignore. Specifically, legalizing recreational cannabis in tandem with medical use in North America can be seen to have diminished the incentives for researchers to develop targeted therapeutics for specific pathologies, given the flood of cannabis flower being distributed through dispensaries. That happened despite a preference held by the majority of doctors to prescribe targeted and licensed treatment that does not need to be smoked.

The North American approach also blurred the lines between the recreational and medical markets, strengthening the impression that users of such therapeutics were simply prioritizing pleasure while claiming a genuine need.

This misconception is not only counterproductive for patients looking for proven treatments, [but] it also detracts attention from the fact that ECS-modulating medications can provide not only far superior side-effect profiles compared to traditional pharmaceuticals such as opiates, but also treatments for conditions that are currently untreatable.

The Czech Republic might end up legalizing recreational cannabis use before Germany, but it is a smaller market. Is it big enough to move the needle and find out what the EU will tolerate?

Peter Lynch once noted that if you spend 13 minutes a year on economics, you’ve wasted 10 minutes. Politics is arguably the same. Influences on international regulation are vast and varied, and even if you have a good idea of the outcome, the timings are just as complicated to predict.

Therefore, as a rule, we don’t bet on regulation. Instead, we invest in what we know: strong teams, innovative science and untapped market opportunities. We select our investments assuming that the regulatory landscape is fixed as it is today. That way, if nothing changes, we know that they can succeed regardless, and as and when things continue to open up, they can be positioned to benefit further.

A prediction I do feel confident in making is that governments and medical communities will continue to gain understanding of the benefits of these medications.

How has your approach to investing in the cannabis sector changed in the last 12 months? What are your expectations for the next 12 months? Is consolidation in the cards in that period?

With regards to our thesis, not at all. We started by focusing on Europe and continue to do so. Likewise, we launched the fund to target life sciences and deep tech investments in the sector, and this remains unchanged, largely due to the fact that our portfolio is performing very well.

It’s also gratifying to see that a number of U.S. funds are now looking to Europe for the next wave of growth in the sector. This is an asset, as we like to syndicate rounds and having stakeholders across the pond is often helpful when it comes to intercontinental expansion.

Here are our predictions for this year, and those we made for 2022 are here.

We’re happy to say that most of our past predictions have come to fruition, and those for this year are on track to do the same.

What advice are you giving your cannabis-related portfolio companies right now in terms of preserving or extending their runway?

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8 VCs explain why there’s good reason to be optimistic about cybersecurity

It wasn’t long ago when it seemed like the tide was beginning to turn on ransomware. But 2023 has shown us that’s not the case: We’re only half way through the year, yet hackers are already claiming more victims than ever before, reaffirming the importance of cybersecurity for every business.

While 2023 has been fruitful for hackers, it has been less so for the startups trying to defend against them. Investment in cybersecurity has fallen well below the record highs recorded in previous years: security startups saw $2.7 billion in funding the first quarter of the year, a 58% drop from the $6.5 billion recorded in Q1 2022. And just 149 were deals announced in Q1 2023, the lowest total in years and a 45% drop from a year earlier.

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Investors, however, remain optimistic. The explosion of large language models and generative AI has many excited about the technology’s potential in the cybersecurity space. Others believe that the need to secure the cloud and connected devices — coupled with a drop in valuations — makes now the perfect time to invest.

We checked in with some of the leading investors in cybersecurity to hear their thoughts on the funding slowdown, what market trends they are most excited about, and cybersecurity’s ongoing diversity problem.

We spoke with:

Alex Doll, founder and managing general partner, Ten Eleven Ventures

Funding for cybersecurity startups has flatlined. How has your investment strategy changed to reflect the new market conditions?

We successfully closed our latest cyber-only, stage-agnostic global fund in June 2022 and are actively deploying capital from it. Despite the current environment, our investment strategy is largely the same as it has always been, although, within our cyber-only, stage-agnostic and global mandate, we are always agile and adjusting to look for the stages, sub-sectors and geographies where we see the most significant opportunity at the best value.

Right now, those sub-sectors include new approaches in the software supply chain, identity, privacy and trust. We are actively investing across stages where we see market opportunity and compelling tech. Just last week, we announced a seed investment in Silent Push and a Series B investment in Blackbird.ai. We’re still hunting actively, including meeting with several inspiring entrepreneurs at InfoSec in London.

While growth-stage opportunities have decreased at the pre-IPO stage with the downturn in the public market, we’ve found some very exciting prospects at Series B and C, where non-cyber specialist funds have pulled back, and we’ve been able to be strategic in helping those companies on their next chapter.

What advice would you give your portfolios to survive the current challenging market?

During uncertain and potentially scary times like these, leaders must stay close to their teams, communicate an inspired and motivating vision, and give team members time together to solve problems collaboratively. This kind of culture can be challenging to reinforce as we normalize from the pandemic; we are still adjusting to remote work routines, and have experienced a lot of shocks (including the SVB crisis) over the last 12 months. But it is more important than ever.

Given that many public cybersecurity companies are posting faster revenue growth than other tech companies, should cybersecurity startups lean more heavily into pursuing revenue growth over cash conservation than the average startup today?

There has undoubtedly been a shift in perspective; investors are now more heavily weighting capital efficiency metrics when making investment decisions for cybersecurity companies raising new rounds. So companies need to keep these metrics in mind, especially early on, and as they approach maturity.

On the other hand, companies should be mindful of not “starving growth” by underinvesting in sales and marketing or, importantly, R&D. Experimentation is still essential when developing the best go-to-market strategy for new products and for new audiences.

There should be more intention around measuring the spending on R&D and looking for leading indicators of success as projects develop. For example, there is always a lot of attention on quantifying the marketing/sales funnels and channels (and for good reason), but I am always amazed at how little time is spent on R&D productivity metrics. R&D productivity stats may be less developed and more subjective to a degree, but that’s “art” that is required learning for every cybersecurity CEO.

Every R&D resource needs to be accountable to the team/business, like sales and marketing are accountable every quarter. For example, measuring innovation release cycles and the number of true “market tests” can be a very predictive but overlooked statistic for early-stage companies. Great companies have an inherent urgency in their innovation cycle times.

Is cybersecurity-focused venture capital in a downturn? Do you expect venture investment in the category to pick up in the back half of the year?

While there has been a decline, cybersecurity investing will accelerate again within the next 12 to 18 months. Cybersecurity spending is still a priority for enterprises, and we are seeing interesting new investment areas — including protecting AI and organizations from the risks of disinformation — that will propel more investment rounds going forward.

Additionally, new funds are being raised right now in the space that will contribute to increased funding levels in the future. Overall, cybersecurity is still seen as a strong growth area, and it is resilient compared to many other sectors.

Valuations have dropped, yet cybersecurity M&A activity remains flat. Are you accelerating your cybersecurity investments to take advantage of lower prices?

We are active where we see well-priced opportunities, of course, and it is refreshing to invest when expectations on valuation are not so inflated. So, yes, we believe it is a good time to invest, and we are actively looking for companies with expectations aligned with today’s environment.

Recent data shows that only 24% of the cybersecurity workforce are women. Are you seeing changes in cybersecurity founder demographics, or do they mirror what we’re seeing amongst cyber workers more generally?

While most cybersecurity founders we meet are men, we’re seeing increasing numbers of women executives in these companies. Notable examples of innovative CEOs in our portfolio are Poppy Gustafsson, CEO of Darktrace, and Anusha Iyer, founder and CEO of Corsha.

A lot of the research and thought leadership within the portfolio is coming from women, such as Marta Janus, principal adversarial ML researcher at HiddenLayer, or Amanda Berlin, lead incident detection engineer at Blumira, which is exciting. We are actively meeting with new female founders and executives all the time, and would love to meet others who are looking to speak with a cybersecurity specialist investor.

Looking ahead, what cybersecurity trends are you most excited about from an investing point of view?

We think that AI brings several new dimensions to the cybersecurity sector, including augmenting security analysts and making traditional security operations tools easier to use. Also, as you can see with our recent investment in HiddenLayer, machine learning models, including LLMs, must be protected from malicious attacks. We also closely watch new risks emerging from AI-enabled automation, including bots, and symptoms like vast amounts of quickly spreading disinformation.

How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?

Historically, we have invited founders to submit via our website or email. The most important details to include are the team’s background, product idea, initial thoughts on early/milestone customers, and some idea of a round size, as well as some thoughts around the “use of proceeds”: Why that amount is required and how the founder would spend it in the next 18 to 24 months to get to the next milestone.

Before they get on a call with us, founders should know that we are cybersecurity specialist investors and already have a lot of knowledge on general dynamics in the space. So beyond general statistics on breaches and industry growth, we would like to know the founder’s unique experience in cybersecurity and how that contributes to the product they are looking to build and grow.

We would like to see early evidence that they are getting early and rapid feedback from potential buyers or design partners. The founding team’s ability to receive and iterate quickly on this feedback is very important. Great companies have inherent urgency in their innovation cycle times, and we think this predisposition can be seen very early in the DNA of a winning founding team.

Barak Schoster, venture partner, Battery Ventures

Funding for cybersecurity startups has flatlined. How has your investment strategy changed to reflect the new market conditions?

Our investment strategy remains consistent. I founded a cybersecurity company before becoming a venture capital investor, and my passion for the sector has not changed. Cybersecurity remains a critical area of focus for Battery, and we have expanded our scope to include other related sectors, including privacy protection, developer tools, cloud computing, data analytics and artificial intelligence. We aim to capture opportunities in adjacent markets that have synergies with the cybersecurity market.

We maintain a long-term perspective and prioritize investments in startups with promising technologies and strong market potential, even if the immediate funding landscape is challenging.

What advice would you give your portfolios to survive the current challenging market?

Focus on the customer: Continue building software that people want, meet customer needs, listen to feedback and proactively address their pain points. Additionally, many cybersecurity companies may need to revisit their go-to-market strategy by exploring different distribution methods (such as direct, managed security service providers, value-added resellers, open-source, self-service, etc.); by adapting to the needs and compliance regulations of customers in newly emerging market segments; and by investing in research and development to uncover new opportunities, improve efficiency and differentiate themselves in the market.

It is also critical that companies preserve cash flow and ensure efficient resource allocation. We are advising our companies to closely monitor cash flow and maintain a healthy financial position to ensure sustainability.

8 VCs explain why there’s good reason to be optimistic about cybersecurity by Carly Page originally published on TechCrunch

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15 investors lift the lid on the biggest surprises of H1 2023

The first half of 2023 hasn’t been kind to startups, but venture capital investors weren’t spared migraines either. Some VCs had a tough time of it, with their portfolio companies finding it hard to fundraise, while others dialed back their investment cadence to match the current investment climate. But what would they have done differently if they had a crystal ball? To find out, we asked 15 investors what they found to be the most unexpected trends of the year so far.

Rather unsurprisingly, the biggest surprises all seem to be related to AI in one way or another. Several investors said while they were caught unawares by how quickly generative AI took off, the real eyebrow-raiser was VC funds going from a conservative stance to jumping headfirst into AI-related companies’ cap tables seemingly overnight.

“The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But it really is a tale of ‘haves and have-nots’ in fundraising right now,” said Matt Murphy, partner at Menlo Ventures.

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Jenny He, founder and general partner at Position Ventures, had a similar take: “I was surprised at how quickly the AI boom happened in 2023 and how many top tier firms went from a wait and see approach at the end of 2022 to becoming very active in 2023. Some of our portfolio companies went from quiet insider rounds to very hot competitive rounds at a rapid markup at the beginning of 2023, spurred by the AI boom.”

Not all AI-related surprises were positive, though. John Tough, managing partner at Energize Ventures, was baffled by how readily some firms cannibalized their climate funds to buy into AI. “We knew generalist investor interest in climate was fleeting, but it has still been surprising to see how many household names planned to launch a climate focus area and then moved along to LLMs and AI instead,” he said.

For Rajeev Dham, partner at Sapphire Ventures, this rapid increase in AI investment also brought some worries. “There’s no question that advancements in AI will spawn an incredible set of companies, disrupt industries and be the transformative technology that drives far more productivity within existing companies, but my concern is that we’re still in the very first inning, which will lead to a lot of lost capital,” he said.

It wasn’t all about AI, though. Mark Grace, an investor at M13, was surprised by the range of early-stage valuations: “Valuation ranges are all over the place, especially at the Series A stage. We all know how quiet the later stages have been, and the seed market has seemed strangely resilient. However it has been interesting to see the wide variance in Series A pricing.”

As for what investors wish they’d done differently, several felt they should have been faster on the uptake and more active than they were. “In macro environments like this one you always regret not being more active while everyone else was fearful,” said Logan Allin, managing partner and founder at Fin Capital. “These cycles only come around so often and are a boon for net-new investments in portfolios.”

Jason Lemkin, CEO and founder of SaaStr, wishes he had taken the time to meet with more founders. “I slowed down in 2022 as did many, and should have picked it up more. Multiples are still relatively low in SaaS but great companies are being formed as often as ever.”

But our favorite answer to this question by far came from Howie Diamond, managing director and general partner at Pure Ventures: “Not have personally invested in First Republic Bank stock!”

Read on for more about what investors felt were the biggest surprises and what they learned from the first half of 2023.

We spoke with:

Matt Murphy, partner, Menlo Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

The No. 1 surprise has been the speed of financings and valuations in the generative AI space. Probably no surprise there. But, it really is a tale of “haves” and “have-nots” in fundraising right now.

The No. 2 surprise is the scarcity of later-stage companies raising. It’s not that surprising, but behind the scenes, companies are still getting their houses in order, and it’s really difficult to sell right now, so companies are grinding through things until they find more predictability.

No. 3 would be the amount of M&A and companies trying to be acquired. We’re only going to see that accelerate.

In hindsight, what do you wish you had done differently in the first six months of 2023?

We mobilized the entire firm around GenAI and it paid off. We’ve got a strong portfolio and continue to invest. We’ve even got a handful of investors who are attending hackathons and coding in their free time. I only wish we’d started building that pipeline more purposefully in 2022. So many of these businesses are being started by founders leaving companies with pockets of AI talent, so you really need to be focused upstream on founders before there is even a full twinkle in the eye. We have been doing a great job of this so far, and really doubled down on Menlo’s Future Founders program this year.

Sheila Gulati, managing director, Tola Capital

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

Startup investing in 2023 has been defined by difficult macroeconomic headwinds on one hand and accelerating AI tailwinds on the other. The dichotomy has created a startup investing environment of haves and have-nots that has been quite interesting and, to some extent, surprising.

I’m surprised that the AI conversation is not centered more on the potential of AI for good. There are intractable problems that society has yet to solve where AI could offer a breakthrough. Technology has a history of presenting these types of breakthroughs and thus has been a harbinger of optimism.

AI is no different, and I see education as a prime example of where AI could offer every child individualized instruction that addresses their style of learning, pacing needs, and adaptive modalities. This could advance education practices for all learners and provide the inalienable right to education for all offered by a good society.

I’m obsessed with thinking through these types of scenarios and working on them, as AI will offer many breakthroughs for the world.

In hindsight, what do you wish you had done differently in the first six months of 2023?

While we spent time on it, we wish we had spent even more time with academics and researchers at top-tier institutions focused on AI. We believe a good subset of the AI generation’s decacorns will originate from deep technical research, much of which is in academic research labs today.

Gen Tsuchikawa, CEO, Sony Ventures

We’re curious if you’ve run into any surprises in the startup investing world thus far in 2023.

15 investors lift the lid on the biggest surprises of H1 2023 by Karan Bhasin originally published on TechCrunch

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15 investors talk about their investment cadence in H1 2023

As part of our ongoing coverage of VC performance in the first half of 2023, TechCrunch+ surveyed 15 investors about their investment cadence and their plans for the second half of the year.

As expected, it appears a good mix of investors wrote checks at the rate they’d aimed for, while others fell a bit short. However, there is a sense that a slower investment cadence is going to become the new norm. Rajeev Dham, partner at Sapphire Ventures, and Mark Grace, investor at M13, both noted that the rapid investment cadence of the pandemic years has passed, and the adjustment period has been a bumpy ride for some.

However, those who operated at a slower cadence seem to be favoring a more cautious approach. Gen Tsuchikawa, CEO of Sony Ventures, said, “We have always been selective in our investments, and we are keeping the cadence of those investments flexible for now.”

Dham also advocates prudence for the coming period. “Once we understand what the new operating cadence is of businesses and then apply the appropriate price, which we now all know what it is (what it has always been!), then we can act accordingly. The other massive shoe to drop is further retreat from the most active investors in the 2018–2021 era. The more they retreat, the more likely there is to be less capital in the system chasing startups, which also level sets on price.”

Grace has his eyes firmly set on the full-half of the glass: “I think dealmaking cadence will continue to rebound. You need to be an optimist in this industry!”

Logan Allin, managing partner and founder of Fin Capital, stated that his firm was the most active fintech investor across the globe in Q1 thanks to its focus on early-stage startups founded by repeat founders.

He gave us some insight into his firm’s confidence: “This accelerated rate of new company formation is a function of (a) Management teams turning over the reins to professional management to take the company public or exit via M&A or buyout, and (b) seasoned entrepreneurs with underwater options that are not worth sticking around for to vest further.”

Read on to learn more about the investing climate of the past six months, and how these investors aim to tackle the next few months.

We spoke with:
Matt Murphy, partner, Menlo Ventures
Sheila Gulati, managing director, Tola Capital
Gen Tsuchikawa, CEO, Sony Ventures Corporation
Logan Allin, managing partner and founder, Fin Capital
Jason Lemkin, CEO and founder, SaaStr
Kaitlyn Doyle, vice president, venture, TechNexus Venture Collaborative
Rajeev Dham, partner, Sapphire Ventures
Jenny He, founder and general partner, Position Ventures
Oliver Keown, managing director, Intuitive Ventures
Rex Salisbury, founder and general partner, Cambrian Ventures
John Tough, managing partner, Energize Ventures
John Henderson, partner, AirTree
Christopher Day, CEO, Elevate Ventures
Mark Grace, investor, M13
Howie Diamond, managing director and general partner, Pure Ventures

Matt Murphy, partner, Menlo Ventures

Did your investing cadence meet your expectations? Did you exceed your targets or undershoot them?

The back half of 2022 was dead. Things suddenly picked up in late February, and we felt it across the board. We made investments in Anthropic and Typeface and have continued at a fairly rapid pace since then. In Q2, we made several commitments, including two life sciences companies, one digital health, one hard tech company and a few SaaS companies. So, the end of Q1 picked up and Q2 really accelerated. We even had a term sheet in on a company and we won the deal, but it got acquired.

Is your firm planning on accelerating its dealmaking cadence in the back half of 2023? Why or why not?

Q2 was already busy and active for us, but mainly at the early stage. We have three funds: an incubation fund (Menlo Labs), which has been steady state; our Venture Fund, which picked up significantly in Q2; and our Inflection Fund (defined as early growth in companies with $3 million to $10 million ARR), which was still slow in Q2.

We expect Labs and the Venture Fund to remain just as busy as they have been from a pacing standpoint, but [we] expect the Inflection Fund will accelerate significantly in the back half of the year. About 80% of the companies in our sweet spot haven’t raised in two-plus years, and many will need to come back to market in 2H 2023. We’re excited about that segment of the market, where there is early but predictable scale and where valuations have settled substantially.

There will be many flat and down rounds, and there should be no stigma around that. The multiples VCs will use to value companies will be different, but that doesn’t change whether a business is good or not. So we’ll all get past valuation and focus on building great companies.

Sheila Gulati, managing director, Tola Capital

Did your investing cadence meet your expectations? Did you exceed your targets or undershoot them?

Our current focus is AI, primarily in the areas of domain-specific foundation models, AI/ML tooling, AI SaaS applications, AI compliance and governance, and AI security tools.

We have closed deals in these spaces in 2023, but the frenzy around AI has definitely meant a lot of capital has rushed into this market. The result has been that we have backed off certain deals based on valuation, and we expect this to continue in the AI world. It has meant fewer deals overall.

Is your firm planning on accelerating its dealmaking cadence in the back half of 2023? Why or why not?

We’re focused on doing the right deals. Generational companies will emerge from this transformative period defined by AI, but there will be many losers, too.

15 investors talk about their investment cadence in H1 2023 by Karan Bhasin originally published on TechCrunch

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11 VCs reveal how hard it was for their startups to fundraise in H1 2023

Everyone knows that raising venture capital has been harder for startups lately — unless you are building an AI startup, of course. But instead of only talking to founders, we’re flipping the script today.

We wanted to hear from investors how their portcos are handling a cash-light environment. To that end, TechCrunch+ recently asked 11 VCs how the first half of 2023 bore out for their investments.

From their answers, it appears a startup’s ability to fundraise in today’s climate is based on several key factors, including capital efficiency, the market and its needs.

Q2 failed to bring a funding reprieve for web3 startups and unicorns

How bad was H1 2023?

Menlo Ventures’ Matt Murphy was succinct when we asked how 2023 was shaping up for his firm’s portfolio companies: “Fundraising is challenging, full stop.”

“Challenging” is a good descriptor. So is “quiet,” which is how Jason Lemkin of SaaStr Fund put it. For Kaitlyn Doyle of TechNexus Venture Collaborative, the year has been mostly “flat rounds with companies trying to delay the valuation discussion.” She added that the second quarter felt a lot like the first, with investors and startups taking a “wait and see” stance.

Other investors had slightly brighter perspectives on H1 2023. Rex Salisbury of Cambrian Ventures felt the narrative that “this is a terrible time to raise” is simply not true, especially at the early stage. That sentiment matches what we’ve seen thus far in the data: The earlier a startup goes out to raise a round, the better its chances of landing a strong valuation. Indeed, the massive repricings of the public market are yet to trickle down to seed and pre-seed deals.

11 VCs reveal how hard it was for their startups to fundraise in H1 2023 by Alex Wilhelm originally published on TechCrunch

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4 VCs illustrate why there’s good reason to be optimistic about the machine learning startup market

When you talk about investments in artificial intelligence startups versus machine learning startups, it’s important to distinguish “AI” from “machine learning.” Those phrases are often used interchangeably, but they carry a slightly different meaning.

Machine learning, or ML, is a method of training AI models so that they can learn to make decisions. Put another way, ML involves training models to solve specific tasks by learning from data and making predictions. AI, on the other hand, is the broader concept for systems that mimic human cognition.

So ML is a subfield of AI but not the same thing.

Lonne Jaffe, managing director at Insight Partners, explains that Insight uses a “three-layer” framework to unpack the definition of an ML startup.

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At the first layer, he says, are core infrastructure companies — products with which a person builds an ML system. At the second layer are apps that seek to tackle a particular use case or workflow using ML. The third layer, meanwhile, comprises ML startups that manifest within an industry as an “actual player” in that industry — think startups that become a startup bank, even if the core of the startup is still ML talent.

According to this framework, examples of ML startups range from Weights & Biases, which provides tools to create and monitor AI models, to Iterative Health, a healthcare company that leverages an ML system designed to identify cancerous polyps from a colonoscopy.

The market for ML is quite large, with a report from Grand View Research estimating that it was worth $49.6 billion in 2022 and could grow at a CAGR of 33.5% by 2030. And it’s been building for some time: A 2021 survey by Dresner Advisory Services found that 59% of all large enterprises are deploying ML, with 50% of those organizations claiming to have 25 or more ML models in use today.

Why is this area growing so fast? 451 Research, the tech R&D group within S&P, posited in a recent report that the initial wave of ML adoption focused on making legacy systems and processes smarter — like business intelligence, customer support, sales and marketing and security. But now, as those applications mature, the attention has shifted to more niche, industry-specific and lucrative ML applications, particularly in finance, retail, manufacturing and healthcare.

Jerry Chen, a partner at Greylock, believes we’re just starting to see what the next generation of ML companies will be. “The cycle is going strong,” he told TechCrunch+. “I’m curious to see how incumbent companies and tech players enter, compete or partner with the startups. In particular, I think we will see some interesting go-to-market partnerships in the next few months.”

But what about the broader VC ecosystem? Are VCs in general optimistic about the future of ML?

To get a better sense, TechCrunch+ surveyed investors including Chen and Jaffe about the state of ML investing today. We touched on the health of the ML funding landscape, and whether the hype around ML, which several years ago was quite strong, is beginning to die down. We also asked investors what challenges stand in the way of ML tech adoption and what the next few months might look like in terms of market growth.

We spoke with:

(Editor’s note: The following responses have been edited for length and clarity.)

Lonne Jaffe, managing director, Insight Partners

How strong is the ML venture fundraising market today and how has it evolved thus far in 2023?

The release of ChatGPT five months ago sparked the fire of startup innovation around ML, along with a renewed fundraising dynamic. We’ve gone from systems of prediction — like classification or recommendation systems — to systems of creation. While funding has been flowing into generative ML systems, there has also been a lot of progress in more “traditional,” discriminative ML systems, like prediction or classification systems.

We’ve been particularly active recently in applied computer vision ML systems in healthcare, some of which may soon match or even exceed human physician performance across certain domains. For example, dental startup Overjet uses AI to analyze dental X-rays to help dentists decide if a tooth needs a filling or a crown, improving patient outcomes.

4 VCs illustrate why there’s good reason to be optimistic about the machine learning startup market by Kyle Wiggers originally published on TechCrunch

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With $10T on the line, 6 fusion investors explain why they’re all in

Fusion power could be considered the quintessential venture capital bet: It’s expensive and risky, but the potential rewards are enormous. The world paid $10 trillion for energy last year, according to the IEA, so even a single-digit percentage of that pie would generate revenues in the tens of billions. Oh, and a commercially successful fusion power plant would change the world.

But that’s just part of the reason why investors have been diving deep into fusion power in the last few years. “There is more confidence than before fusion machines getting not only to ‘scientific breakeven,’ which is getting more energy out of the fusion reaction than the energy that it takes to get to the fuel, but also getting enough excess energy to make for viable commercial power plants,” Phil Larochelle, partner at Breakthrough Energy Ventures, told TechCrunch+.

The field achieved a milestone late last year when the Department of Energy’s National Ignition Facility announced that it had created a fusion reaction that produced more power than was required to spark the fuel pellet. There’s still a long way to go, but net-positive controlled fusion is no longer just theoretical. “The industry is slowly leaving the lab and moving into the engineering phase,” said Wal van Lierop, founding partner at Chrysalix Ventures.

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Momentum has been building over the last decade, though. “This recent renaissance in fusion has seen a blossoming of diverse technologies,” said Thai Nguyen, partner at MCJ Collective.

Breakthroughs in superconducting magnets coupled with exponential advances in computing power and machine learning have transformed the field seemingly overnight. More powerful and efficient magnets helped breathe life into the field, and the computing advances allowed researchers to simulate a potential reactor’s conditions in a fraction of the time previously required. Suddenly, small teams could feasibly design and tweak reactors.

“All of this adds up to an increased pace of innovation across a range of fusion approaches,” said Alice Brooks, principal at Khosla Ventures.

As private funding has rushed in, it has also allowed teams not only to refine existing reactor designs, but also explore alternatives that had previously been dismissed. “The transition to private science funding with a focus on commercial relevance has put experimental (and physical) heft behind a lot of concepts that had been percolating in academia for years, but largely couldn’t get funded given the gravity of tokamaks and laser inertial fusion mega-projects,” said Joshua Posamentier, managing partner at Congruent Ventures.

That doesn’t mean commercially viable fusion is a sure thing, or that investors can expect returns on the usual timelines. On the contrary, “if you have a traditional five- to seven-year time horizon venture fund, it is difficult for a fusion investment to make sense.” Katie Rae, CEO of The Engine, said.

Rather, firms are investing on much longer timelines, in part because it’s what the sector requires and in part because the potential market is enormous. “The economic opportunity justifies the timeline,” Rae said, adding that investment figures are likely to increase in the coming years. “I expect we’ll see bigger amounts going into startups as they accomplish their next set of milestones.”

Read on to learn more about what these investors expect from fusion, when they expect the technology to become commercially viable, and balance that academia needs to strike with venture to truly push the envelope.

We spoke with:

Katie Rae, CEO and managing partner, The Engine

Fusion has broken a lot of promises in the past. What’s different this time? 

It’s easy to look from the outside and believe the adage of “fusion is always 30 years away.” But if you dig into the research, there has been a steady beat of scientific progress and accomplishments in fusion since research really began in the 1950s. In fact, the progress has actually progressed faster than Moore’s law. What’s different now versus earlier is the confluence of a few key workstreams.

There have been a few significant milestones achieved in the industry in the last few years. In September 2021, Commonwealth Fusion Systems demonstrated, at scale, an entirely new type of superconducting magnet technology that enables a new commercial pathway for fusion energy.

In December 2022, the National Ignition Facility at Lawrence Livermore National Lab demonstrated a fusion experiment that got more energy from the plasma than it took to heat it, or Q>1, for the first time in history. This is an example of the robustness and advancement of the simulation tools that exist; this was a long predicted result and confirms much about plasma and fusion physics. Additionally, there has been significant innovations and progress in ancillary technologies, such as materials, advanced simulation and computational capabilities, and electronic components, that enable new capabilities and technical development on more accelerated timelines.

Which approach to fusion do you think holds the most promise and why (e.g. tokamak, shear-flow stabilized Z-pinch)?

With $10T on the line, 6 fusion investors explain why they’re all in by Tim De Chant originally published on TechCrunch

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VCs remain confident alternative protein has a real future despite public-market woes

How well have alternative-protein companies done in the past year? It depends on who you ask.

The industry has had an interesting go of it between the U.S. getting comfortable with cultivated meat production, layoffs and countries banning production. Yet, startups and investors are hanging in there.

To get the pulse of what’s germinating in this fast-rising industry, TechCrunch+ surveyed five investors, all active in various areas of investment in alternative protein, and they had a lot to say on the subject.

Nate Cooper, managing partner at Barrel Ventures, bluntly pointed out the valuation mismatch that startups in the sector enjoy, saying too many “food tech” companies are today valued as if they were pure technology plays. “At the end of the day, they are selling a CPG product and should be valued as such,” he said. “Until this stops, there are unfortunately going to be a lot of investors and companies left holding the bag, and a lot of companies that, realistically, will never grow into the private valuations they were given.”

Many of the startups tackling food are doing so to help improve the Earth’s climate and change the dependency on animal-based foods. Rosie Wardle, co-founder and partner at Synthesis Capital, said it is also driven by consumer demand for the same.

4 investors discuss the next big wave for alternative seafood startups

“Shifting away from animal proteins and toward alternative proteins will be necessary for governments to address climate impacts and to reach their net-zero targets,” Wardle said. “To this end, we are already seeing alternative proteins highlighted by governments across the world as a key solution to the climate crisis, and we expect this focus to grow in the coming years.”

However, more infrastructure is needed to ensure alternative proteins can be produced at levels that will make an impact. While venture capital is helping here, companies are getting creative when it comes to additional funding sources to build manufacturing plants, said Alice Brooks, principal at Khosla Ventures.

“It’s likely that startups will need to fund their first plants largely with venture capital,” Brooks said. “However, we are seeing companies using creative ways to fund their buildouts with partnerships. We encourage startups to prove their unit economics and scalability with the minimum size plant possible so they can get out there and test with customers.”

Read on to learn how companies can get more consumers on board with eating plant-based alternatives, where the gaps are in the mainstream manufacturing of alternative proteins, and who they think are some of the “bright spots” in the industry so far.

We spoke with:

(Editor’s note: The following responses have been edited for length and clarity.)

Alice Brooks, principal, Khosla Ventures

Beyond Foods and Impossible are clear incumbents, but both cited declining sales last year as the reason for their layoffs. How can alt-protein companies reach more people and earn greater customer acceptance?

The market is still early for plant proteins and we are seeing them being adopted across a range of products. Any big change, like this one, takes years for customers to adopt. For new entrants, the key to a good product is taste and cost. Can it be as tasty as the conventional option? Can it be comparable in cost?

Have valuations in the alternative-protein space compressed in line with what we’ve seen with Beyond on the public markets? How has the changed investing landscape impacted your strategy in the sector?

In the past year, given recent economic conditions, the bar is higher for fundraising. In the food tech space, we have not seen valuations soar as much as they did in other areas, but we’re still advising our companies to focus on de-risking the most critical technical and commercial milestones with each financing.

The days of growth at all costs are abating, and there is now a greater focus on demonstrating valuable commercial proof points earlier in a company’s life.

VCs remain confident alternative protein has a real future despite public-market woes by Christine Hall originally published on TechCrunch