Navigating a new normal in fundraising

Whether you’re a venture capitalist looking for an exit, a limited partner looking for a reason to invest, or a startup looking for capital, it’s been a challenging time to be in the fundraising space. Interest rates are on their way down, but money remains tight, and IPOs have been few and far between.

“A lot of things work in good times, but the challenge has been now that the deployment cycle has slowed, and the ability to get liquidity back and share it to LPs has slowed,” said BofA Securities’ Shawn Hoyer, who led a discussion of the current environment at the Bank of America Triangle Innovation Summit.

Players in the market — investors and entrepreneurs — are still adjusting to the new reality that’s followed the end of the easy money era, Hoyer said. “A lot of VCs recognized they were supporting excessive founder behavior in the marketplace — like giving a founder $50 million to take off the table on a $20 million revenue software company, was probably a bit much.” he said.

He recalled talking to a leading VC in 2020, who said, “Look, my concern isn't the valuations that we're paying, because I feel like we're sophisticated software investors. The big concern I have is that 86% of our investing partners have never lived through a downturn.”

Have founders and startup executives figured how to live in the new normal? Michael Clifton, a partner at Falfurrias Management Partners, said it’s been a mixed bag. “I've watched entrepreneurs forced to figure that out. You can tell the difference between the ones who've been through a down cycle like GFC — or not,” he said.

These market movers discussed several other trends in the current fundraising space:

A focus on operations: One silver lining of the current slow VC market, Clay Thorp, founder of Hatteras Venture Partners, said is a renewed focus on the nuts and bolts in a business. “I think now that there's been some rationality in the market, that has meant companies are actually paying attention to cash flow and actually focused on operations,” he said.

All of a sudden, companies that previously might have been commanding high valuations are wanting help managing the business in a profitable manner with good unit economics and making sure you've got sort of a balanced risk reward,” he said. “One reason is the end of pandemic-era monetary policy that has shifted in recent years, citing that the (free money) spigot is largely turned off for most folks.”

The rise of opportunities in AI: As Thorp also noted, the one notable exception for fundraising has been artificial intelligence (AI) startups, which have been reverting to pandemic-era valuations that are “kind of bonkers.” Scot Wingo, general partner at the Triangle Tweener Fund, said new AI technology, and particularly large language models (LLMs), is providing startups with a way to establish a company structure with lower capital requirements. Said Wingo, “We're now seeing a new class of founder,” noting that they appear more willing to stay lean in their operations by testing out new AI tools. He said he’s

watching how AI tools and remote operations allow companies to operate with lower headcount and grow faster.

Looking beyond the current marketplace, what areas are these key investors thinking about and looking for? What gets them excited about the future?

Wingo suggested that there’s more to come in tech-enabled home services, like HVAC and plumbing, that can modernize the way homes are built and maintained. “We're only 10% digital in our lives, so I think there's tons of opportunity there,” he said. “In particular, the service industry is one that I think needs to change a lot.”

In the healthcare space, Thorp said the excitement is the potential for life-changing discoveries. “There are tech jockeys who are applying their wares to three-dimensional small molecules. These guys have a special way of doing it. I think about the old line process of 50 years ago, where a chemist made a molecule that might lead to finding aspirin or atorvastatin or whatever. To be able to do that in an industrializable way that's actually predictable, where you can at least get a first handle on the solution pretty quickly — I think that's going to open up a lot.”

Clifton pointed to what feels at this point like an old investment industry favorite: quantum computing. This time, he thinks its moment may be arriving. “Quantum has held promise for a while, but it is finally coming up on this point, where in the next several years, there could be computers that are able to do things that are physically impossible to calculate today using classical computing,” he said. That can open up all sorts of new frontiers in molecular discovery, weather prediction, supply chain optimization and, he said, even in the financial markets: “There's potentially kind of a brave new world.”