How venture capital has changed since the pandemic gold rush?

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Greetings on this Wednesday hill climb as we embark on the 59th edition of Weekly Olio - your passport to giggles, wisdom, and a pinch of enigma with our tantalizing thought piece (yes, the infamous Publisher's Parmesan). 🧀

In today's serving of Publisher's Parmesan, we discuss how venture capital has changed since the pandemic gold rush.

Fascinating stuff, isn't it? 👏

Will come to that, but let’s first start with the curation.

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Publisher’s Parmesan 🧀

How venture capital has changed since the pandemic gold rush?

Over the past two years, the daily lives of venture capitalists have undergone a significant change. Investors are now spending more time on research, market maps, and outbound deal sourcing. As a result, there has been an increase in pre-empted deals, larger funds investing earlier, and high turnover among young VCs. Consequently, in 2023, unicorns have become even rarer, with investors vying to back a handful of in-demand startups.

The day-to-day lives of venture capitalists have undergone a significant change in the past two years. The record-breaking days of excess in 2020 and 2021, driven by immense investor FOMO and cheap capital, are no longer the norm. Instead, we are seeing a period of contraction and relative prudence, where soaring interest rates have mostly curbed lavish bets on loss-making startups.

Investors are finding it increasingly difficult to locate promising startups because many are choosing not to publicize their fundraising rounds until after the fact. This puts venture capitalists in the position of trying to catch up with deals that are already done. As a consequence, investors are having to search for startups earlier in their development cycles, before they even start fundraising. This is compounded by the fact that growth activity has slowed, forcing later-stage firms to look elsewhere.

Strategic investors have been somewhat protected from the effects of this trend due to their expertise and connections with startups. However, for Series A lead specialists, this is a cause for concern. It has now become commonplace to seek out companies outside of the fundraising process, which emphasizes the need for thorough research. Investors who wait for the fundraising process to begin may never get a chance to invest because so many funds are preempting the deal.

Overall, the key to success for investors is to be proactive and show up when other investors have slowed down. This puts them in a good position to take advantage of opportunities when they arise.

However, working as a venture capitalist is still a challenging task with almost impossible odds. Most of the portfolios of venture companies don't achieve unicorn status, and many companies are sold just to get the invested money back, while others fail. It's tough to deal with the constant failures when you feel like you're doing quality work every day.

In 2021, a record number of 787 unicorns (startups worth over $1 billion) were minted, but that number has tumbled since then. Despite some eye-opening valuations being lumped upon very young AI startups like Mistral and ElevenLabs, the post-pandemic era has been defined by a scarcity of both good deals and capital, which has led to intense competition among founders and even investors in the same fund.

Nowadays, VCs spend a lot more time sourcing deals, conducting market research, scrutinizing startups' metrics, and trying to pre-emptively fund a startup before it even starts searching for new capital.

Shrunken ambitions

Many venture capital funds have lowered their expectations from investing in 10 companies a year to just 3 to 5. This is because VCs are now more focused on providing support to their existing portfolio firms, which is a significant shift from the generosity of 2021.

However, this scarcity of funds has led to intense competition among investment teams, with VCs fighting to get their preferred deals approved. Some new investors had initially expected their companies to go public within three years but have ended up with underperforming portfolios, less excitement, and limited chances of a significant payout.

Cold calling heats up

Venture capitalists (VCs) now devote more time to market analysis, company evaluation, and historical data analysis. Although some of this research is intended to help portfolio companies understand the macro environment, there has also been an increase in outbound deal sourcing.

Each member of the investment team speaks to about five to fifteen potential companies a week. Junior staffers conduct more outreach to gain a better understanding of the market and process the top of the funnel. VCs use software to streamline their outbound work by examining website traffic, headcount growth, and whether a startup has nabbed someone from a unicorn to focus the investment team's work.

Each partner creates a list of the companies they were interested in but missed out on every six months. They then narrow it down to about 25 companies and develop ways to approach them. Thanks to their strategy of staying in touch with founders even as other investors begin to back away, funds have been able to get into deals they thought had been lost.

Slower and more strategic dealmaking

Investors claim that while there is still a lot of activity at an early stage, it is difficult to find good deals these days. During the pandemic, investors would invest before proof points were met, such as product-market-fit or the first million of annual recurring revenue (ARR). However, investors are now paying closer attention to these metrics.

In the past, VCs always relied on their peers to share good deals, and many deals were sourced this way. But it's not the same anymore. The market has cooled down, and there's less FOMO, so referrals don't carry the same weight.

VCs have to work harder now to get the privilege to invest in some of those hyped deals. Dealmaking now takes about three weeks from the initial meeting to the term sheet, whereas it only took one week in the frothy market. While it's still possible for deals to close in one week, it's a lot less common now.

Startups are always raising

Investors are finding it increasingly difficult to locate promising startups because many are choosing not to publicize their fundraising rounds until after the fact. This puts venture capitalists in the position of trying to catch up with deals that are already done. As a consequence, investors are having to search for startups earlier in their development cycles, before they even start fundraising. This is compounded by the fact that growth activity has slowed, forcing later-stage firms to look elsewhere.

Strategic investors have been somewhat protected from the effects of this trend due to their expertise and connections with startups. However, for Series A lead specialists, this is a cause for concern. It has now become commonplace to seek out companies outside of the fundraising process, which emphasizes the need for thorough research. Investors who wait for the fundraising process to begin may never get a chance to invest because so many funds are preempting the deal.

Overall, the key to success for investors is to be proactive and show up when other investors have slowed down. This puts them in a good position to take advantage of opportunities when they arise.

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