Venture capital investments worldwide dropped 47.8% year over year in May to $18.85 billion from $36.08 billion, according to S&P Global Market Intelligence data.
The number of funding rounds slumped 38.9% to 1,129, from 1,847 a year earlier.
One bright spot: funding actually jumped a little from the April doldrums:
May totals increased slightly from the previous month, when $16.52 billion was raised across 1,057 venture capital-involved funding rounds.
Here’s what I’m seeing in the market…
Companies without AI at the core are struggling to raise. Especially at Series A, valuations for non-AI companies are extremely low.
For founders, this can be dispiriting.
But as an investor, I view this as a great opportunity. I’m doubling down on some of my most successful companies at rock bottom prices!
Even for AI startups, fundraising can be difficult.
Huge slugs of capital are going into a couple of companies like OpenAI and Anthropic. For everyone else, pickings are slim.
A lot of investors are sitting on their hands. I see only about half as many deals as I did at the peak market.
Many minority investors are waiting for a big name like Sequoia to come in. Only the strongest of signals gets them to open their wallet.
I don’t operate that way. I make my own decisions, and the reputation of the other investors is a very minor factor.
But even I have slowed down my investment pace so far this year. Fewer deals to choose from means fewer deals that I like.
Soon, I think some great startups will emerge at the AI application layer. I’m excited about companies that apply AI to an industry to make 10x better software.
Imagine AI tools for buying and selling derivatives, for example. You could describe the risk you’re seeking to hedge and AI could show you the perfect derivative to buy at the best possible price.
Startups like this will have more defensibility than another chatbot or copywriting app.
I expect to see this new generation of AI-enabled SaaS companies later in the year. When that happens, I hope to ramp up my investment pace.
If you’re struggling to raise, my advice is to extend runway and get to breakeven ASAP. It’s hard, but it’s the only way to survive.
What are you seeing in the fundraising market? Leave a comment and let us know!
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On Saturday, I had lunch with one of my most successful founders. As I dug into my burger, he said something that stopped me cold.
“We give away swag bags to new customers,” David* said. “The tote bags themselves cost $0.30 each.”
In that moment, I recognized something I’ve seen time and time again in the best CEO’s.
They see the big picture. But they also know every detail.
My lunch companion is running a company with millions in revenue. He supervises a dozen employees.
But he knows the cost of a canvas tote from Alibaba, down to the cent.
Let’s take Brett, another amazing founder I met last year. He runs a billion dollar SaaS company that’s growing at an incredible rate.
SaaS involves a lot of metrics. And Brett knew how his company stacked up on every single one of them.
And then there’s Aaron.
Aaron runs a SaaS company with over $20 million a year in revenue. He recently raised a $125 million round led by one of the best firms in Silicon Valley.
At a meeting with Aaron, one of the other investors asked about selling to the government. Aaron knew everything about government sales, from subcontractors to how lobbyists work.
And he wasn’t even interested in selling to the government yet!
Before I started investing, I thought I knew what a great CEO looked like. He would focus on the big picture and leave the details to someone else.
But when I meet with the best founders, the truth is more complicated.
They articulate the purpose of their company with the zeal of a missionary. But they also know every detail of the business.
It’s wise to delegate to a great team. But the best founders know everything the team is doing and make sure they’re staying on track.
Today, when I evaluate a founder, I look for attention to detail.
Do they know what’s going on day to day? Or do they think that details are beneath them?
I want the founders that are willing to roll up their sleeves.
What traits do you see in great founders? Leave a comment and let us know!
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Last week, Apple unveiled the Vision Pro. The movie experience is incredible, and photos look amazing. But Vision Pro’s AR capabilities could also revolutionize the way we work.
Imagine building a 3D CAD/CAM design for a mechanical heart valve. Instead of viewing a prototype on a 2D screen, you could see it in three dimensions.
We could rotate and zoom the image at will. We could even blow it up to hundreds of times its actual size and walk through the valve, inspecting every element!
Being able to view designs in 3D could also transform construction.
TANGObuilder, a company I invested in this year, makes powerful software for structural engineering designs. Now, imagine being able to design a home in three dimensions!
Vision Pro could even be indispensable on the job site.
Today, a startup called Argyle uses AR to show construction teams where to put structural elements like pipes and HVAC. Argyle shows detailed AR renderings on hardware like Hololens and iPhone.
In the future, construction workers may see their environment in greater resolution on Vision Pro. Every structural element could be crystal clear.
But Vision Pro will have to overcome some serious shortcomings first.
Again and again, those who have tried the headset say their faces hurt after about 20 minutes. Around half a laptop’s worth of weight strapped to your face can be very uncomfortable.
In the near term, I think Apple will introduce a better system of headbands to distribute the weight. Longer term, hardware will get smaller and lighter.
Another issue is battery life.
Vision Pro requires you to lug around a little battery pack on a cord — no one’s idea of sleek. And even with that, you only get 2 hours.
If you want more, you have to plug into an outlet.
However, battery capacity is increasing every day. In the last decade, capacity has more than tripled.
If Apple can address these weight and power problems, Vision Pro could be a compelling platform for work. I look forward to backing companies that make the most of this revolution!
Would you use Vision Pro at work? Leave a comment and let us know!
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Fresh capital from venture investors and bank loans is scarce and expensive. Going public is near impossible. Some business models that worked when cash was cheap are unsustainable now. That means venture-backed startups are running out of money and facing hard choices.
“The Mass Extinction Event for startups is under way,” said Tom Loverro, general partner at venture firm IVP, in a recent tweet. Loverro said in an interview that none of his portfolio companies has shut down recently, but it is early days in what could be a wave of startup failures. “It’s like the entire industry went out drinking and is now suffering the consequences,” he said about the venture boom of 2021 that he believes is heading for a bust.
Why is 2023 seeing so many shutdowns?
When startups raise a round of funding, it typically gives them 18 months of “runway.” This is the amount of time they have until they run out of cash, given their current monthly burn rate.
The hot market ended around the beginning of 2022. We’re now almost 18 months past that.
And startups are running out of cash, right on schedule.
If this were 2021, they’d just go out and raise a bunch more.
But today, the market for anything that’s not generative AI is weak. Non-AI companies can raise, but only if they have incredible growth.
For everyone else, the music has stopped.
In recent months, several companies that raised significant venture funding have folded, including biotechnology company Goldfinch Bio, wine business Underground Cellar and fintech company Plastiq.
California startup Zume, which was developing a robotic pizza maker and was once valued at $2.25 billion, recently entered a wind-down process handled by Sherwood Partners, a restructuring firm, according to Sherwood’s co-founder and co-president Martin Pichinson.
Notice how companies that involve “stuff” keep popping up among the fatalities? That’s no accident.
Stuff is really hard. Zume had to buy a bunch of robot arms and trucks — that’s really expensive.
A software startup just needs some laptops. Their one bill — cloud computing costs — is covered with AWS credits!
Software startups fail too. But because they scale easily and require fewer resources, they’re harder to kill.
I had an opportunity to invest in some of the companies that have shut down recently. I passed.
Of my 20 investments, none have shut down yet.
But sadly, some surely will. Failure is inevitable in the world of startups.
If the founder tried his best and kept us updated, I want to be the first check into his next company. Some of the greatest investments of all time are in repeat founders!
For founders that are still fighting, the key is to reduce burn and hit breakeven. Then, you control your own destiny.
Be ruthless. Cut staff. Trash pet projects.
If you survive, you have a chance to thrive.
And if you do hit the wall, don’t beat yourself up too much. Come up with your next best idea, and try again!
Are you seeing startups hit the wall? Leave a comment and let us know!
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When I was a kid, there were no yoga teachers. Heck, no one ever even heard of yoga in our town. Today, that little town in Wisconsin has 7 yoga studios.
Oshkosh went from 0 yoga teachers in the 90’s to perhaps dozens today. We also added pilates instructors, meditation coaches, acupuncturists.
But that’s not all. Strange sounding jobs involving computers popped up.
One was called “search engine optimization.” My mom bravely waded into the nascent industry in 1999, and we were suddenly catapulted from the poor to the middle class.
This happened as factories closed all around us. Places that employed hundreds became vast gravel lots.
Surely the town was devastated. Right?
Wrong.
Decaying warehouses along the river became lovely apartments. New businesses opened and the local university expanded.
The town’s population grew.
Today, Oshkosh and America as a whole have some of the lowest unemployment rates on record. And yet we can’t seem to stop worrying.
A quarter of workers are worried that AI will put them out of a job, according to a CNBC survey. In some fields, that’s as high as half.
I don’t doubt that AI will make some jobs unnecessary. For example, an AI chatbot could reduce the need for call center staff.
But does anyone love working in a call center? I don’t think so.
That person can move into a more fulfilling job elsewhere. Some may become EMT’s, like my friend Matt — a job that’s deeply rewarding and almost impossible to automate.
Others will take jobs that don’t exist yet.
The vast movement of workers into new industries has happened before.
In 1910, 14 million Americans worked on farms out of a population of around 100 million. In the 21st century, that fell to just a couple of million workers.
And they were feeding a population more than three times the size.
All those former farm workers didn’t languish on the dole. They got jobs in factories.
My childhood saw the end of those factories. They either moved abroad or automated most of the employees out of work.
And yet, unemployment is at rock bottom. Meanwhile, median wages have more than doubled since 1991, even after inflation.
There is no limit to human creativity or human desires. As computers take over one task, we’ll create another.
If we could look decades ahead, we wouldn’t believe the prosperity we’re about to enjoy.
Now, let’s go get it.
Do you think AI will cause mass unemployment? Leave a comment and let us know!
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“There are no buyers for empty office space at any price.” That’s a friend of mine who works in NYC commercial real estate. But landlords aren’t the only ones in deep trouble.
I’m writing this post from my living room. Chances are, you’re reading it at home too.
That means we’re not in offices. And as landlords survey their barren domain, things are getting desperate.
“What we’re seeing is the unfortunate collision of the most rapid increase in interest rates in a one-year period and the realities of how people work,” said Gregg Williams, principal receiver at Trident Pacific, a receivership firm for defaulted commercial mortgages.
Xiaojing Li, managing director at data company CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels.
CRE loans are nothing like residential mortgages.
Landlords make small payments during the life of the loan. The loan is usually for five to ten years, much shorter than a residential mortgage.
In recent years, most landlords have only had to pay the loan interest.
When the time is up, the landlord has to pay the entire value of the building. Since they don’t have that kind of cash laying around, they usually refinance or sell the property.
For a long time, this was a great playbook.
But now, interest rates have doubled. Moreover, work from home is entrenched, which could lead to long term vacancies in office towers.
So if you’re the landlord, what are your options?
You can’t refinance. The rates are so high that you can’t afford the payment.
And if you sell, you’ll get way less than what you owe on the loan.
So either the bank backs off, or you walk away from the building.
So far, the banks are playing ball.
Only some defaults end with the lender taking the keys. Often, property owners can stave off foreclosure by paying off loans with their own cash or by extending and renegotiating mortgages. Still, debt brokers and attorneys say lenders are less patient than they have been in the past.
What else can they do? They don’t want to own a bunch of aging, vacant office towers.
Making a deal with the landlord solves the problem — for now. But if the landlord can never repay what he borrowed, the banks are just hiding losses.
Bad real estate loans could sink regional banks. Smaller banks own 80% of these mortgages — $2.3 trillion.
If these loans go bad, it will make the banking crisis in March look like a tea party.
One bright spot: the office market in most cities is actually holding up.
Nationally, the vacancy rate is only up 3.7% from pre-Covid levels. The massive outlier here is San Francisco, with vacancies up 12.8%.
The banks at greatest risk from a CRE crisis will be regional banks with exposure to SF, LA, and NYC. One of the largest CRE lenders in New York, Signature Bank, already bit the dust in March.
Long term, I think office space nationwide is in serious trouble. The technology for remote work is getting better every day.
Soon, workers may join meetings from their couch on an Apple Vision Pro. The experience might be just as immersive as in-person without hours wasted commuting.
It’s a future I look forward to. But then, I’m not a landlord.
What does the future hold for CRE? Leave a comment and let us know!
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A founder I invested in wondered about how to approach PLG vs. Enterprise sales strategies. Not gonna lie: I didn’t really know.
But Stevie Case sure did! She’s the CRO of Vanta, and Harry interviewed her on 20VC.
Send episode to founder. Happy founder. Awesome day!
You can do this with basically any topic. That’s what makes 20VC so valuable.
Someone needs to digest every episode and make HarryGPT. It could answer almost any startup question with info from high quality guests.
What are your favorite tech podcasts? Leave a comment and let us know!
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PS: Shoutout to a great portfolio company of mine, Podium, for producing the hilarious All-In Balenciaga video! I cribbed a screen for this post. Enjoy!
I hired a new investment analyst! He’s hardworking, detail-oriented and works around the clock. For free.
His name is GPT-4.
This week, GPT-4 and I have been investing together. We passed on a bunch of companies but we did find one winner!
Let’s look at two companies we reviewed this week…
Company #1
Company #1 is a generative AI company.
It has an interesting concept and a few paying customers, but the details were sketchy and it seemed a little too early for me. I like to see companies at $200-500k ARR before investing.
The valuation is a very reasonable $8 million post-money.
Nonetheless, my decision was pass. But let’s see what GPT-4 thinks…
I prompted GPT-4 by telling it that it was the world’s best angel investor. I often like to assign it an identity so that it will act accordingly.
Next, I explained that I would be feeding it a deal memo.
Let’s see what it says!
It hallucinated some very prestigious backgrounds for our founders! Hey, what founder doesn’t need a little extra credit, right?
But it got the other details dead on.
So what’s your decision, GPT-4?
GPT-4 didn’t give us a decision, only a bunch more questions. Just like a real VC!
I’m so proud!
But let’s force his hand by explaining that this is all the information we have:
GPT-4 is a pass. And for the same reasons.
This deal memo was very short on specifics. It said the company had a few paying customers, but never provided any numbers.
Given that they only have a few customers and just graduated from an accelerator, I’m guessing revenue is minimal. It might be a couple thousand a month at best.
I could chase down the exact numbers. But if I spent all day pestering founders for specifics, I’d never sleep.
GPT-4 may not need it, but I do!
In some cases, I do ask for these specifics. But I didn’t see anything compelling enough here to warrant it.
Company #2
Company #2 is a really cool marketplace that uses AI in an innovative way. It has strong traction, growing revenue revenue rapidly month over month.
It’s also operating in a huge market. The founder is very ambitious and has founded several companies in the past.
Valuation is also reasonable.
I’m in! But before we sign and wire, let’s see what GPT-4 thinks…
This deal memo was very detailed and much longer. Given GPT-4’s character limit on prompts, I had to enter it in a few prompts.
GPT-4 understood it perfectly and gave some interesting results:
GPT-4 is in! And for some of the same reasons.
Traction is strong. The team has very relevant experience and a clear plan to dominate their market.
With my new analyst’s confirmation, I requested an allocation!
Time to Give My New Employee a Performance Review
GPT-4 really impressed me in its ability to digest data on companies and draw sophisticated conclusions.
It spotted a profound lack of information on Company #1. And in Company #2, it identified the strong traction, big market, and great team that makes a winning bet.
Best of all, it had the guts to commit right away when it saw something special. Maybe it really is the world’s greatest angel investor!
Any mistakes it made were minor.
It hallucinated some team educational backgrounds, but it got almost every other detail right. And in any case, I don’t really care where or if people went to school.
GPT-4 is an amazing tool for individual angels. Most of us can’t afford to hire a team! And it’s great to have someone to check your thinking against.
But even if I had a huge staff, I’d still augment them with GPT-4. Just as in chess, I think the best investing will be done not by AI or by humans, but by humans and AI working together.
GPT-4 had a great first week! I can’t wait to unleash him on more startups on Monday.
Have a great weekend everyone!
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