The Winter of Venture Capital: Navigating the Inflection Point
MVP's co-founding partner, Jared Carmel, distributes an annual internal recap we are sharing publicly providing a thorough overview of our journey, strategies, and future outlook for 2024.
In conjunction with this letter, we invite you to read the MVP’s Year In Review at our website here:
MVP's 2023 Year In Review - Jared Carmel's Team Email
Every year, our co-founding partner, Jared Carmel, distributes an internal recap for the Manhattan Venture Partners team, providing a thorough overview of our journey, strategies, and future outlook. This year, we've made the decision to extend this transparency beyond our internal circle and share this message with the public. By doing so, we aim to offer insight into our thoughts, challenges, and opportunities as we navigate the venture capital landscape.
The following content encapsulates Jared's annual recap. We believe it will provide readers with a profound understanding of our vision and objectives as we progress forward.
The slogan "Winter is Coming" has long hung in my office, not because I am a fan of Game of Thrones, but because I felt the market was overdue for a correction and we needed to brace for it. And like a broken clock, I was eventually proven right as a frosty chill descended on the venture capital world over the past 18 months - though the depth of this arctic winter caught me by surprise.
Considering the length of the last bull market, it has been an enormously challenging period, especially for those not accustomed to enduring such extended economic fragility. Years from now, when historians etch the story of these tumultuous times for the VC industry, they may point to late 2023 as the pivotal inflection point.
The Boom and Bust
Venture fortunes flooded the asset class over the last decade, reaching unprecedented heights of over $681 billion invested in 2021 as record amounts of capital chasing the promise inherent in private innovation. Yet, in a violent reversal of fortunes, the incoming tide swiftly turned - plunging to just $462 billion deployed in 2022 and 2023 declined further, reaching a 5-year low of $285 billion.
Many expected an eventual cooling and consolidation, but few predicted the severity of this downward swing. Grand visions and soaring valuations crashed to earth abruptly amidst rising interest rates, geopolitical turmoil, inflationary pressures, and a souring market for tech equities. Seemingly overnight, the era of easy money and boundless ambition was displaced by constrained budgets and skeptical scrutiny.
Even though others were not prepared, we were! This was the year our 2019 macro secondary market theory of "Disruptive Companies, Distressed Sellers" and Secondary-as-a-Service™ started to come to fruition. And with the MVP All-Star Fund IV having 70% dry powder to begin 2023, we were able to react to the shifting landscape. Our "Land and Expand" model has historically served our LPs well with superior returns from companies like Coinbase, DraftKings, and Postmates. We recognized the potential of looming down rounds or structuring away the value of junior securities, so we landed into primary rounds of some of the most exciting, relevant, and tangible companies we have ever invested in: Hawkeye360, RapidS0S, PlatformScience, and Blue Voyant. Plus, we had a proper understanding of the asymmetrical market dynamics around Klarna and our ability to take advantage of the inefficiencies in the market.
Of course, past cycles demonstrate that this asset class has seen both extreme highs and lows over its half-century history. Greed and fear create an intrinsic boom-bust cadence - irrational exuberance gives way to distress and depression before the next expansion phase begins. Although we knew winter was coming, the venture winters feel coldest to those unprepared. And having enjoyed an extended run of mild summers, many funds now find themselves navigating arctic climes wearing just t-shirts and flip-flops.
The Gathering Storm in 2023
While broader economic bellwethers like public equities and employment figures are starting to stabilize going into 2024, caution persists in startup land. The tech innovation ecosystem seems out of sync with the recovering macro picture as several storm fronts converge:
IPO markets remain frozen mainly for tech offerings, with only the most differentiated unicorns daring to test the public waters.
Investors face liquidity crunches, with venture fundraising sliding nearly 60% below 2021 and aggregate capital commitments sliding drastically.
Startups at all stages are struggling to raise their next rounds amidst skeptical VCs obsessing over valuation, milestones, and fiscal prudence.
This prevailing sense of gloom intensified with the shocking collapse of Silicon Valley Bank in Q1 2023 - eliminating one of VC and tech's most reliable backbones right as the blizzard set in.
And so, we enter 2024 with a feeling that the clock has finally struck midnight on the startup world's epic capital party of the past decade. The financial reckoning so many dismissed as a fantasy doomsday scenario now imposes a harsh reality check - especially on companies lacking concrete business models.
Venture Firms Reckon with Changed Terrain
The vicious shakeout in 2022 and 2023 leaves behind an altered competitive landscape with winners and losers clearly defined - separated on the returns leaderboard by a gaping chasm. A new world order emerges with concentrated power shifting to the handful of visionary firms who timed vintages and strategies correctly for the unraveling era (back pat). The best now holds piles of dry powder while the rest watch from a freezing distance.
Spared from the worst storms, these fortunate few gain leverage to cherry-pick post-apocalyptic bargains - buying into marooned assets from distressed sellers at relatively low valuations. As capital congests in fewer hands chasing scarce traction, competitive crowding crushes mediocrity.
Among the fallen stand the carcasses of yesterday's heroes - like Softbank's Vision Fund, now registering an estimated $100 billion in losses, epitomizing the savage climate change pummeling impatient money managers expecting permanently sunny skies. Bankruptcies already litter this altered terrain, as once shining unicorns like Convoy, Veev, and Olive AI collapse despite billions in prior funding funneling into complex business models untested by the elements.
On the flip side, the LP secondary market looks poised for another avalanche of a year in 2024 thanks to high demand for liquidity, shrinking bid-ask spreads between buyers and sellers, record fundraising, and dry powder from mega-funds like Blackstone's $22.2 billion, Lexington's $22.7 billion, and Industry's $1.7 billion vehicles. These favorable dynamics suggest robust deal flow as pricing alignment improves, investor confidence rebounds on valuations, and deployment ramps. The perfect storm satisfies what appears to be a considerable pent-up appetite for both LP-led and GP-led secondary sales.
For specialists such as MVP, as we raise ASV and deploy ASIV into the later-stage startup world, the confidence from the global LP community proven by this mountain of committed capital confirms the scent of blood in these secondary waters. The avalanche of discount deals from overwhelmed general partners with older funds and founders with a tired cap stack spells a potential feeding frenzy to satiate the liquidity desperation since traditional exit pathways remain frozen shut for the foreseeable future.
As nimble growth-stage secondary specialists, we pinpoint prime targets others overlook or shun because they are still frozen and unable to react. Again, this environment is ideally suited for acquiring solid, even stellar assets, with a look-back on pricing.
Make no mistake - the present climate marks the early innings of a generational buying goldmine as the need for liquidity should flood secondary channels. Classically, investors who rode the momentum wave became overextended, panicking at the worst possible moment and ultimately are forfeiting quality assets at fire sale rates. We built for this blizzard, hoarding reserves while they splurged.
Pockets of Resilience
Still, stability surfaces in more protected sectors are better insulated from the storm's fury: cybersecurity, enterprise automation, defense technology, supply chain analytics, and even generative AI display traction. Investments leveraging centralizing digital efficiencies found heated demand as customers shed higher-priced solutions vulnerable to deteriorating economic conditions.
Relentless innovation marches forward even in wintry days. Fortunes await those identifying microclimates ripe for disruption amidst the volatility - as creative destruction fuels growth prospects independent of temporary capital cycles. Mountains stand tall, separating fertile valleys hidden underneath from the intimidating range towering overhead. With precise navigation and grit, this hostile topography breeds hardier startups. Spring's thaw can unlock immense potential if one survives until then.
Reasons for Optimism in 2024
Still, cautious optimism creeps back as experts call the bottom on this downward plunge. The worst systemic excesses now wash out, setting the stage for a gradual thaw. Consider the changing weather patterns:
The private capital industry sits on record reserves of dry powder - over $4 trillion ready to deploy into discounted assets not seen in over a decade.
M&A interest from cash-rich technology titans likely increases as they emerge from bunkers with large balance sheets and renewed risk appetites.
Talk shifts from survival mode towards prudent opportunities amid volatility, with a sense that the darkest days have passed.
We even see growing confidence among later-stage startup founders that warmer investment climates loom on the 2024 horizon. Of course, sober minds expect a constrained funding environment below 2021's peak levels for years to come, given interest rates and structural overcapacity across the innovation economy needing rebalancing. But the hope persists that the Fed remains dovish, and the worst cuts occurred, allowing steady adaptation going forward.
The Road Ahead
The road ahead promises twists and turns, but moments like these separate proven performers from untested novices. We identified storms back in 2019 when others saw only sunny skies. They invested heavily atop the peaks in 2021 while we quietly took cover.
MVP All-Star Fund V will continue the tradition and is built to seize opportunities that distressed sellers forfeit. Our experience allows us to recognize treasures accidentally discarded in the turmoil. We don't just endure downturns – we position to thrive on them.
Let the accomplishments speak for themselves: 60 portfolio companies, $1.2 billion funded, $900 million realized, 2.3x returns, and sub-2.5-year holds showcase resilience.
The fact is, choppy times strongly favor specialists in disruptive ventures surrendered by speculators caught overexposed. While some shout into the wind, the next All-Star Fund will continue to make methodical moves - seeking undervalued assets neglected in the melee. Our ASV warrants prime time in investors' plans in 2024, not despite volatility's tests but because our navigation tools gain the most significant traction in stormy seas. While panic breeds headaches for many, we see opportunities.
The ride promises unpredictability, but savvy allocators know who to partner with during unsure stretches. We'll gladly pick up stranded stragglers once they regain composure. Until then, please keep your arms and legs inside - it could get bumpy. But rest assured, our headlights pierce the fog. We've mapped this route before – stick with those who have proven they anticipate turns unseen by chasing thrill seekers focused on summits behind them rather than hazardous winding mountain roads lying ahead. Trust goes to those who airlifted you off Everest once before.
So bundle up and brace yourself! But recall that this too shall pass. Spring eventually emerges even from the most brutal winters. Compounding rewards to those who can see further - hidden green shoots offer signals that the ice will thaw and good times bloom once more when the soil defrosts. Knowing this allows confidence and conviction to overcome the intimidating outlook temporarily obscuring our views.
"From the end spring new beginnings." – Pliny the Elder, Roman Author (probably not the Beer)
Thank you as always,
Jared Carmel