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 some way or the other. 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 in head-first 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 mark up 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
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