VC firms are in the middle of a rough year: deal flow, exit values, and index returns have all fallen precipitously. However, we’re also witnessing the rapid evolution of transformative technologies like AI and the blockchain, the consistent growth of vital industries like climate mitigation, and a profusion of innovative companies focused on all the above.
In other words, while it’s true that times are tough for VC firms, opportunities abound. Let’s see what Titanium Ventures partners have to say about the state of their industry – as well as the trends that are shaping the global economy and investment landscape – now that we’re halfway through a tumultuous 2023.
How has 2023 been difficult for VC firms?
“Overall VC deal volumes, valuations, and terms will remain more conservative through the end of 2023.”
— Matthew Koertge, Managing Partner
The numbers in VC aren’t pretty: deal flow is down by 53 percent, exit value has collapsed by 48 percent, and total index returns have slid by 20 percent. According to Crunchbase, global VC funding fell from $47.8 billion to $21 billion year-over-year.
So what does all of this mean for the VC industry? Koertge explains that “many portfolio companies will continue to reduce costs in the near term to extend their cash runway. The focus will be on profitability rather than growth at any cost.” Koertge also expects the value of portfolio companies to continue falling through the end of the year.
“We will see significant pullback from the VC market from corporate venture capital, with up to 30 percent leaving the market over 2024 as companies look for cash savings opportunities.”
— Marcus Bartram, General Partner
Bartram also expects the IPO market to remain closed. While these are all signs that VCs face a difficult environment today, there are many promising investments that will drive returns tomorrow. And Titanium partners are putting AI at the top of this list.
The AI revolution is underway
“Generative AI is one of the most fundamental innovations in technology in over two decades.” — Saad Siddiqui, General Partner
AI will lead to vast shifts in how we work, the products and services we use, the pace of innovation, and company performance – which is why it’s the top-cited technology among Titanium Ventures partners.
“Many VCs will earn eye-popping returns and, overall, LLMs will generate tremendous value for consumers and businesses.”
— Albert Bielinko, Partner
As the AI sector receives a huge infusion of capital, startups proliferate, and regulation struggles to keep pace with the technology, there will inevitably be winners and losers. “Venture capitalists in aggregate will lose money betting on LLMs and the hype will exceed the dot-com bubble,” Bielinko predicts. But he also recognizes that AI is among the most transformational technologies ever introduced – a fact many VCs and portfolio companies will capitalize on.
“There will be serious consideration about monetizing the massive amount of high-intent consumer traffic interacting with [OpenAI’s] chat bots.” — Yash Patel, General Partner
Patel points out that ChatGPT reached 100 million monthly active users just two months after its release, making it the fastest-growing consumer app of all time. He expects OpenAI to “recruit and hire the best AI researchers and engineers in the world,” which will push the Bay Area “tech ecosystem to heights we haven’t seen before.”
“The net change in employment from AI is zero, meaning that the number of jobs lost will be matched by the number of jobs created.”
— Mark Sherman, Managing Partner
While AI has been a wellspring of anxiety among those who are concerned about economic disruptions and job losses, it’s easy to overlook the amount of human capital that will be liberated by the technology. Beyond the massive productivity gains that will be generated by automating workflows, customer engagement, and countless other operations, AI will create jobs like prompt engineers, AI auditors, data ethicists, and so on.
“I believe we will see the first major breach of a corporation because of an AI/LLM-based attack in the not-so-distant future.”
— Marcus Bartram, General Partner
When security researchers used GPT-3 to compose phishing emails in 2021, they discovered that the click rate for these messages was significantly higher than it was for human-composed messages. And this was two years ago – considering how much LLM technology has advanced since then, we’re almost certain to see a major cyberattack that relies on the software soon.
“The ultimate in software design is AI. The ultimate in hardware design is robotics.” — Steve Schmidt, General Partner
Schmidt observes that “New software tools will increasingly help these worlds [robotics and AI] collide through new levels of collaboration between the mechanical, electrical, and software engineers that bring these products to life.” While the combination of AI and robotics has historically led to fears of job losses and economic displacement, this synthesis will also open up opportunities that we can’t even imagine today.
Other trends in VC and the broader economy
“Blockchain is going to continue to be challenged until there is a clear government regulatory framework.” — Saad Siddiqui, General Partner
While Siddiqui notes that there’s “institutional appetite” for blockchain investments, he says these resources will remain “on the sidelines until there is clear government direction on what the guardrails are.”
“Climate tech can be capital and hardware-intensive, which may require timelines longer than a typical five-to-seven-year hold period to generate venture-like returns.” — Titanium Ventures CFO Geoff Dolphin
From the relentless acceleration of AI to the necessity of cybersecurity and climate change tech, there are plenty of opportunities to find and create value. However, these shifts will likely require a new investment thesis for many VCs – such as different expectations for how long it will take to receive significant ROI.
“VC firms will continue to place greater emphasis on diversity and inclusion across their own teams and their portfolio companies.”
— Matthew Koertge, Managing Partner
Koertge also anticipates greater emphasis on ESG – particularly “better transparency, including goals and objectives as well as measuring and reporting on these.” And he expects that “climate-tech investing will continue to grow, especially in areas like renewable energy, sustainable agriculture, and clean transportation.” Similarly, Bielinko makes the case that “Residential solar will accelerate significantly, especially in the U.S., where the Inflation Reduction Act will dramatically increase electrification.”
Economic turmoil has been painful for VC firms and their portfolio companies, and the banking crisis earlier this year only added to their woes. That said, the second half of 2023 will be critical for investors that have a longer time horizon than the next few months of economic volatility.