As we just got the VC data for Q1 2023, we thought it would make sense to address the current landscape of the Venture Capital Market as we see it. There has been a great deal of news surrounding the venture capital industry in the last year, beginning with the tech stock market downturn in 2022 and the correction in the values of the large publicly traded technology companies. It continued with the failure of Silicon Valley Bank and concerns that spread to the overall health of regional banks. There is no question that the uncertainty among investors has some implications on venture capital and, to some extent, the early-stage tech world where Florida Funders operates. What we have seen is that the negative impact on valuations has primarily affected late-stage, higher-valued companies causing down rounds. Although, for the most part down rounds have been relatively modest in space in which FF operators of Seed to Series A companies, particularly in the Southeast United States.
In terms of the Florida Funders portfolio specifically concerning Fund-1 we have felt some impact from the macroeconomic trends such as less liquidity and activity in the M&A market. Several of our portfolio companies that have been performing well have decided to postpone a possible exit and instead made the decision to raise additional funds because of valuation suppression. We are also seeing companies in our portfolio complete bridge rounds of financing at flat or fairly modest increases to prior valuations, instead of going out to raise larger priced rounds. In the long run, we believe these bridge rounds that we choose to participate in may well prove to be to our and our investors’ benefit as a result of our increased ownership position.
We see the current uncertainty in the tech market and lower valuations, as an opportunity for us and our investors. Start-up founders are running their companies leaner, decreasing burn rates, focusing on a clear path to reaching positive cash flow, and also accepting lower valuations. Based on history over the last few decades, when there is uncertainty in the economy – and a recession, or risk of a recession – it is often proven to be the best time to put money to work. Many of the highest-return tech Seed-to-Series A investments in the 2008-2009 financial crisis are now multi-billion dollar valuation companies.
Here are some examples of the fund returns with vintage years during the last major economic downturn:
Khosla Ventures: Khosla Ventures, a California-based venture capital firm, raised $1.05 billion for its third fund in 2009. The fund invested in companies such as Square, Climate Corporation, and Jawbone. By 2019, the fund had generated a net IRR of 35% and a 20X MOIC (multiple on invested capital), making it one of the top-performing funds of its vintage year.
Foundry Group: Foundry Group, a Colorado-based venture capital firm, raised $225 million for its second fund in 2009. The fund invested in companies such as Fitbit, MakerBot, and Zynga. By the time the fund was fully realized in 2018, it had generated a net IRR of 28.3% and a 9.42X MOIC.
Sequoia Capital: Sequoia Capital, a Silicon Valley-based venture capital firm, raised $930 million for its twelfth fund in 2008. The fund invested in companies such as Airbnb, Dropbox, and LinkedIn. By 2018, the fund had generated a net IRR of 25% and a 9.3X MOIC, which was impressive considering the challenging economic environment during 2008.
Union Square Ventures: Union Square Ventures, a New York-based venture capital firm, raised $156 million for its second fund in 2008. The fund invested in companies such as Etsy, Foursquare, and Twitter. By 2018, the fund had generated a net IRR of 24.6% and a 9X MOIC.
Andreessen Horowitz: Andreessen Horowitz, a Silicon Valley-based venture capital firm, raised $300 million for its first fund in 2009. The fund invested in a range of startups, including Airbnb, Box, and Twitter. By 2019, the fund had generated a 22.5% net IRR and a 7.61X MOIC, making it one of the top-performing funds of its vintage year.
Accel Partners: Accel Partners, a global venture capital firm, had one of its best-performing funds in the vintage year 2009. The firm raised $525 million for its eighth fund during the height of the financial crisis, and by the time it returned capital to investors in 2017, it had generated an impressive 19.5% net IRR and a 4.16X MOIC. Accel’s portfolio included investments in companies like Dropbox, Etsy, Facebook, and Spotify.
As you can see, downmarkets create strong opportunities for venture capital investing. Some of the highest performing early-stage tech funds came out of the 2008-09 financial crisis.
At FF, we believe we are well-positioned to benefit from the volatility in the current economy. We remain steadfast in our disciplined approach to investing in the very best founders, in markets we know, and in companies that we believe are the best opportunity for success with our help. We’re already seeing more favorable valuations for investors than we have seen over the past several years and we are excited to begin raising our Fund-3. With the removal of SVB and other early-stage tech debt providers in our market, we believe we will continue to see the price of equity rise and valuations drop. Furthermore, we think 2023 will prove to be an outstanding vintage year for venture capital funds and produce historically outsized returns.
If you have additional questions or would like to explore this opportunity in more detail, please reach out to either Saxon Baum, Marc Blumenthal, or Tom Wallace.