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welcome to episode 10 Today
we're diving into why
venture capital returns have hit a ten year low
in 2024 from economic uncertainty
to shifting investment dynamics
and the rise of artificial intelligence
will break down the trends reshaping the VC landscape
and explore what the future holds
for this once high flying industry
let's get started
alright so let's jump into it
today we're going deep on venture capital okay
specifically um
YVC returns have basically tanked
yeah like they hit a ten year low here in 2024
yeah and we're gonna try to figure this out
I mean imagine
you're prepping for this big meeting with investors
right you gotta be able to talk about this stuff
you know
you can't just sit there like a deer in headlights
absolutely yeah
you really have to understand
like all the dynamics at play right
it's crucial for anyone who wants to
you know either get funding
or understand this whole kind of economic picture
exactly so
we've got some
really good material to kind of dig through
we've got this article on medium by chaos of money
okay
and then reports from Pitchbook and iwi and CB Insights
yeah those are great sources
and they offer some interesting perspective
some some conflicting ideas too
oh really
but what jumps out at me right away
is just how much returns have dropped
like Pitchbook is reporting that Q4 of last year
2023 saw plunge to negative 20%
whoa negative 20% yeah
that's scary
a huge difference from the boom years that we had
yeah not that long ago
yeah so that's gotta hurt
so what's going on
is this is this all about like the lack of exits
yeah you know
things like ipos and mergers and all that stuff
that chaos of money talks about
they talk about this liquidity bottleneck
it's like companies are just stuck
yeah no
that's a big part of it
when companies can't like go public or get acquired
it's hard for investors to
you know turn those assets into cash right
so it really impacts their returns
and then their ability to reinvest in new companies
what does that even mean break that down
what's a liquidity bottleneck
basically it's one of Muncha companies
they're you know
they're ready to exit like they're mature
they could go public they could be acquired
mm hmm
but the market conditions like they're not great
so it's it's like
you know everyone's trying to get through a toll booth
at the same time yeah
and the gates are down
so it puts pressure on like valuations and stuff
makes it tough to get funding even exactly
it can really mess with the company's plans to exit
or grow so
it's like a domino effect yeah
one thing leads to another
but this isn't just like a venture capital problem
right yeah
the whole economy is kind of a factor here
oh absolutely
I mean inflation
interest rates are up and you know
globally things are a bit unstable
that medium article talks about all that right
investors are getting a lot more cautious
they don't wanna just throw money into risky startups
if maybe safer options are out there
make sense yeah
they're like wait a minute
so is this also a correction do you think
cause remember a couple years ago
valuations were insane especially in tech
for sure yeah
the market goes through these cycles
we had that time like especially in tech
you know saws
fin tech things were crazy
valuations were sky high
even if the fundamentals weren't always there right
so now like things are getting real
reality check some companies are facing big markdowns
yeah double whammy huh
no exits andd more realistic valuations
not great okay
but what about this whole AI craze
because everybody's pouring money into AI right now
I mean is that part of the problem
it's definitely something to watch
CB Insight says that 37% of all VC activity this year
2024 went to AI ventures field 7% huge
it makes you wonder where the markets going
you know yeah
seems like everybody start an AI company these days
right it's like the new the new hot thing
but is it gonna be a bubble right
like will it burst and then everybody loses money
could happen AI has a ton of potential for sure
but not all these AI companies gonna be winners
obviously investors
gotta be smart about where they put their money
it's like how do you even stand out in that crowd
you know if you're going into these investor meetings
what do you even say like hey
we're not just another AI company
how do you do that that's the challenge right
you can't just throw AI
on your pitch deck and call it a day
you gotta show them that you actually get it
you know the market that you have a plan
that you can solve a real problem
hmm hmm and make money and yeah
eventually profitable
show them you're not just chasing the hype right
so what about early stage companies
are they just like out of luck
yeah because everybody's so risk of ersnail
yeah it's definitely harder for them
they're looking at longer timelines to exit
more competition out there
oh yeah
and investors are way more
cautious about putting money into early stage stuff
it's tough so they're gonna have to be really scrappy
they gotta prove they can really execute
and build a real business hmm
okay so let's look at this from another angle
like what about the VC world itself
what's going on behind the scenes
that might be contributing to this
okay so one big thing is just like
there's a lot of crowding in certain sectors
especially software too many companies not enough money
pretty much
so many companies fighting for the same pot of cash
it means smaller returns for everybody
it's like everybody wants a slice of the pie
but the pie keeps getting smaller
exactly
and it's not just software fin tech consumer tech
it's happening everywhere
so yeah
standing out from the crowd is really really key
big time okay
what else is going on in the VC world
well
there's this big delay in what we call liquidity events
fewer companies going public
fewer acquisitions
so it's harder for these VC funds to you know
give money back to their investors
the people who gave them money in the first place
their LPs right
the limited partners so it's like if the exits dry up
everybody gets stuck yeah
startups the funds
the Lps exactly
it just creates this this cycle of caution
lps are hesitant to commit to new funds
and then the vcs have less money to invest
it's all connected right
makes sense it's this whole like complex web of stuff
yeah tangled web
and to add to that
we're also seeing a shift in like how LPs are feeling
like their sentiment you mean yeah
because other types of investments
are starting to do better than
venture capital oh
they're looking for greener pastures
make sense but hold on a second
if everybody's pulling back from VC
where are the returns like
is there any good news here
oh there's always opportunity
you just have to be willing to like
think outside the box okay
so what are we talking about here
well like Eastwind Substack
they talk about these under explored
places and industries you know
instead of everybody piling into Silicon Valley
and focusing on software right
investors are starting to look elsewhere
okay so where are they going
well
things like energy tech are getting a lot of attention
Climate Solutions Agratec
even space exploration
there's a ton of potential in those areas
because there isn't as much VC money there yet
so it's kind of like the Wild West out there
you can stake your claim before everybody else shows up
but it's not just about you know
chasing the new shiny object right
it's about being strategic too
definitely the funds that are doing well
they're not just following trends
they're doing their homework
really digging into these companies
they're being more careful
more selective and they're in it for long haul
so you gotta be like a detective
not just a you know
a hype chaser exactly
okay that makes sense
and um
it kind of
goes back to what we were talking about before
like how do you convince those investors
that you're the real deal
that you get it right
if you can show them you understand these new markets
that you've got a unique approach
you're way more likely to get their attention
even in a tough market make sense
okay so what does all this mean for the future of VC
is it about to like completely change
I think it's already changing
that EWI report it talks about how VC has to adapt
like diversify go beyond the usual suspects
explore new markets
new industries to spread the risk basically
exactly and tap into the next wave of innovation
but it's not just about spreading the money around
so what else needs to happen
valuations they have to be more realistic
you can't just chase hype and inflate numbers anymore
investors they gotta be like grounded
look at the fundamentals
make sure their investments make sense in the long term
no more playing fast and loose right
it's got to be about sustainable growth
that's what we all want yeah
sustainable growth so not just about riding the wave
it's about building companies that can like
weather the storm exactly
companies that are resilient
adaptable and you know
companies that actually have a positive
impact on the world so it's not just about making money
no it's about making a difference
and that's becoming more important to investors
you know like
they wanna
put their money into things that actually help
that's gonna have a big impact
on what kinds of companies get funded in the future
okay so let's bring it back to our listener
who's getting ready for that
big meeting with investors yeah
what's your advice like
based on everything we've been talking about
I think
the most important thing is just to show them that
you understand how the market works
be upfront about the challenges
don't sugarcoat it
but also talk about the opportunities
show them that you have a plan
that your business is built to last
so basically be real
be transparent show them that you can adapt exactly
be proactive not reactive right
and focus on the things that you can control
you can't control the economy
but you can control your team
your product your vision
is about building a company that can thrive
no matter what's happening out there
but it's not just about the numbers in the plan right
no definitely not
it's also about storytelling
oh okay
investors they wanna hear a story
something that captures their imagination
something that gives them confidence
you gotta connect with them on an emotional level
make them believe in your vision
so it's like yeah
data is important
but it's the story that really sells it
it's about the passion the purpose
like why are you doing this exactly
and do you believe in it
that's what makes them wanna be a part of it
do you gotta weave it all together
the data the strategy
the heart you gotta paint a picture of the future
that investors wanna be a part of right
if you can do that you'll be in a good place
even in a market like this
you can still get funding if you have a great idea
a strong team and a vision that people believe in
it's all about being prepared
being flexible and believing in what you're building
yeah and don't forget to enjoy the ride right
building a company is tough
but it's also incredibly rewarding
embrace the UPS and downs
learn from the mistakes and keep innovating
couldn't have said it better myself okay
you know for our listeners out there
who wanna dig into those sources
we mentioned we'll have all the links in the show notes
perfect and until next time
keep on diving deep and it's not just
you know about the money
yeah we're also seeing a shift in LP sentiment
like their their feelings exactly
oh yeah
because other types of investments
are starting to do better
than venture capital they're like
see ya VC I'm out of here
pretty much they're looking for better returns
which makes sense right
but right hold on
if everybody's pulling back from VC
then where the returns
like is there is there any good news in all of this
oh there's always opportunity okay
you just have to be well
you gotta think outside the box a little bit
so what are we talking about here
give me some specific well
like Eastwind Substec
they talk about these like
under explored geographies and industries okay
you know instead of everybody just
flocking to Silicon Valley and focusing on software
right investors are starting to look elsewhere
so where are they going what's hot
well energy tech is getting a lot of attention okay
climate solutions agro tech even space exploration
whoa space yeah
that's pretty out there yeah
it is but there's a ton of potential in those areas
because there isn't as much VC money there yet
so it's like the wild west huh
get in there before everybody else
exactly so but you know
it's not just about like chasing the shiny new object
right you gotta be strategic about it
yeah for sure
the funds that are doing well
they're not just following trends
they're doing their homework
really digging deep into these companies right
being more careful more selective
and they're in it for the long haul
they're not just looking for a quick buck
exactly so you gotta be like a detective
not just you know a hype chaser
that's a great way to put okay
that makes sense and it
it actually kind of
ties back to what we were talking about earlier
about convincing those investors
that you're the real deal
if you can show them that
you understand these new markets
that you've got a unique approach yeah
you're way more likely to get their attention
even in a downmarket especially in a downmarket okay
so what does all this mean for the future of VC
like is it is it about to like completely change
I think it's already changing
you know that EWI report
it talks about how VC has to adapt yeah
like diversify go beyond the usual suspects
explore new markets new industries
spread the risk basically
exactly and tap into the next wave of innovation
but it's not just about spreading the money around okay
so what else needs to happen
valuation right
they got to be more realistic
you mean no more that crazy hype in inflated numbers
exactly investors
they gotta be like grounded right
look at the fundamentals be real
yeah okay
make sure their investments make sense in the long term
no more plane fast and loose with valuations
exactly okay
I like that it's gotta be about sustainable growth
sustainable growth yeah
that's what we all want make sense
so it's not just about like riding the wave
you know riding that high wave okay
it's about building
companies that can weather the storm right
companies that are what resilience adaptable
exactly and what was that other thing you said before
oh companies that actually have a positive
impact on the world right
not just making money but making a difference
that's becoming more important to investors
so they wanna
put their money into things that actually help yeah
okay that's interesting
I think that's gonna have a big
impact on what kind of companies
get funded in the future okay
so let's bring it back to our listener who's
you know
getting ready for that big meeting with investors yeah
what's your advice based on
you know everything we've been talking about okay
so I think
the most important thing is just to show them that
you understand how the market works
uh huh be upfront about the challenges
don't sugarcoat it right
but also talk about the opportunities right
show them that you have a plan
that your business is built to last
so basically be real be transparent
show them you can adapt exactly okay
be proactive not reactive right
and focus on the things that you can control
you can't control the economy yep
but you can control your team
your product your vision
exactly it's about building a company that can thrive
no matter what's happening out there right
but but it's not all about the numbers in the plan
right no
definitely not okay
it's also about storytelling
ah okay storytelling
yeah investors
they wanna hear a story
something that captures their imagination
something that gives them confidence
so how do you do that talk
you gotta connect with them on our emotional level
make them believe in your vision
so it's like data is important
but it's the story that really sells it exactly
it's about the passion the purpose
like why are you doing this right
do you believe in it
that's what makes them wanna be a part of it
so you gotta weave it all together yeah
the data the strategy
the heart you gotta paint a picture of the future
that investors wanna be a part of
exactly if you can do that
you'll be in a good place
even in a market like this
you can still get funding if you have a great idea
a strong team and a vision that people believe in
it's all about being prepared
being flexible and believing in what you're building
yeah and don't forget to enjoy the ride right
building a company is tough
but also incredibly rewarding
embrace the UPS and downs
learn from the mistakes and keep innovating
couldn't have said it better myself
so
it sounds like the VC landscape is going through this
like really interesting evolution
you know we've seen a downturn
but there's also this shift towards sustainable growth
a focus on these new sectors
and a real emphasis on fundamentals
yeah it's definitely a time of change
I think this evolution presents both challenges
and opportunities right
you know for those who are willing to adapt
think differently embrace a long term perspective
yeah
there's still tons of room for success in the BC world
so this deep dive has been really helpful
you know especially for someone like you
who's about to go into that investor meeting
we've covered a lot from metro trends
to these structural challenges
to new opportunities what are some of the key takeaways
like if you had to sum it all up for our listener
okay well
I think the
most important thing to remember is that the VC
landscape it's changing
but it's not like dying right
it's transforming
and this transformation requires a shift in mindset
for both investors and entrepreneurs
so instead of looking at this downturn as like
a sign at the end right
we should see it as a chance to like make things better
exactly it's a chance to build a more resilient
sustainable impactful VC ecosystem
well that's focused on creating lasting value
not just chasing quick returns
I like that and for our listener
who's about to pitch their company to investors
hmm what's the one piece of advice you would give them
I would say going with confidence
knowing that you've done your homework
be prepared to talk about the challenges
but also highlight
the opportunities that this new landscape presents
and most importantly
tell your story with passion and conviction
investors are looking for companies that are
not only viable but also inspiring
that's great advice remember
even in a downmarket
great ideas with strong teams and a compelling vision
can still get funding it's about being prepared
being adaptable and believing in what you're building
that's it awesome
well thanks for joining us
on this deep dive into the world of venture capital
yeah we hope you found it insightful and helpful
as you navigate this you know
kind of crazy landscape here's my pleasure
for those of you want to learn more
check out the shownotes for links
to all the source material we talked about
yep all the good stuff
until next time keep on diving deep