Subscribe
Share
Share
Embed
Welcome to the Venture Capitol podcast, the place where politicians can impact the startup industry nationwide. Join NVCA President & CEO Bobby Franklin for a unique podcast that looks at public policy through the eyes of America’s venture capitalists — the people who are investing in the high-growth companies of tomorrow. This show brings together VCs, policymakers, and policy influencers to discuss and debate issues that affect our nation’s economic future.
Speaker 1 (00:05):
Hello, everyone. I'm Bobby Franklin. Welcome back to NVCA's Venture Capitol Podcast, where the O in Capitol stands for Capitol Hill, and where we bring together VCs, policymakers, and policy influencers to discuss and debate issues that affect our nation's economic future. Our industry has experienced years of frenzied investments and soaring company valuations, but now venture capital investment levels are readjusting as businesses assess the current economic landscape. VCs are navigating persistent inflation, slowing growth, and rising geopolitical tensions, making the industry's key messages for policymakers more important than ever. We're going to discuss those key messages in today's episode. First we will talk to NVCA research director Shiloh Tillemann-Dick and dive into the data from the recently released Q4 2022, PitchBook-NVCA Venture Monitor report. Next we'll hear from NVCA policy experts Justin Field and Charlotte Savercool to get a look ahead at what we expect Congress to be focused on and how it impacts our industry. To get us started, I would like to welcome my first guest, Shiloh Tillemann-Dick. Welcome to Venture Capitol, Shiloh.
Speaker 2 (01:26):
Thanks for having me, Bobby.
Speaker 1 (01:28):
So, we're seeing a lot on social media about how the venture market contracted compared to 2021. Can you walk us through what happened last year?
Speaker 2 (01:39):
Well, a lot's been made about how market activity slowed down in the second half of the year, but 2022 wasn't a bad year. Trees never grow till they reach the sky, and even though activity was down from the heights of 2021, most of the numbers for 2022 were at or above their 2020 numbers. The big standouts on the high end was fundraising, which had hit an all-time high of 162 billion. And on the low end it was exits, where they were down almost 37% year-on-year. But when compared to prior record year 2020, they were only down 3%. So you win some, you lose some. I think it is more useful to compare the first half of the year to the second half of the year because I think you can view the first half of the year 2022 as kind of the after party to 2021. And then the second one, you had a major pivot in the macroeconomic environment, which was largely driven by the Russian invasion of Ukraine.
Speaker 1 (02:47):
So does that mean it's past the after party, and we're in the hangover the next day?
Speaker 2 (02:52):
I think we're just past the hangover now, and now we're probably cleaning up the House and taking out the trash and such.
Speaker 1 (02:59):
So, without going into too much detail on what got us here, what are the top things founders need to know about the market in 2023?
Speaker 2 (03:08):
I think the primary thing founders are going to want to take into account is that money is a lot more expensive than it used to be. According to our friends at PitchBook, in Q4 2021, there was $1.72 of VC funding available for every dollar of demand. As of Q4 2022, it was down to 52 cents. And in addition to that, increased interest rates mean that the situation is more extreme in the venture debt markets.
(03:35):
Also, I think total addressable markets aren't what they used to be. A dramatic increase in trade barriers and such means that founders need to understand what their TAM is according to the markets of today and tomorrow, not what it would've been based on the conditions of two years ago. And then, I think the last bit of it is that kind of the age of growth at any cost is over. We're no longer in the era of unicorns. At Bessemer Venture Partners, they rolled out the idea of the Centaur as their new paradigm, which is based around a company hitting a hundred million in ARR over any given year. And so I think the real answer here is, don't try to be a unicorn. I think I'm exposing my Western roots, but try to be a workhorse rather than a show horse, because that's what the times call for.
Speaker 1 (04:30):
Are there any regional or state trends you're seeing that investors should be aware, of interest?
Speaker 2 (04:36):
There are so many interesting things going on across the country. I know VC is famous for its hotspots on the coasts, but in the last five years, Indiana, Georgia, North Carolina and Utah have all had huge growth, and I'm really excited to see where they go over the next five years.
Speaker 1 (04:54):
And are there any sectoral trends that caught your eye, possibly ones that we aren't hearing about?
Speaker 2 (05:01):
Energy and commercial products and services have grown a lot in the last couple of years, 50 and 38% respectively since 2020. So when I hear policymakers, investors and operators talk about the need to develop new energy supplies and supply chains, those both seem interesting.
Speaker 1 (05:20):
Shiloh, where are opportunities for investors?
Speaker 2 (05:23):
Basically, everywhere. I mean, I don't want to be trite, but this is one of the best times to have capital to deploy in a generation. And investors are going to have a lot of opportunities in the next few months. I mean, if I was an investor, I would, obviously, start looking in the likely places, but I would not hesitate to go beyond the developed ecosystems. So much work is being done all over the country that there's opportunities really anywhere you're willing to look. I mean, I would also just take a moment and say that if I was an investor, I would be watching how the programs the government passed last year evolve, because the funding they could provide during a very tight monetary environment could be some really fantastic wiggle room or runway or whatever metaphor you care to use for founders in some of the nation's most interesting companies.
Speaker 1 (06:26):
Shiloh Tillemann-Dick, research director for NVCA, thank you so much for joining us today on Venture Capitol.
Speaker 2 (06:33):
Anytime, Bobby. It was a pleasure.
Speaker 1 (06:39):
Now let's welcome back Justin Field and Charlotte Savercool with NVCA's Government Affairs team. Justin, Charlotte, welcome to Venture Capitol.
Speaker 3 (06:48):
Thanks for having us, Bobby.
Speaker 4 (06:50):
Bobby, always great to be on.
Speaker 1 (06:51):
So, Justin, what's top of mind for Congress, and what implications will this have for our community?
Speaker 4 (06:59):
Well, we're moving into this new divided government, and so basic functionality is top of mind, unfortunately. The debt ceiling is really knocking every major economic issue, from a congressional perspective, out of the way, kind of like a hurricane coming through. Nobody knows how we're going to address the debt ceiling, what that's going to look like, what sort of spending and tax implications are going to be wrapped up around it. What I can guarantee you is this. You're going to hear a lot of conversations around increasing taxes on rich people, cutting spending for different programs, debt, et cetera.
(07:33):
They need 218 votes in the House of Representatives and 60 votes in the Senate. Whatever ultimately gets that together and gets us past the debt ceiling is going to be what you'll see. We don't know what that coalition's going to look like. We don't even know if Speaker McCarthy's going to still be speaker at the end of it. What we do know is there's a great deal of uncertainty. Ultimately, I do think they pass a debt ceiling without a default, but it's going to be one of the messier, if not the messiest process we will see before we get there.
Speaker 1 (07:59):
Well, that brings me to Charlotte. Charlotte, with Republicans taking control of the House, what will some of the priorities be? And will there be opportunities for our industry in this Congress?
Speaker 3 (08:11):
Yeah. Great to be here, Bobby. I think some of the things Justin just alluded to is going to be represented in these first several months of this year, with Republicans taking back control of the House. I think we've seen a lot of frustration with agency activity. We've seen a lot of frustration with several bills that have been passed with pretty significant price tags associated with them. So I do think that the government spending concern is going to be top of mind, particularly as we're looking at this debt ceiling conversation. I do also think we're going to see a lot of focus on oversight activity. The Capitol, House, Senate, they're back open now. I think with Republicans at the seat of the chairs in several committees, we're going to see agency officials be called up to Capitol Hill and testify on some of the things that they've been doing that, frankly, we've had a lot of concerns about too. So I think we'll be able to help out and, obviously, be tracking several of those conversations.
(09:11):
One of the last things I'll mention on the priority side is, how are we looking at China? And this has been a running theme for the last several Congresses. There's been a lot of bipartisan activity and interest in addressing some of the concerns there. And you saw one of the first acts in the House, or both, to create a new select committee on assessing competition with China. So I think we're going to continue to see a lot of activity there from both sides of the party. Thinking about opportunities for us, we're seeing a lot of new committee chairs be appointed, new committee members, new members elected to Congress. So I think there're going to be a lot of opportunities for us to develop relationships with new champions on the Hill, which is exciting. And I'll just call out one particular committee that has announced some of their agenda items and priorities, which is the House Financial Services Committee. Patrick McHenry is the new chair of that committee and has called out capital formation bills and blockchain legislation as some of his priorities. So I think there will be opportunities for our industry there.
Speaker 1 (10:12):
Justin, Charlotte talked about agency heads maybe being called before the Republican chairs, and certainly expect to see that. But thinking about what's going on at the agencies, there's been an unprecedented amount of money passed by Congress over the last two years to fund a range of technology programs. Where are particular areas of interest, and why do you think we're seeing such an effort on a bipartisan basis now?
Speaker 4 (10:39):
Yeah, Bob, this is a really interesting thing that's happening here, because there's a bit of a bifurcation in who's going to get called in front of Congress for the going to the woodshed, if you will. Those will be the regulatory agencies more primarily, et cetera. What we're seeing in terms of opportunities for technology has more bipartisan support than one would expect. Things around semiconductors, for instance, advanced energy, technology that has a nexus to national security. Those are all things that there's been a real sea change in how Washington has viewed the technology ecosystem over the last five years, largely through, going back to what Charlotte was saying, through the lens of geopolitical competition with China. That is driving a bipartisan coalition that wants to see greater government investment into technology.
(11:27):
So we see things of the CHIPS and Science Act that passed. We saw, obviously, the Infrastructure Investment and Jobs Act that passed, both bipartisan. Inflation Reduction Act passed on a partisan basis. But even chunks of those, I think will have bipartisan support going forward. And so if you're looking at where government is going to be significantly involved over the next five to 10 years, which I believe that we are in a new era of technology policy, I think it's going to absolutely be anything that is adjacent national security for both good and bad policymaking. I think you're going to see things in energy absolutely there. And in trying to push more of this activity in more parts of the country, not dissimilar from what we're seeking to try to do with the mission of Venture Forward.
Speaker 1 (12:11):
Charlotte, a bit less exciting, maybe one would call it scary topic, but one that needs to be covered as part of any policy outlook like we're giving today is the SEC. And I wish I were talking about the athletic conference that my alma mater belongs to, but I'm talking about the Securities and Exchange Commission. We spent a lot of time at the SEC or filing comments with the SEC in 2022, responding to a variety of really bad proposals. What are we expecting this year at the SEC?
Speaker 3 (12:47):
Right. Scary is spot on, I think, in the regards to the SEC. And last year we had an episode all about just one of the proposals, and I think we submitted comments to round four or five and joined in with a coalition on several other issues. So there were several scary things happening over at the SEC that we've had to spend a lot of time on over the last year, but the most impactful being the private funds proposal. And I think now that we're in this new year, one thing that we're going to be watching for is when the final rules actually come out. So we saw what all of these proposals looked like. There are a lot of prohibitions on common GP, LP terms that the SEC is trying to prevent. They're trying to put forth new restrictions over side letters, but we don't know what the final rule is going to look like.
(13:35):
So as we go into this new year, we're expecting the SEC to release their final regulations on the private funds and other issues that they've been working on for several months. So I hope that we will have good news, but I'm not positive on how this is going to come out and impact VCs. But we are preparing... with our board, board leadership, other groups... on our response and navigating our strategy on that. But one of the things we're also expecting out of the SEC this year is we looked at, last year, a lot of targets on private funds. I think we're going to see some more proposals come out on the private company side, and this could be expanding the amount of information that's included on a Form D when a private company is going through a financing round or making changes to the shareholder record count, which that is something positive that was put in place from the Jobs Act, which was just celebrated last year for its 10-year anniversary. So that's something of concern that we're also paying close attention to.
Speaker 1 (14:39):
Well, on behalf of the industry and all the members at NVCA, let me just take a moment to thank both of you, Charlotte Savercool, Justin Field, for all the work that you do on behalf of our members, on behalf of the entrepreneurial ecosystem. Your work is vital to the success of what happens here in the US and our competitive nature against other countries and how innovative we are. I just want to thank you both for all the hard work.
Speaker 3 (15:06):
Thanks, Bobby, and thanks for having us.
Speaker 4 (15:08):
We appreciate it. We think we have two of the best jobs in Washington. We look forward to continue working on this stuff.
Speaker 1 (15:13):
Well, thank you both, and thank you for joining us, once again, on Venture Capitol.
(15:21):
Thanks for listening. But before we gavel out, we have some exciting news to share here at NVCA. As many listeners know, our last episode officially kicked off the start of a year of celebration at NVCA to commemorate our 50th anniversary. If you haven't already tuned in, be sure to check out the episode featuring stories from early NVCA influencers for a look back at our history, including our role in guiding the ecosystem through legislative challenges and successes. We're so proud of the work that we have accomplished over the last 50 years and look forward to celebrating with the venture community at our annual Leadership Gala. The event will take place on May 11th, 2023 at the Four Seasons Hotel in San Francisco. For more information and to register now, please visit nvca.org.
(16:12):
Now, before we leave you, here's another fun fact. The original phone number for the White House, back in 1878, was simply the number 1. In fact, a phone wasn't installed on the president's desk in the Oval Office until 1929. Course, today if you just hit the number 1, you're really calling the country code for the entire United States. But back in 1878, you might've gotten the president. Again, thank you for listening to Venture Capitol, a podcast brought to you by NVCA. Hope you enjoyed the show, because investing in tomorrow starts with smart policies today. I'm your host, Bobby Franklin, wishing you good days ahead. Bye for now.