Tough Environment for Entrepreneurs
Being a founder is hard and the journey is often thankless. Entrepreneurs experience crazy highs and terrible lows. And recently it’s gotten even harder to be an entrepreneur.
Overall, the market remains under considerable stress. The increase in interest rates, as well as the threat of a recession, has made investors much more conservative. The days of free-flowing easy capital are gone (at least for the time being). Pitchbook data indicates that more companies are taking bridge, continuation, or down rounds; inside rounds are at multiyear highs; and there are fewer rounds with a new lead investor obtaining a board seat than at any time in at least a decade.
The third quarter of 2023 saw the lowest overall venture deal value in six years and the lowest deal count in roughly three.
Venture capital funds were forced to mark down their late-stage portfolio companies in line with comparable public companies that tanked last year amid rising interest rates. US-based venture capital funds' IRR fell to -16.8% in Q4 2022. That's the worst quarterly return the asset class posted in a decade.
This environment has been tough on entrepreneurs who are often struggling with lower valuations and getting investor interest.
Over the last 12 months, we've witnessed a lot of bridge rounds at prior inflated valuations, but now companies are being forced to raise, and many that haven't been able to grow into their valuations find themselves in a tough spot.
Investors and founders alike are optimizing for stability and cash flow to meet the challenges of the current market.
Weak companies may not be able to raise. Strong companies with great fundamentals who hit their milestones have no problem raising. Companies are more focused on sustainable business models (or limiting burn, making prudent decisions, and focused on driving towards cash flow neutral).
We continue to see great companies with great momentum and great founders get funded. But It’s been a challenging environment, to say the least.
Given the environment outlined above, we’ve been spending a lot more time than usual with our portfolio companies, supporting them through this challenging environment.
Reason for Optimism?
One of Warren Buffett's most famous quotes is: “Only when the tide goes out do you learn who has been swimming naked.”
Well, it distinctively feels like the tide is receding. And I think we’ll continue to see a period of reckoning where companies that either raised at too high a valuation, and/or didn’t raise enough money to weather this current storm are stuck and forced to make very hard decisions.
Amid these stormy seas, we feel very well-positioned to ride the waves. We’re actually more bullish than ever and feel that this current environment is much healthier long-term than the environment just 18 months ago.
Automotive Ventures is investing in the next wave of mobility innovation by identifying and backing the best entrepreneurs who are attacking the biggest challenges across the mobility landscape. We are funding the next wave of innovation in transportation.
Impact on Valuations
Interestingly, despite everything mentioned above, the valuations of Seed stage companies (the state at which Automotive Ventures typically invests) have been resilient. Pitchbook data indicates that the median seed deal size reached $2.8 million in July 2023, representing an increase of 260.6% from its 2010 level. In the same period, the median seed pre-money valuation grew 227.9%, landing at $10.4 million.
Carta reports even more bullish numbers:
Why is this? Large investors have increasingly embraced seed-stage investments, including the ability to add opportunistic alpha to their investment strategies, gain larger equity stakes and influence, and access disruptive technologies before they revolutionize an industry.
While valuations at the Seed stage have remained strong, this doesn’t tell the whole story. What Carta and Pitchbook don’t report on is the success rate of companies seeking capital. So while the best companies seem to be successfully getting funded at higher valuations, many many companies out there are languishing in an environment where it’s harder to convince investors to open their checkbooks, and when they do, the pendulum has swung pretty dramatically towards an environment where the investor has a lot more power/influence than does the entrepreneur. We’re seeing much more aggressive investment terms that favor investors over entrepreneurs.
Market Timing
Warren Buffett cites the concept of "Mr. Market,” a fictional character used to represent the stock market, who is described as being highly emotional and prone to erratic behavior.
Buffett's advice is to approach investing with a long-term mindset, rather than being swayed by short-term fluctuations driven by market sentiment. By focusing on underlying business fundamentals and buying quality companies at attractive prices, investors avoid being swept up by Mr. Market's emotional swings and instead build successful long-term investment portfolios. We at Automotive Ventures subscribe to this philosophy.
Our theory is that investing in hard environments (like this current one) is far better for long-term returns. This notion excites us and motivates us to work even harder.
Validation of our Thesis
We started investing 3 years ago with the thesis that the way we transport people and goods would change dramatically over the next 10 years. We raised our first fund to invest in exceptional founding teams at an early stage that would benefit from the big macro thematic areas affecting Mobility.
We’re proving that the thesis is working – we’re beginning to see the winners in our portfolio emerge.
Whether it’s WarrCloud, whose revenue growth has surpassed 50x since we invested (and has much more headroom to grow), or a more recent investment, Axion Ray, which is tracking to a 4.5x return within our portfolio already (the underlying business continues to accelerate), it’s really exciting (and a great honor) to be working with such talented entrepreneurs and founding teams.
This has provided great validation that we’re on the right path and need to keep our heads down and keep focused on delivering value.
Startup Pipeline
Our mission is to see every single early-stage Mobility deal globally. And we continue to have a strong pipeline of companies to evaluate.
Over the past three years, we’ve looked at nearly 2,000 companies and invested in 25 (~1.25%).
The key to this process? We focus our branding and networking efforts to reach 6k mobility professionals worldwide, and we actively manage our 36k followers on LinkedIn.
We nurture our ecosystem relationships, aspiring to build connections with every mobility-focused incubator, accelerator and VC globally. We get many of our high-value investable opportunities through referrals from our portfolio company founders and LPs.
We continue to see strong deal flow that comes in organically through our branding efforts, as well as through our network of investors.
Wrapping Up
Automotive Ventures aims to fund the next wave of innovation in transportation, delivering long-term capital appreciation by investing in early-stage automotive and mobility technology companies that are best positioned to benefit from the industry’s biggest trends; seeking out innovative companies with strong potential for growth and profitability.
We invest at the intersection of where startups will solve big pain points across the evolving mobility landscape while delivering outsized returns for our investors.
We continue to witness exceptional entrepreneurs attacking big ideas across the mobility landscape. We continue to work hard to position Automotive Ventures as the preferred source of capital for early-stage Mobility startups across the globe.
Our ruling metric is delivering above-average returns (aka Alpha) for our investors, which also aligns us with the best outcomes for the entrepreneurs we invest in. We are architecting a machine that will deliver above-average long-term returns, and we appreciate all of our investors and entrepreneurs being on this journey with us.
Thank you for your ongoing support, and we look forward to working closely together with you to create the future of this industry.
For more information on Automotive Ventures, see the following articles:
Architecting a VC Firm Part 1: Supporting our Portfolio Companies
Architecting a VC Firm Part 2: Managing our Startup Pipeline
Architecting a VC Firm Part 3: Working with our Investors (Limited Partners)
Architecting a VC Firm Part 4: Managing the Automotive Ventures Brand
