@Tata-JLR: ‘The 2021 era glorified the role a lot’: How venture capital has changed since the pandemic gold rush

Gone are 2021’s record-breaking days of excess, propelled by immense investor FOMO and cheap capital. They have been replaced by a period of contraction and relative prudence, where soaring interest rates have largely curbed lavish bets on loss-making startups.

“The 2021 and 2020 era glorified the role a lot but actually it’s working with impossible odds – it’s still a lot of failure,” Notion Capital partner Kamil Mieczakowski told Business Insider.

“The majority of the portfolios of venture companies don’t achieve unicorn status, many you sell to get your money back, many fail. It’s difficult to deal with that because you feel like you’re doing good, quality work every day.”

In 2021, a record 787 unicorns – startups worth over $1 billion – were minted. That number has tumbled ever since despite some eye-opening valuations being lumped upon very young AI startups like Mistral and ElevenLabs.

The post-pandemic era has been defined by a scarcity of both good deals and capital, which has led to intense competition among founders and even investors in the same fund.

Nowadays, VCs spend a lot more time sourcing deals, conducting market research, scrutinizing startups’ metrics, and trying to pre-emptively fund a startup before it even starts searching for new capital.

Shrunken ambitions

Typical funds have shrunk their ambitions from 10 to between three and five new investments a year, according to Fabian Heilemann, CEO of impact fund Aenu.

In addition, Heilemann said VCs were more focused on keeping enough cash on hand to support their existing portfolio companies – a stark contrast from 2021’s abundance.

AENU

But scarce capital has also led to increased competition within investment teams, Heilemann added, as VCs vie to get their chosen deals approved.

Indeed, some new investors assumed their companies would go public in three years, according to Marc Sabas of impact fund Ship2B Ventures.

Instead, they have been left with a down portfolio, less excitement, and limited chances of a big payout.

Cold calling heats up

Investors who spoke to BI said VCs spend more time mapping out markets, analyzing companies, and evaluating historical data. That’s where the majority of investors are spending their time, according to Ash Arora, partner at early-stage fund LocalGlobe.

LocalGlobe.

While some of this research is to help portfolio companies understand the macro-environment, there has also been a general uptick in outbound deal sourcing, investors said.

At Notion Capital, each member of the 10-person-strong investment team speaks with between five to 15 prospective companies a week. Junior staffers do more outreach to build their understanding of the market and process the top of the funnel, Mieczakowski said.

Notion Capital uses software to streamline its outbound work; it looks at website traffic, headcount growth, and whether a startup has nabbed someone from a unicorn to focus the investment team’s work.

For Ship2B Ventures, each partner draws up a list of companies they were interested in but missed out on every six months. Together, they whittle it down to around 25 companies and find ways to approach them.

Sabas said the fund had been “able to get into deals we thought had been lost,” thanks to its strategy of keeping in touch with founders even as other investors start to pull back.

Slower and more strategic dealmaking

There’s still a lot of activity at early-stage but good deals are hard to find, investors said.

Pandemic-era investing consisted of writing checks before proof points were met, such as product-market-fit or the first million of annual recurring revenue (ARR). But investors are now paying closer attention to these metrics, Notion’s Mieczakowski said.

Chris Chuffart, founding partner at Prediction Capital, agreed, citing examples of absent due diligence from investors that other funds would consider a “validation factor” of their decision to back a particular startup.

“At the time it truly felt like you were, as a VC, being interviewed to get the privilege to invest in some of those hyped deals,” he said, speaking about the record-breaking years that peaked in 2021.

“It’s the total opposite today in an investor market.”

VCs have long relied on peers to share good deals – many are still sourced this way – but it’s not the same gravy train as it once was. The all-around cooler market means there’s less FOMO so referrals don’t carry the same weight, Sabas said.

Dealmaking takes about three weeks from the initial meeting to the term sheet, investors said, versus one week in the frothy market. “That can still probably still happen, but it’s a lot less common,” said Alexander Danielsson, partner at impact fund Norrsken VC.

Startups are always raising

Many rounds are flying under the radar. Startups choose to announce when they actually need more money, hoping new investors will approach them on the news. That means VCs are sometimes left chasing deals that are already complete, investors said.

To get ahead of the pack, investors try to find startups “earlier, earlier, and earlier,” Mieczakowski said. This is compounded by growth activity coming to a halt, forcing later-stage firms to look elsewhere.

“If you’re a Series A lead specialist, it’s probably going to be a little bit concerning,” said Louis Fearn of Jaguar Land Rover’s fund InMotion Ventures. Strategic investors have been somewhat unscathed due to the expertise and connections they offer to startups, he added.

Capturing companies outside of the fundraising process is slowly becoming the norm, emphasizing the need for stellar research. Investors who wait patiently for the fundraising process to start would simply “never see the day” because of all the funds that preempted the deal, Mieczakowski added.

In all, being proactive is about showing up when other investors have slowed down, Sabas said. That sets a VC in good stead for when an opportunity to cut a check does arise, he added.