VC Funding Tanks, Alpha Partners Shares Perspective and Future Expectations on Venture Market

Recently, there have been various reports about the decline in venture capital funding. VC money is a key component in funding risky early-stage ventures. While only a fraction of the investments may drive results, some of these companies may turn into revolutionary platforms or launch new products. Many of the biggest tech firms accepted VC money to get to where they are today.

The rapid rise in interest rates, compounded by global risk, has compelled many VCs to slow or pause funding. Some big investors have switched to debt securities as these are less risky, and returns are far higher than the zero-interest rate days of several years ago.

One recent report indicated that US VC investments cratered by 45% when comparing the first three quarters of 2023 to 2022. The analysis claimed that during 2023 $89.3 billion was raised, contrasting to $164.3 billion in 2022.

A different report claimed that global corporate venture capital-backed funding and deals dropped to the lowest levels since 2018.

However you slice it, venture funding is down across the world.

CI recently connected with Steve Brotman, Managing Partner at  Alpha Partners, a venture capital firm that invests alongside “hundreds” of smaller VCs. Their website explains their strategy:

“We partner with Early-Stage VCs to double down in their leading companies. Small, specialist VCs are the first funders of 80% of unicorns and tech IPOs, but 90% of the time, these first funders lack the capital to follow on in their growth stage winners. Alpha is purpose-built to solve this capital gap for Early-Stage VCs. As a result, Alpha invests in top-tier growth equity rounds led by the world’s best investors.”

Alpha Partners aims to drive venture-type returns at a lower risk and shorter durations. Brotman shared his thoughts on the current VC marketplace.  We asked Brotman which sector of venture funding has declined most dramatically. He said that while it is hard to say for the full year of 2023, looking at the drop in 2021 to 2022 global VC spending by industry, we can see that transportation has fallen 53% and Fintech has fallen 40%.

“Transportation’s decline was compounded by a number of factors: pandemic-driven long-term behavioral changes, lower shipping volume, uncertainty in human labor, and concerns of global economic downturn and rising interest rates,” said Brotman. “Fintech had strong tailwinds in 2021, with stimulus checks increasing consumer spending/investing and low-interest rates helping new businesses such as buy now pay later [BNPL] companies take off. However, with the economic shift in 2022 of rising interest rates and declining personal savings rates, those tailwinds turned into headwinds.”

With the economic shift in 2022 of rising interest rates and declining personal savings rates, those tailwinds turned into headwinds Click to Tweet

While these two sectors may have declined the most, one area has gained significant traction, Brotman said. Artificial Intelligence (AI) generated significant headlines this past year as ChatGPT provided consumers access to the technology fueling the AI race.

“This past year has seen an enormous increase in AI capabilities and the number of new startups in the field,” Brotman stated. “According to Crunchbase data, 26% of VC allocation from seed to growth stage has gone to AI startups in 2023, compared to 11% in 2022.”

And what about valuations? There has been a ton of ink that valuations during the boom were unrealistic. The many down-rounds reported are emblematic of this phenomenon. So, with rates on hold, have valuations bottomed?

No said, Brotman. They should continue to fall into 2024  as higher interest rates continue to impact the venture sector along with the overall lower growth rates.

So, are VCs participating in lower-priced rounds? Pursuing follow on investments in the firms they already backed?

“Companies have been avoiding going out to market in this environment, so we’ve seen a majority of deals as bridge rounds, generally with insiders. There are some exceptions, however, for leading companies that are being preempted to raise now.”

So when does the pause in VC funding end? When is the gloomy market going to turn the corner? Is it when interest rates are no longer expected to rise? Is it when rate cuts return?

It has already recovered a bit during Q3, said Brotman, as funds need to deploy.

“The issue is that LPs are not investing in new funds as much.  That means 2025-2027 will be even worse than today’s valuations.”

We asked Brotman about his expectations for 2024 and the overall economy; will we be in recession?

Brotman predicted that rates will start to bite hard, as will deglobalization.

“Government spending will likely be forced to drop given high-interest spending.”

The current inflationary fiscal policy and a federal government that loves to spend counters the narrative that it wants to drive inflation lower. There are trillions of dollars still in the queue – effectively fighting the Fed and its mission of lower prices while building a debt crisis.

“This is a big concern,” stated Brotman. “In 2025 if rates continue up, they could consume 1/3 of all government and as much as 1/2.”

The current inflationary fiscal policy and a federal government that loves to spend counters the narrative that it wants to drive inflation lower Click to Tweet

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