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How venture capital is changing, and why it matters

Cheap money is over. A trio of startup VCs dish on what the pandemic changed about founder diversity, location and industry.

A panel discussion at the Amplify Philly House at South by Southwest 2024 in Austin, Texas (Photo courtesy Amplify Philly)
Venture capitalists are bankers with better branding.

Friends and I traded that joke back and forth in the 2010s. A fiscally cautious response to the Great Recession contributed to a slow, if steady, economic rebound, spurring central banks around the world to maintain historically low interest rates. This cheap-money era motivated money managers to chance ever-riskier asset classes. 

Big money flooded funds focused on every stage, from a startup’s first check all the way to its IPO.

Money managers everywhere sought a piece, as has reported, from pension funds to sovereign wealth funds. 

University endowments did too, which transformed higher education. As recently as the 1960s, there was only a modest difference in the resources between the most prestigious institutions and more public ones, according to research by Stanford’s Caroline Hoxby. Then elite schools began aggressive and effective money management. Today, an entire half of the $800 billion in institutional endowments is held by just 20 universities — Harvard, Penn and Princeton among them. Hedge funds with mascots.

All this money washed into ever more and ever-larger VC funds. Yet until the pandemic, Americans were starting fewer and fewer companies. More cash chasing fewer companies birthed hundreds of so-called unicorns. Another outcome? The high-flying status of swash-buckling VCs. Leaving the spreadsheet-waving nerds in the office, VCs took to conference stages and podcasts. Debuting in late 2009, mass-market breakaway reality TV success “Shark Tank” defined the era by ushering entrepreneurs into a dark room with dramatic sound effects to grovel before a panel of celebrity investors. 

It seems now the arc is bending a different way. Between March 2022 and July 2023, the Federal Reserve Bank increased its benchmark interest rate faster than it had since the 1980s — making money more expensive to slow down a red-hot economy (which it appears to be successfully doing).

Along the way, safer asset classes like US treasury bonds looked juicier, and the valuations of tech companies that depend on the attractiveness of future earnings collapsed. 

Suddenly, in the daylight of a post-cheap money hangover, venture capital looks less attractive. Smaller funds and stricter terms followed. As has reported, the number of deals and size of funds shrunk — see our analysis of the most recent Venture Monitor reports for Baltimore and Philadelphia and Pittsburgh and DC. Starved of easy money, startup founders were yanked from growth at all costs to a path to profitability. 

Here marks a new era of venture capital: from relative obscurity to finance’s cool kid all the way to a more sober and disciplined approach. Or so I heard from Roberto Rodriguez, the San Diego-based founder and general partner of healthcare focused Sequential Ventures.

“VC could use some humility,” he told me earlier this month at SXSW, the sprawling tech conference at which cities around the world boast their innovation cred. He joined a panel I moderated that also included Investors of Color managing partner Eli Velasquez and my old friend Archna Sahay, Head of Venture Platform at Northwestern Mutual Future Ventures.

We were inside an Austin, Texas, bar that served as the Amplify Philly House and were brought together by the University City Science Center, a nonprofit dedicated to nurturing the growth of life sciences startups.

Over an hour, we held the attention of a few dozen conference goers, even with the sway of an adjacent open bar, to answer: What do entrepreneurs, and their supporters, need to know about how venture capital has changed? 

We hit on four main points:

  • VC fundraising has gotten harder
  • Entrepreneurs need to be more selective in investor pursuit
  • Capital is slowly getting more accessible
  • Not all demographics are growing the same

Raising venture capital is a difficult sales process that has gotten more difficult — so make sure you want that

In the 2010s, venture capital received far more attention than its relatively minor status merited.

Fewer than 1 in 5 businesses that are incorporated hire an employee. Of these, less than 1% will ever raise venture capital. Even among VC-friendly tech companies, fewer than 1% reach unicorn status or otherwise get on a path to going public, per a 2018 CB Insights analysis, a hallmark of success. Put simply: Of every half-million companies started, 1,000 raised VC, and of them, fewer than 10 neared public markets. 

VC is clearly not for everyone — even many SaaS startups eschew VC — and for many reasons. For one, it may take as long as two years to raise a Series A after a seed investment. With fewer dollars and more companies, an always difficult path has only gotten more difficult.

That means, even if 2024 proves to be a better year for fundraising startups than 2023, any post-pandemic entrepreneur ought to reconsider whether VC is the path for them. 

Raising venture capital is a sales process — the entrepreneur is selling an equity stake in her company — and just like any sales process, not all customers are equal, and whole customer segments are worth avoiding. So, for whom does VC still make sense?: Only those who intend to pursue growth at all costs.

“VC is expensive capital,” said Sahay, of Northwestern Mutual, who encourages entrepreneurs to pursue paying customers first. “If VC is not really what you want, find a better way.”

Spend more time finding a specific match between VC and your company  

Pity the average entrepreneur thrust on stage at a startup pitch night in the early 2010s. 

The format became a trope of the cheap-money era, in which a group of investors were gathered often in a public event to hear 7- to 10-minute pitches from founders. These events were often branded as local adaptations of Shark Tank, or Dragon’s Den or Lion’s Den or some other adversarial dynamic. 

The subtext for a less experienced founder was that they needed to hawk themselves to money men for any chance at chasing their dream. At regional events, too few of these “investors” were actively writing checks, and even if they were, pitching “investors” is as generic a concept as pitching “customers.” 

If VC dollars have gotten scarcer just as more companies are pursuing them, entrepreneurs must spend more time finding the right fit. 

Velasquez, of Investors of Color, has a simple 5-point framework that all companies he invests in must fit. Rodriguez’s fund, Sequential Ventures, is specifically tied to socially-conscious health innovations. Sahay represents the corporate venture arm of a life insurance firm, and only invests in companies tightly aligned to the business’s goals: “No pet insurance,” she said. 

An entrepreneur might review 1,000 investors  and VC firms before finding 100 that might fit and then work them to find just a few that get involved.

Entrepreneurs can raise money from anywhere 

Given the necessary specificity, it’s unlikely all an entrepreneur’s best investor prospects will live a bicycle ride away. Fortunately the pandemic completed an existing trend: Entrepreneurs anywhere can raise money from anywhere, said Sahay.

“Everyone finally had to accept that we could do a lot of due diligence over Zoom and email and spreadsheets,” she said. “And then get on a plane when you need to.” 

Local proximity may confer some advantage by way of network and insights, but so can industry, former employers, universities or any other tool to learn more about what specific investors prioritize. 

It may be nice to have your first customer locally, but it isn’t necessary — and the same should be true for VC.

“I started my career in Silicon Valley, in the Bay Area,” said Rodriguez. “But if you take a step back, more of this activity going to where the best entrepreneurs are, the best ideas are, wherever they are, is what we all want.” 

Among the 10 most active regions, 35.67% of 2013 VC deals happened in Silicon Valley, according to a analysis of Pitchbook data. By last year it had dropped to 29.35%. In that time, Austin, Miami and Philadelphia all gained share. Big cities, yes, but they demonstrate that VC can be accessed nearly anywhere The spell has been broken. 

Entrepreneurs are getting more diverse — though they aren’t all yet growing the same 

As the geographic spread of VC has gotten more diverse, so too has founder background.

Since the pandemic, entrepreneurship boomed in the United States, and Black women have helped lead the effort. Higher rates of immigration contributed, too. Though the demographics of those who start companies in the United States have become more representative of the country’s population as a whole, those who grow companies haven’t changed as much. 

Put another way: Most American demographic groups start companies, but not as many grow them.

Some of this is by choice — Americans choosing flexibility over growth. Velasquez says that if growth-focused entrepreneurs aren’t representative of American demographics then we’re still missing out on innovations we can all benefit from

In the 2010s, inclusive entrepreneurship efforts matured from social justice into an economic case. Review’s extensive analysis of the history of inclusive entrepreneurship here. Progress is coming, but pure representation is far from there.

“There are more people writing checks who look like us now,” said Velasquez, motioning to Rodriguez and Sahay. “That helps, but it’s taking a long time.”

It all starts with the entrepreneur

Lost status among venture capitalists may be a welcome refocusing. 

VC is one of many tools to time travel with money — bringing back hoped for profits to spend it now by trading company ownership. It’s one strategy, like debt financing or other banking options. They’re all different fits for different companies and stages and founders. In this way, a VC is better viewed as like your accountant or lawyer — necessary service providers that come in various approaches and persona.

The rightful focus for local leaders is on the entrepreneurs and workforce. Aided by changing expectations and video conferencing, the rest will follow.

Last decade, helped by social media and well-polished tech conference stages, venture capitalists became credible celebrities in American culture, especially within local tech startup ecosystems. For a time, it seemed they were somehow more valuable than the entrepreneurs these investors were meant to fund. 

In the middle of the 2010s, I remember circular conversations with economic development leaders about who had to come first for a tech economy to flourish: the entrepreneurs or the investors. 

This was always silly: It starts with the entrepreneur. 

“Remember,” said Velasquez to founders. “The investors need you more than you need them.”

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