2023: The Year of the Bridge | Getting Off The VC Train | My Top 5 Predictions for 2024
Being that this is the last newsletter of 2023, I wanted to take the opportunity to reflect briefly on the year as well as put out some bold predictions for 2024.
2023 Reflection “The Year of the Bridge”
A good read on getting off the VC train
My top 5 predictions for 2024
2023 Reflection: Bridge to 2024…
If I were to sum it up in quote, I’d toss it to Jerry
Sometimes The Light's All Shining On Me
Other Times I Can Barely See
Lately It Occurs To Me
What A Long Strange Trip It's Been
What a long, strange trip 2023 has been indeed. At times it seems the only light that has been shining is a spotlight of scrutiny sitting atop an itinerary of uncertainty. We never really know what’s around the corner, but we’ve really not known this year.
As such, it’s been a year of treading carefully and operating with a new level of constraints. It’s also had its pockets of tranquility as we’ve all had to sharpen our focus and take care of our businesses. I’ve experienced that there’s also more empathy and less grandstanding with a sense for many that “we’re all in this together.”
We’ve all taken some hard knocks, we’ve waited patiently for the quarters to pass and the Fed to holster its hammer and well, we’ve almost made it!
But, before we toss 2023 into the annals of history, I wanted to reflect on the year we’re still somehow in. I’ll keep it short as not to dredge up too much angst.
Back in Q2, as part of our capital provider market sentiment survey, I asked folks how much of their portfolio they thought would need bridging. 80% thought less than 25% of their portfolio, which was flat from 12 months prior (Q2 2022).
Respondents primarily viewed it as the job of existing equity investors to provide these bridges, along with support from new investors and lenders.
Well, existing equity investors have acted on that job, but I think the extent to how much bridging would be required was meaningfully underestimated.
Almost 40% of all equity financings tracked by Carta in 2023 have been an insider round (read bridge or extension). As you’ll see in the quote below, Carta’s Head of Insights expects that to reduce dramatically to 25% of all rounds in 2024, reverting back to 2022 levels.
I’m a bit skeptical of the expectation that a reduction in bridge rounds will actually mean more cash for new startups. Reserves that have funded bridges (addressed below) are a different allocation of capital than first checks. If the pot of money for first checks is not increasing, the amount of new checks being written is unlikely to increase much. That said existing funds still need to be deployed and, barring continued unforeseen macro and geopolitical headwinds, I do think investors will be able to focus on writing new checks much more than they’ve been able to the past 12-18 months. We’re all hungry to fund new companies.
Back to insider rounds a bit. Historically they have been about VCs deploying reserves to continue betting on and increasing ownership stakes in their top companies. Of course, that changed to a much more defensive posture in 2023 with many more portfolio companies in need of additional capital and many more VCs: 1) knowing how hard it would be to attract fresh equity capital from new investors for those companies and 2) wanting to avoid downrounds in their portfolios at all costs.
Bridges and extensions can only go so far though and at some point “net new” capital has to come in at whatever price. Either that or a company has to be self-sustaining, bought or cease to operate. Cue Jason Lemkin and the exhaustion of VC reserves.
So, a lot of bridging has happened with equity and debt. Bridging will continue to happen, but it can’t stay at 2023 levels. Let’s not pretend that a bridge round or possibly even an extension is a milestone financing event. Both have their time and place, but a functioning ecosystem of healthy software companies and the capital funding them cannot be 40% bridge capital.
Some green shoots
Inflation is starting to look like my kids’ bouncy house when I pull the plug.
The stock market is ripping (yet again), which is both good for the psyche and hopefully for the private markets.
Venture valuations are showing a smidge of a rebound across stages.
Companies are beginning to add net new ARR and although 2024 growth expectations are down, there is still growth.
Operators are proving to be resilient and don’t seem to have the fatigue one might expect.
2024 HERE WE COME!
Getting Off the VC Train
Charles Hudson at Precursor Ventures (pre-seed/seed) put up a good post last week on “Getting Off the VC Train”, based on conversations he’s been having with venture-backed founders.
I approach most of these conversations with founders with a simple question - is getting off the train a choice, an option, or a necessity given the state of the business.
Charles provide a simple matrix for the type of companies these founders may be running, saying
If you’re not in one of the rightmost quadrants in the chart above, I would question whether it makes sense for you to stay on the VC train and rely on venture funding for your future financing needs.
In asking founders why they want to get off the train, he’s found that their responses largely fall into three buckets:
Clear recognition that the original thesis was wrong - keep going or shutdown decisioning point
Fear of the unknown - the future state of the fundraising market and the bars for them to clear to raise the next round
Desire to control the company’s destiny - believe they can get to a good outcome without raising any more money.
Getting off the VC train is not an easy feat. Sometimes companies have a choice, many times they don’t and are just forced by the market. I’d say it’s much easier to get off (and back on) the train if the amount of VC injected has been moderate at reasonable valuations. Unfortunately, there’s a whole generation of companies for whom that is not the case. It does not mean their business or its potential is broken, but their capital structure very likely is and their optionality has certainly been dramatically reduced. We’ve seen a lot of these this year and it’s just unfortunate.
My Top 5 Predictions for 2024
We’ll all been reading our share of prognostication pieces lately, so I figured I’d pile on with some of my own predictions. While I have no clue as to the level of mental rigor applied by other prognosticators, I must say I’m feeling pretty confident about my predictions below.
The year will consist of 366 days, meaning we should all be 0.27% more productive.
Daylight Saving Time will continue to be a bane of our existence and our elected legislators will not alleviate the pain. Also, many people will continue saying Daylight Savings Time, which is incorrect.
<20 readers of this newsletter will drive a Cybertruck.
>2,000 readers of this newsletter will complain about the video conferencing platform they’re using at least once (or their call counterparty will complain about it). Someone abstract away the pain for us!
Any parent of kids under the age of 5 will, yet again, have a good look in the mirror and a shake of the head when they receive their Spotify Year in Review.
Closing Out
Thanks again for being a reader and a part of our ecosystem. I hope you have a wonderful and relaxing holiday season and spring into 2024 packed with energy and purpose. There will certainly be new challenges, but remember, if my first prediction above rings true, you have one extra day to solve them all.
Happy Holidays,
Brian and the Bigfoot team