Investment activity this year is being restrained by low levels of available capital, but plenty of funding opportunities exist for determined entrepreneurs.
That’s according to a panel of investors who spoke yesterday during the Early Stage Symposium in Madison, an annual event held by the Wisconsin Technology Council.
John Neis, managing director of Madison’s Venture Investors, highlighted a “lack of liquidity” in capital markets during his remarks. He explained the ecosystem is heavily influenced by limited partners “at the top of the food chain” who invest in venture capital funds.
These investors are typically making new fund commitments while “harvesting” returns from earlier investments, he said, but they have had “net-negative cash flow for two years running” due to fewer mergers and acquisitions occurring, and other factors.
“Which is unusual … and in the meantime, all the companies out there that had previously been funded, instead of exiting they’re possibly needing one more round of financing,” he said.
Neis added he’s hearing from other fund managers that they’re doing fewer deals and allocating reserves to existing portfolios.
These and other factors have led to a decline in capital availability, he noted. And at the same time, the number of new companies actively seeking investment is higher than it was just a few years ago.
“So it’s all these mouths to feed, so the available capital that’s out there is being spread across a lot more companies,” he said. “All of that has contributed to a really tight environment.”
Meanwhile, gener8tor Partner Maggie Brickerman said the trends of lower valuations, fewer deals and smaller deal volume are clear in Series A investments and beyond. Series A typically follows an earlier seed funding round and represents a more significant investment in the business.
But at the same time, she said “there’s really strong deal volume” at earlier stages of financing.
“It’s just actually fewer companies, so it’s more concentrated in a unique set of companies in the early stage,” she said.
That trend may be reflected in the latest tally of 2023 early-stage investments from the Tech Council. The group’s total for the year so far includes 45 deals accounting for more than $417 million in funding.
While that’s well below the standout years of 2021 and 2022 — in which Wiscosin saw $869 million and $640 million, respectively — it’s near the total for year-end 2020, which was nearly $484 million. But that total was spread across 114 deals, more than double the number seen so far this year.
In the more competitive fundraising environment, Brickerman underlined the importance of getting some early revenue with a strong growth rate — anything to illustrate to investors the potential trajectory of the business based on hard data.
She also said having a “credible” lead investor is crucial for startup founders, as other VC firms will be more likely to “piggyback” into a funding round for a company that’s already been vetted.
Still, Katie Schmitz of Ziegler in Milwaukee added lead investors usually don’t like to “fly solo.” Schmitz is head of principal investing and fund management for the firm.
“If you’ve got a long list of [strategic investors] that can go alongside that lead, that’s an ideal scenario for someone stepping into a lead position,” she said.
And Neis argued entrepreneurs shouldn’t count themselves out just because overall funding activity is down this year, urging attendees to be diligent in seeking investment.
“The numbers are down across the board for every sector, there’s no question about it,” he said. “But good companies are getting funded. Good companies can find capital.”
–By Alex Moe
