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HBS Sounds Off: The Current State of Venture Capital

HBS students and faculty share their thoughts on the venture capital space and advice for students looking to join or start a fund.

The venture capital (VC) landscape has changed dramatically in the past year. According to Kroll, while VC funds in the US are sitting on $300 billion of uninvested capital, investor caution and fears of a recession are creating challenges for VC portfolio companies. Funds are finding it difficult to exit their investments, and companies are struggling to raise capital without accepting a “down round” – a decrease in valuation from a prior fundraising round.

The outlook for VC is an important topic for HBS students, given the popularity of jobs and internships and the reliance on VC capital for early-stage startups. According to the HBS employment data, 7% of students in the Class of 2022 joined a VC fund post-graduation, representing the fifth-most popular career choice. VC was also the fourth-most popular internship choice for the Class of 2023. According to Senior Lecturer of Business Administration Jeffrey Bussgang (BA ’91 MBA ’95), the number of students entering VC has risen in the past few years but has dropped off this year due to the market environment. “Each year I track how many HBS graduates secure jobs in VC,” Prof. Bussgang said. “From 2015-2018 it was around 20, from 2019-2022 it jumped to 40, but for the Class of 2023 I estimate that it settled back down to 20-25, and I think that figure will remain the case for the Class of 2024.”

The Harbus spoke to HBS students and faculty with experience in the VC space for their thoughts on the current opportunities and challenges facing the industry, as well as advice for current students looking to pursue careers in VC or launch their own funds.

Current state of VC

The current VC environment is closely tied to the state of the technology sector, including both large public companies and early-stage startups. In late 2020 and early 2021, once the Covid-19-related lockdowns began to lift, the technology sector took off. Martyna Piotrowska (MBA ’25), who was working at a VC fund from 2021-2023, explained that there was a large boom in the sector due to pent-up demand, and tech companies capitalized on this momentum by raising significant amounts of capital. This boom led many funds to look past typical red-flags that would crop up during due diligence, and funds that had little experience in VC (e.g. hedge funds, crossover funds) started entering the space in order to take part in the action. “People prioritized growth over profitability, and investors focused a lot on the top-line (revenue) and a company’s marketing efforts,” Piotrowska explained. “Every company was trying to raise money since there was so much money going around.”

Prof. Bussgang, who also serves as the General Partner and Co-Founder of Flybridge Capital Partners, noted that 2021 was an anomaly in the VC world. Prior to the pandemic, the total value of VC deals was between $100 billion and $150 billion per year in the U.S. In 2021, over $300 billion of deal activity was observed, which was a record high. Exit opportunities for VC funds, which include IPOs or outright sales, also peaked in 2021 at $800 billion.

However, starting in late 2022, the landscape began to change. According to Prof. Bussgang, exit opportunities plummeted to $100 billion in 2022. In the first 6 months of 2021, there were 631 technology company IPOs with total proceeds of $149 billion. In the first half of 2022, that metric dropped by ~50% to 328 IPOs and $37 billion in proceeds, and in the first half of 2023, there have only been 124 IPOs and $14 billion in exit proceeds.

Devon Gethers (MBA ’25), who launched an early-stage VC fund called Meridian Ventures this year, explained that public market weakness has resulted in reduced valuations for private companies in funding rounds. Excluding companies focused on artificial intelligence and machine learning, median valuations for seed-stage companies have fallen below Q4 2020 levels. This has a ripple effect on limited partners (LPs), as the CEO of the Harvard Management Company, N.P. Narvekar, noted in his annual letter that VC funds need to mark down their holdings. These markdowns will in turn impact the endowment’s reported value.

There are several factors that explain the slowdown in the tech / VC world. Piotrowska explained that the U.S. Federal Reserve’s decision to hike interest rates is a major contributor. With higher interest rates, institutional investors and other limited partners (LPs) can get higher rates of return on safer investments, such as government bonds and other debt instruments. This raises the bar for VC funds, since they have to demonstrate their ability to outperform these safer investment options. Furthermore, higher rates have made it more difficult for companies to take out loans, which particularly impacts growth-stage companies that can’t access public debt markets. Gethers added that many LPs are having to deal with reduced liquidity and the “denominator effect”, meaning that stock market declines have made investors over-exposed to private investments, and several investors are reducing commitments to VC and private equity (PE) funds in order to rebalance their portfolio

It’s important to note that the slowdown is not affecting all VC funds in the same way. Josh Lerner (PhD ’92), the Jacob H. Schiff Professor of Investment Banking, noted that funds focused on Seed (early-stage) and Series A investments have been impacted less than later-stage funds (Series B / C). He explained that in 2021, later-stage funds made more aggressive investments and drove valuations higher. “The big boys have raised huge later-stage funds,” Prof. Lerner said, referring to established mega-fund VCs. “We’re now seeing a reckoning taking place in growth and later-stage venture funds, which is affecting more established groups.” One of those funds, Tiger Global, which previously had little VC experience, recently had to write down the value of its venture investments that it made in 2021 by 33%. The drop in valuations in 2022 has primarily impacted later-stage companies, and increased fund sizes have now made it more difficult for funds to find actionable opportunities that require larger investments. Prof. Lerner also noted that the downturn has been hard on first-time VCs, as they have found it difficult to raise new funds or additional capital compared to the mega-funds.

Near-term outlook

Despite the negative sentiment in the VC space, there is room for optimism in the next 6-12 months. Manuel Franck (MBA ’25) noted that near-term opportunities are promising in early-stage VC funds. Franck, who has served as Chief of Staff to a VC-backed startup in Argentina, explained that while average Series A investment rounds have declined in value, this has allowed funds to evaluate a wider set of companies and invest in those with high return potential. The prior investment craze crowded out first-time and early-stage VC funds in favor of funds that could write larger check sizes, while today’s environment is benefitting those who had been sitting on the sidelines. Gethers added that companies are also shifting their strategy in this reduced-valuation environment by offering investments in the form of securities that delay setting a valuation until a later funding round.

Prof. Lerner is optimistic in the near-term, noting that there has already been a recovery in the public markets in the past 6-9 months. He also explained that the importance of technology in our daily lives makes a recovery for VCs even more likely. “Technology is so much more important in the economy today, and it represents a higher share of innovation spending,” he said. “Artificial intelligence is a classic example of where we’re seeing robust investment activity and innovation.” Lerner also noted that rising rates could provide a silver lining for VC funds, as companies are more likely to seek funding from VCs as the debt market has become more challenging.

Piotrowska explained that there is also a practical consideration pointing to a near-term revival in the VC space. Companies that raised funds in 2021 at high valuations are beginning to run out of cash, and will need to return to the public or private markets in order to continue funding operations. “Companies can’t extend their runway forever, but we will see a few down-rounds,” she said, referring to companies raising capital at a lower valuation than previous rounds. She also noted that investors will be much more diligent this time around when evaluating companies, putting greater emphasis on profitability metrics (gross margins, EBITDA growth) compared to growth metrics (revenue growth, advertising spend).

Advice for students

Across the board, everyone who spoke to the Harbus agreed that VC remains an attractive industry for those looking to get involved with investments in innovative companies. However, there are a few things that people should keep in mind when evaluating funds they would like to join. According to Prof. Lerner, those looking to join a fund should do research into the fund’s prior investment record. “Hiring and funding will be done by the VCs with the strongest records,” he said, adding that first-time funds will have a more challenging time compared to more established funds. Furthermore, he recommended students evaluate specialist VC funds, such as those exclusively focusing on AI, climatech, or fintech, instead of more generalist funds. “Specialist funds have done substantially better than generalists, and their depth of knowledge outweighs the generalist approach,” he explained.

Piotrowska noted that it will be a long time before the space returns to the high activity of 2021. A sizable reduction in interest rates and higher macro-economic growth is needed to reach those levels. She agreed that mega-funds and funds that avoided the later-stage investment craze will be in a stronger position in the near-term.

Franck explained that the past few months have resulted in a “flight to safety” of investor capital from emerging economies back to the U.S. He noted that there are promising investment opportunities and entrepreneurs in emerging markets, particularly Latin America and Africa, but in the near-term investor interest will be focused on developed countries. “LatAm has many industries ripe for disruption, particularly in financial services,” he said.

For those interested in launching their own funds, Gethers noted that it is a tough road, but students can be successful if they do thorough research on fund strategy, investment stage, and industry focus. “Do the research and talk to people to understand what the job is like,” he said. “Starting a fund requires significant preparation and risk tolerance – you need a network to raise capital, a narrative to convince investors, and access to strong dealflow.”

Venture capital will continue to remain an area of interest for HBS students going forward, and the macro-economic landscape coupled with fund resiliency will determine the contours of the next investment wave.

Prior to joining HBS, Abhiram worked in Houston, TX at Ara Partners, a private equity fund focused on energy transition and decarbonization technologies. A New Jersey native, he graduated with a B.S.E. in Chemical & Biological Engineering from Princeton University in 2019. Outside of class, you can find him biking around Boston’s many trails, dominating (sometimes) at pub trivia, or trying out the local food scene.

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