As we move into 2024, the venture capital outlook is similar to a year ago. An economy filled with apprehension, mixed signals and uncertainty continues to set a cautionary tone for founders and investors as both parties wait for a rebound in market confidence. Global headlines surrounding upcoming elections, international conflicts or policy battles certainly aren’t helping to spark the return to a more predictable economy. Yet, history shows that technology continues to advance through uncertainty, and new catalysts such as AI will create waves of disruption, new winners and a fair share of market casualties.
As frustrating as uncertainty is, some approaches can help investors and entrepreneurs position themselves for success. As always, the venture capital market begins with the end in mind: liquidity. We have seen acquisition and IPO activity in the VC space plummet from record highs at the end of 2021 to flatlining every quarter since. (Q3 2023 did show a slight resurgence driven mainly by a few large IPOs, including Instacart.)
When liquidity stops, the first impact is on later-stage venture deals. As a result, available venture capital in the market shifts to other investment opportunities. Lately, we have seen activity move toward earlier-stage deals, particularly in hot sectors such as logistics, fintech and the rapidly emerging applications of AI. The uncertainty bug has early stage investors and entrepreneurs thinking differently about their funding strategies. As an investor focused on early stage technology startups, JumpStart Ventures follows a few principles that have helped our portfolio through these uncertain times.
- Co-invest with partners who have the ability and expectation to participate in future funding rounds. Having a syndicate of co-investors creates partners with aligned interests and the ability to share investment risk to help portfolio companies extend their cashflow runways.
- Require an achievable 18-month operating timeline for any company plan in which you invest. Startups are typically aggressive and optimistic, which is good. You want an ambitious vision, but since things rarely go as planned, there must be time to counteract. Investing in a plan with less than a year of runway leaves little time to react if there are unexpected revenue or cost issues.
- Favor investments with a clear path to market with proven or at least highly predictable product-market fit. Revenue traction helps build sustainability and offset investment capital needs. A company can’t pull back and lean more heavily on managed growth to extend its runway unless it has credible recurring revenue as a base.
- Partner for growth by providing startups with more than just capital. Building a successful portfolio of investments relies on helping portfolio companies with resources and connections that can impact them financially, including follow-on investors, customer introductions, strategic partners and top talent.
Taking a measured approach to investing and company growth does not mean being risk averse. It means providing flexibility from an investment and operating perspective to provide an operational runway so companies can adjust and make room for calculated performance-based pivots rather than banking on projections.
While uncertainty continues to define venture capital activity in 2024, as fast as the market can hit the brakes, it can also step on the gas. The goal is to keep early stage companies as healthy as possible so that the upswell is there to ride when market confidence returns. ●
Jerry Frantz is president of JumpStart Ventures