Trends to Watch: 2023 Venture Capital

The current macroeconomic environment, coupled with record increases in valuations over the last several years, is creating an increase in down-rounds, repricings, and recapitalizations.

The exponential rates of valuation increases seen over the last few years are gone and, particularly for capital-intensive companies that raised cash in or and or companies that did not meet their projected development goals

Regardless of the structure, balancing investor expectations regarding ownership levels and upside pay-outs, while keeping management and other employees incentivized through cash and equity compensation, will be critical to ensure continued growth for companies.

Trends to look out for that are on the immediate horizon:

De-risking Investments Investors are feeling the pain in their portfolios, and they are looking for ways to de-risk and increase return rates for new investments.

Standard convertible preferred stock and pari passu series that have been the norm for the last decade are giving way to senior securities with accruing dividends, guaranteed multiple returns, and/or participation features.

Some investors also are looking for the right to force a sale in shorter timeframes i.e., - months, which can create misalignment of incentives among early and latestage investors and/or common shareholders.

A Focus on Governance and Management Accountability Investors will be hyper-focused on their portfolio companies’ development and growth progress and ability to stay within the budget and business plan.

Founders and management teams will have less freedom to make mistakes and investors may look for ways to hold the management team accountable, such as through enhanced governance and consent rights for investors and altering management compensation structures to include more performance-based compensation cash and equity.

Gone for now are the days of “total founder control” involving founder super-voting shares, voting proxies, and total Board control.

Expanding Deal Timelines Venture capital funds still have funds to invest, but they will take longer to approve an investment, in part because they are doing more due diligence and negotiating harder on terms.

This means deal timelines are stretching.

Companies looking to raise capital should make sure they have plenty of runway when planning the timing of their next capital raise, expect funding delays, and have a back-up plan for a short-term bridge e.g. convertible notes.

Deal Sourcing Moving to New Markets with new hubs for start-ups popping up, investors may look for deals in “secondary markets” with lower costs, including markets where fund managers have relocated.

On the other hand, some investors may pull back and focus on investing in their backyard in traditional markets so they can keep an eye on their investments and visit more often in-person, dropping by the office for lunch to check in on the business.

There are interesting times ahead.

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John Martin Founder and Chief Executive Officer

PLUTUS CONSULTING GROUP LIMITED