At a gathering of 600 tech entrepreneurs last week in the Seaport, there were free mini burgers and chocolate-covered bananas, but not a lot of optimism for a quick rebound in the fortunes of the tech sector.
The event was organized by Underscore VC, a Boston-based venture capital firm, and the gathering eclipsed its pre-COVID size. I helped lead a discussion on the future of startup funding with a group of entrepreneurs and investors and conducted interviews before and after that. Here are the 10 most interesting takes on what’s happening in tech right now.
1. Everyone knows venture capitalists have money to invest, but they’re still sitting on their wallets. Kevin Colleran, a Boston-based investor at the firm Slow Ventures and an early Facebook employee, told me it had been 20 months since he’d made a new investment. What’s he doing instead? Helping to ensure the survival of companies in which he has already invested.
2. The same goes for angel investors. “When the froth in the market goes away, so does the FOMO,” said David Chang, an entrepreneur and member of the group TBD Angels, using the acronym for “fear of missing out” on a potentially amazing startup investment.
3. Things are tough for companies looking to raise additional capital but struggling to show improvements in revenue, profit margins, or customer growth. Investors who wanted to see a company reach one revenue target last month suddenly are moving the goal posts, and want to see 1.5 times that number, or 2 times. “No one wants to write the last check into a company” that later dies, Colleran said. “So, everyone is waiting for a sure thing.”
4. While we’ve seen layoffs in the tech sector over the past two years, we haven’t seen scores of startups giving up and declaring bankruptcy, observed Maia Heymann, a founder of the Boston venture capital firm Converge. Instead, she said, companies are “living to fight another day,” doing everything they can to cut costs and persuade existing investors to invest more. Startups under stress are also talking with potential acquirers — even if that company just wants a piece of the technology they’ve built, or a few key team members, a deal known as an “acqui-hire.”
5. Before COVID, venture capital firms tended to focus on regions where they had investing partners to scout deals. Now, they’re willing to consider startups anywhere. A Silicon Valley investor in my session mentioned that nine out of his 10 most recent deals were outside of the valley. Heymann said that although most of Converge’s employees are in Boston, the three startups it has backed most recently are in New York, California, and Washington.
6. Startups are done bragging about their valuations — for now. You know things are getting nutty in the startup arena when companies boast about the valuation that investors gave them in their most recent funding round. It’s a fictional number that only becomes real if they go public (and stock market investors assign the value) or get acquired for a specific price. But everyone got excited about investing in and working for so-called unicorn companies with a valuation of $1 billion or more. Now, Heyman said, they suddenly want those unicorns to be draft horses, focusing on the efficient use of capital to attract and serve customers. “What does it cost you to generate that dollar of revenue, and can you grow in a capital-efficient way?” Heymann said.
7. This year and 2024 will likely be an extinction event for a cohort of venture capital firms that have made bad investments in this recent bull market for startup funding.
8. Venture capitalists are looking carefully at lots of companies with products related to artificial intelligence, worried that they’ll miss out on a big winner in that sector. As a result, companies are adding “.ai” to their names to indicate they’re part of the trend. Entrepreneurs know this is a bit of a game, but not having AI as part of your pitch right now is like not listing Microsoft Excel skills on your résumé and trying to get a job as an analyst — you’re liable to just get skipped over. But that’s creating a lot of chaff for investors to sift through.
Some at the Underscore event were concerned that big players like Google, Microsoft, and Amazon are investing so aggressively in AI that startups won’t have opportunities to pursue. (One of the people I bumped into was Raj Aggarwal, a former entrepreneur who has been hired by Amazon Web Services to help lead its push into generative AI.) Others, like Colleran, say it’s still early days. “I see this as the Friendster and MySpace era of AI,” Colleran said, referring to two social networks that preceded Facebook. It could be wise to “wait two years to see how it shakes out,” he added.
9. Bootstrapping a company by relying on customer revenue, rather than investor infusions, is cool again. Mike Festa’s last startup, focused on helping online retailers present their products in 3D form on the web, attracted just over $2 million in funding from Underscore and other investors. But the company didn’t generate revenue fast enough to become self-sustaining, so Festa shut it down. But he thinks 3D on the web and mobile devices has made enough progress that he’s working on a new venture. “This time, however, instead of raising VC capital on the idea alone, we’re going to build the business first on customer revenue,” he said.
10. What could change the status quo? Venture capitalists could begin writing more checks if they see some big money acquisitions, and more initial public offerings follow those of the chipmaker ARM, delivery service Instacart, and Klaviyo, a Boston-based supplier of marketing software. If no medals are given out at the finish line of the marathon, everyone involved is less excited about the slog — and that’s where we’re at now.
At the conference, no one in my group was expecting a reversal of fortunes in 2023. And some predicted a tight-fisted, recessionary environment could last through 2026. But entrepreneurs at the event put on their nice shoes, broke out their brightest smiles, and enjoyed the mini burgers.