I. Market Overview and Economic Indicators
Global Economic Health:
The year 2023 presents a complex global economic environment. Amidst uncertainties stemming from geopolitical tensions, fluctuating energy prices, and post-pandemic recovery efforts, the financial markets exhibit cautious optimism. According to the 2023 WilmerHale Venture Capital Report, “Despite these challenges, the U.S. venture capital market remained resilient, with a total of $130 billion invested across various sectors” (WilmerHale, 2023). Influenced by the Federal Reserve’s monetary policies and interest rate adjustments, investor sentiment has been significantly shaped. A cautious yet innovative approach in finance prevails, highlighting the evolving integration between decentralized and traditional financial systems. Joshua Peck from True Code Capital reflects this sentiment, emphasizing the growing relevance and transformative impact of AI and blockchain technologies in the broader financial landscape.
Industry-Specific Trends:
The blockchain and digital asset sectors, along with AI and big data, are increasingly becoming cornerstones of digital transformation, reshaping industries like finance, healthcare, and supply chain management. “Investments in AI and blockchain startups saw a significant surge, accounting for 20% of the total venture capital investments in 2023” (WilmerHale 2023). Arkady Kulik of RPV, underscores the importance of deep tech and groundbreaking technologies, reflecting a strategic investment focus shift from traditional to technology-centric domains. This trend is further echoed by Sumit Saraf of TradeBacked, who notes the resilience and potential rebound of fintech and insurtech sectors amidst current valuation adjustments. Dovid Duchman from Web Tree Capital emphasizes the significant role of extended reality and AI in transforming the investment landscape highlighting their strategy of harnessing technology to enhance sectors like education and healthcare.
Macroeconomic Context:
The current economic landscape is marked by a tentative recovery from the COVID-19 pandemic, with supply chain disruptions and inflationary pressures being key concerns among others. Jay Vyas of Firinne Capital discusses the adoption of a more rigorous approach, focusing on fundamental analysis to navigate through these uncertain times, indicative of the broader market’s strategy in response to economic challenges. Itamar Novick from Recursive Ventures remarks on the evolving investment landscape, highlighting changes in valuations and due diligence practices. He also notes how geopolitical factors, especially within the Israeli startup ecosystem, are driving more entrepreneurs to establish their companies in the U.S., with a particular focus on Pre-Seed/Seed stage valuations.
II. Thoughts from 23 GPs in the Velvet Ecosystem
In the diverse world of venture capital and investment, each fund presents a unique approach and philosophy. The following summaries highlight the distinct characteristics and strategies of the 23 funds interviewed, showcasing the variety and innovation within the industry.
True Code Capital:
The TrueCode Capital Crypto Momentum Fund LP is a specialized hedge fund designed to cater to the needs of ultra-high-net-worth individuals and family offices. It provides a secure and efficient avenue for these investors to gain substantial exposure to the digital asset market without the need for extensive expertise. Key features of this fund include the use of advanced software to identify trending markets, active management of tokens to keep the portfolio relevant, strategic allocation of investments to high-quality digital assets, and the experienced leadership of Joshua Peck, a prominent figure in cryptocurrency investment. Additionally, the fund employs sophisticated risk management techniques to protect investor capital, making it an attractive choice for navigating the dynamic world of digital assets.
TradeBacked:
TradeBacked provides asset-backed liquidity to cash-flow-positive businesses. The company serves small- and mid-sized companies that need short-term capital, funding the businesses in exchange for their marketable assets, i.e., their inventory. With over $200 million in deals in the pipeline, TradeBacked focuses on small- and mid-sized companies having a minimum of $50 million in annual revenue. TradeBacked clients are manufacturers, Stockists, and Traders of commodities such as metal, minerals, oil & gas by-products, chemicals, fertilizers, non-perishable agro, and luxury assets.
Firinne Capital:
“Firinne Capital combines the experiences of early digital asset adopters with deep institutional investment management expertise. The team members have worked together at some of the largest and most sophisticated institutional asset managers globally. We specialize in applying time-tested institutional-grade investment approaches and processes to novel and disruptive corners of modern finance.
Our Liquid Digital Assets fund provides investors with prudent, benchmark-aware active exposure to the emerging class of decentralized digital assets. The strategy aims to provide investors with a net return in excess of a market benchmark over a market cycle. Positions are selected based on deep fundamental research supported by data science and quantitative approaches to portfolio construction, analysis, and factor consideration.
Our fees are designed to align incentives and ensure that investors aren’t paying performance fees for straightforward market (aka beta) exposure — there is a base fee and an incentive allocation applied to performance in excess of both a high-water mark and the benchmark performance.”
Side Door Ventures:
“We are founders backing founders.
Generalists by nature, our team of former builders and operators is based throughout the United States and Canada, and leverages a global network of entrepreneurial talent. We have cultivated deep expertise across industries, and our team’s past experiences range from landing robots on Mars to inking blockbuster Hollywood deals. Today, we’re always on the lookout for extraordinary thinkers developing world-changing technologies across software, life sciences, defense, deep tech, financial services, and more.
SDV currently operates four core funds and has deployed over $30M into 100+ portfolio companies.”
E2JDJ:
“E²JDJ is an early stage venture capital firm that focuses on scalable, high growth innovative businesses that drive efficiencies and productivity across the food supply chain that improve the quality, resilience and sustainability of the food system, and ultimately human and planetary health. As investors, we deeply engage with our companies as collaborative partners, offering support across strategy, operations, and regulatory compliance as well as facilitating connectivity within the food and agricultural ecosystem. Our hands-on approach ensures companies receive the necessary resources to rapidly scale and commercialize. We ultimately surround founders with the ecosystem that they need to move more quickly than they could on their own.”
Embedded Ventures:
“Launched in 2020, Embedded Ventures is a next generation venture capital firm investing in early-stage deep tech startups. With a thesis that takes a commercial-first approach to investing in early-stage startups with applications that can serve the Department of Defense, Embedded has a first-of-its-kind partnership with the United States Space Force. Co-Founders Jenna Bryant and Jordan Noone have non-traditional backgrounds and strong passions for the communities they represent. The firm invests in pre-seed, seed and Series A rounds for startups focused in digital engineering, advanced manufacturing, and space operations.”
Cipher Chain Capital:
“Cipher Chain Capital, LLC employs a proprietary methodology to enhance market-neutral returns and ensure effective risk management. The positions encompass market-making and delta-neutral strategies within Decentralized Finance. Alpha generation stems from extensive industry expertise, the utilization of AI-driven liquidity tracking instruments, statistically informed decision-making based on first principles, and a robust network of founders and developers within the ecosystem. Since its inception, Cipher Chain has significantly outperformed the S&P 500 (+15.6%), BTC (+36.6%), and the Barclays Aggregate Bond Index (+33.5%).”
EQUIAM:
“EQUIAM is a data-driven systematic investor in the private market. At EQUIAM we think differently. We use data and systemization to build private market portfolios designed to balance risk and provide a shorter time to liquidity than a typical venture firm. Our team is composed of seasoned public and private market investors allowing us to merge the best thinking of both worlds, offering a unique perspective.”
Climate Capital Bio:
“Climate Capital Bio is a Pre-Seed venture fund backing biotech climate solutions that allow the decarbonization of the world’s largest and least sustainable industries. Led by founders-turned investors Jenny Kan and Michael Luciani, the fund is built on Jenny’s expertise as lead engineer in a Nobel Laureate’s synthetic biology lab, Michael’s experience in politics and as a founder with a successful exit, and their track record leading 30 biotech x climate investments together — currently marked up 4.0x.”
Rebellion Ventures:
“Rebellion Ventures is a specialized seed-stage venture capital firm in Silicon Valley that helps entrepreneurs build AI and Automation companies to revolutionize operations and business models, leveraging our operating track record, including building companies to multi-billion dollar IPO and M&A exits, and our network of 60+ leading operators and industry experts as Limited Partners and advisors to portfolio companies. We specialize in seed/pre-seed AI and Automation startups that create revolutionary “10–100x” value and ROI for customers by automating processes, augmenting humans, and enabling new business models, focusing on markets that are ripe for disruption. Our super-power is to help entrepreneurs accelerate growth, leveraging Rebellion’s unique network of 60+ leading operators and industry experts as LPs and advisors to portfolio companies and our operating track record with multi-billion dollar outcomes, specialized industry expertise, and playbooks in building disruptive AI and Automation companies.”
Dux Capital:
“Dux Capital is a seed-stage venture capital firm driven by the Latinx community, we strive to bridge the current funding gap for Latinx founders by investing in diverse and emerging start-ups led by individuals who share our cultural background. By leveraging our unique perspective and networks, we are committed to empowering the next generation of Latinx entrepreneurs to build successful and impactful companies.”
DPH Capital:
“DPH Capital, LP is an equity long/short fund that capitalizes on recurring market inefficiencies through disciplined fundamental value analysis; with a deeply counter-consensus approach to investing globally and across industries. The strategy has a meaningful allocation to Latin American equities as one of its key differentiating factors to other global managers, and the fund’s GP is 100% minority-owned and managed.”
Third Sphere:
“Third Sphere is a pre-seed & seed VC focused on rapidly scaleable climate solutions with minimal science & policy risk and with non-altruistic customers who exist today. Our 10+ year track record includes a 4x DPI fund and many category leading climate companies we’ve seeded including Bowery Farms and Future Motion.
We’re founded and led by entrepreneurs and engineers. We’re very comfortable investing across the software and hardware spectrum. And we’re thoughtful partners to generalist VCs and other types of capital providers.
We’re backed by; Citi, and other industry leading financial & insurance firms, family offices and foundations. Our fourth fund is closing soon and we’ve already made 8 investments that are progressing quickly.”
Silver Harbor Capital:
Silver Harbor Capital is a premier multi-strategy fund that specializes in cryptocurrency investments, utilizing proprietary crypto-specific strategies to generate yield on assets. Since its inception, the fund has consistently outperformed the Bitwise 10 Crypto Index, demonstrating robust performance even in challenging market conditions, such as avoiding losses from the FTX collapse. Its managing partners, with over 15 years of experience in the crypto world, have developed market-beating returns and a deep understanding of the intricacies of crypto markets. Silver Harbor employs a variety of strategies, including investing in innovative technology coins/tokens, utilizing liquidity pools for yield generation, and investing in smaller market cap coins for potential outsized returns. This diversified approach, combined with the expertise of its managing partners, positions Silver Harbor as a dynamic player in the evolving crypto investment landscape.
Department of XYZ:
“The Department of XYZ invests in early stage companies building trusted new financial systems. What sets us apart is our team of former regulators and our strategy of bridging the gap between founders and government. We take on the role of “former regulators on the cap table” for early-stage founders, helping them navigate the regulatory labyrinth. We are focused on founders and innovative concepts that not only foster, but also build trust in, the financial systems of tomorrow. We prioritize groundbreaking advancements made possible by transformative technologies such as blockchain, tokenization, decentralization, and artificial intelligence.”
BXB Capital:
“BXB’s systematic trading fund aims to outperform crypto markets on a risk adjusted basis, over full market cycles, by capturing meteoric rises in the market and stabilizing through, or profiting from, market drawdowns. The multi-strategy fund includes a variety of proprietary directional strategies, as well as a “Kimchi Premium” stat arbitrage — a highly coveted arbitrage play that is difficult for most to gain access to. Our trading IP has evolved from successful commodities trading in the 80’s, which is now built on 100% proprietary and customized technical analysis. Our unique style of trading, decades of asset management experience and 7+ years tenure in crypto come together to drive our competitive edge.”
Decryption Capital:
“Decryption Capital provides investors with a distinctive opportunity to capture the value of blockchain technology through our investments in digital assets and blockchain-related equities. Since our inception in 2018, we boast a proven track record, consistently outperforming the Bloomberg Galaxy Cryptocurrency Index (BGCI) and earning recognition as a finalist in multiple hedge fund industry awards.”
Fernbrook Management:
Fernbrook Capital, a minority-owned (Hispanic) investment firm, specializes in technology-related growth investments, focusing on revenue-stage companies with significant market potential, alignment with major trends, and scalable business models. As of the end of Q3'24, Fernbrook’s Fund I (2018 vintage year) has achieved a 50.7% return since inception, outperforming the S&P 500 by 9.2% and on a risk-adjusted basis by 3.1%. The firm’s Fund II, first closed in 2022 with key investors including the CEO & Chairman of a global equity firm, is expected to finalize by March 31, 2024, and already includes six portfolio companies. Fernbrook’s unique EDGE lies in its active support to founders in various business aspects, leveraging its extensive operational experience and global network. This approach has facilitated partnerships with top investors like Bain Capital Ventures and Sequoia, and recognized diversity at both management and founder levels, with a significant portion of their portfolio companies having underrepresented founders.
Recharge Capital:
“At Recharge Capital, we have built-in distribution networks for our portfolio companies in the healthcare tech and fintech space. On the healthcare tech side, we have a network of fertility clinics providing captive distribution for healthcare products and services. On the fintech side, we are acquiring mortgage servicers for fintech products and services. Each portfolio company we invest in can leverage the resources of the two captive ecosystems, using the distribution channel to leapfrog a traditionally long B2B or B2B2C sales cycle, thus unlocking the scalability of our portfolio companies.
The two captive ecosystems further provide a structural advantage to our portfolio companies. Each ecosystem has its own set of tier 1 institutions that can provide follow-on growth capital to our portcos. Additionally, these ecosystems act as natural strategic acquirers for our portcos and can set a valuation floor for exit marketability.”
ATX Venture Partners:
“ATX Venture Partners is an early-stage venture capital firm focused on leading rounds in high-growth, high-margin technology companies in B2B vertical SaaS and marketplaces ATX is veteran and woman owned and manages $600 million across four fund vintages and a co-investment platform. ATX’s portfolio represents a MAKE-MOVE-MONETIZE ecosystem, infused with embedded AI and productivity/automation software; anchored in themes of end-to-end supply chain, fintech and future of work.
The pandemic and ongoing geopolitical instability have highlighted the increasing importance of resilient and automated supply chains from manufacturing to distribution and have also catalyzed the acceleration of workplace flexibility which demands innovative and secure financial payment processing and lending capabilities, insurance delivery, data security and workplace optimization.”
RPV:
RPV is a deep tech fund led by Arkady Kulik, former COO of VK.com and founder of Thankyou, Russia’s largest digital music label, along with Tamaz Khunjua, a CERN affiliate and tenured professor at the University of Georgia. Having secured $18 million in funding, with notable LPs including Adam Draper and Dave McClure, RPV focuses on five physics-enabled domains: neuroscience, lasers & photonics, alternative energy, advanced materials, and additive manufacturing (CAD/3D printing). With four initial investments, RPV leverages its team’s expertise in physics and strong industry connections to drive innovation and growth in these cutting-edge sectors.
Web Tree Capital:
“Web Tree Capital is a Miami-based early-stage venture capital firm at the forefront of a historic shift to a more collaborative, impactful and immersive internet, Web 3.0. Web Tree invests in creators and pioneers of businesses that utilize disruptive (i) blockchain/distributed ledger, (ii) extended reality, and (iii) artificial intelligence technologies to solve real world problems. Web Tree is founded and run by well-connected professionals with extensive experience investing in pioneer and cutting edge opportunities.”
Recursive Ventures:
“Recursive Ventures is a Silicon Valley VC fund investing in US and American-Israeli founders Pre-Seed disrupting industries through use of Data and AI. Recursive is managed by Itamar Novick, a serial entrepreneur who recently took Life360 public, and a prolific startup investor for 10+ year.
Recursive was founded in 2014 and consistently outperforms most US Venture funds. We have previously invested in winners such as Deel (>$12b), Life360 (IPO), Honeybook (>$2b), Placer ($1b), Credible (IPO), Tile, Armory, SafeGraph, May Mobility, and others.
Recursive Ventures boasts a strategic emphasis on AI investments, especially in emerging sectors like FinTech, InsurTech, and PropTech, showcasing their commitment to fostering innovation and resilience in the face of shifting geopolitical and economic dynamics.”
III. Investment Strategies and Manager Insights
Adaptive Strategies in Uncertain Times:
Adaptive investment strategies are more crucial than ever in these times of uncertainty. A 2023 Venture Capital Report by WilmerHale states, “Venture capitalists are increasingly focusing on early-stage investments, with seed and Series A rounds comprising 60% of all deals in 2023.” Drew Gonzales & JJ Maclean from Side Door Ventures emphasize the need for a multi-stage seed fund approach, reflecting a strategic response to market complexities brought about by the pandemic, technological disruptions, and geopolitical uncertainties. This view is shared by Stephanie Dorsey & Corey Jones from E2JDJ, who highlight the strategic long-term thinking necessary in sectors like food and agtech, poised for growth.
Risk Management and Diversification:
Effective risk management and diversification strategies are essential themes in current investment strategies. “Diversification across sectors and stages has become a key strategy, as evidenced by a 15% increase in cross-sector investments in 2023” (WilmerHale, 2023). Jeff Thompson of ATX Venture Partners discusses employing a strategy focused on diversifying across various sectors, particularly targeting serial entrepreneurs with a proven track record. This approach is echoed by Lawrence Wu of Recharge Capital, who notes the importance of a concentrated approach in investing, focusing on themes where the fund has deep expertise.
IV. Sector Spotlight: In-Depth Analysis
Emerging Technologies and Market Potential:
The potential of AI, big data, and blockchain is vast, with transformative impacts across multiple sectors. Jordan Noone from Embedded Ventures discusses the intersection of national security and deep tech, highlighting how these emerging technologies are redefining traditional sectors. The importance of blockchain in financial sectors is further underscored by Cipher Chain Capital’s Samuel Donnelly & Nathan Goldbaum’s focus on stablecoin yield farming in DeFi, illustrating the market’s rapid adaptation to these innovations.
Undervalued Markets and Strategic Opportunities:
Joseph Day from EQUIAM brings attention to cybersecurity, indicating a strategic shift towards sectors that may have been previously undervalued but now offer substantial growth potential. This trend is also observed by Michael Luciani from Climate Capital Bio, who notes the significant potential in synthetic biology, particularly in climate solutions, suggesting a broader market recognition of the need to invest in sectors poised to benefit from current and future technological and societal shifts.
V. The Future of Venture Capital
The venture capital landscape is evolving rapidly, with significant shifts towards incorporating AI and other advanced technologies into investment processes. Jukka Alanen from Rebellion Ventures highlights the industry trend of new and emerging boutique VC funds that leverage specialization, focus, and small size to drive superior investment return. His firm, Rebellion Ventures, illustrates the role of boutique funds by specializing in helping entrepreneurs build seed/pre-seed AI and Automation companies to revolutionize operations and business models in specific industries and business processes. Susana Espinosa de los Reyes at Dux Capital discusses the role of women and diverse perspectives in venture capital, marking a crucial shift towards inclusivity, which is vital for fostering a more dynamic and holistic investment environment. Additionally, a WilmerHale report highlighted that “The number of female-led venture capital firms increased by 10% in 2023, indicating a positive trend towards greater inclusivity in the industry.”
VI. Market Challenges and Survival Strategies
Navigating Fundraising and Market Fluctuations:
The current fundraising environment poses unique challenges. Daniel Piderit from DPH Capital and Stonly Blue from Third Sphere reflect on the market, where strategic focus, thematic investing, and early engagement with founders are increasingly important. This trend is in response to the heightened competition for capital and the need for differentiation in a crowded market.
Global Economic Implications:
The market is also navigating through the broader implications of global economic shifts. Brent Wall and Jamie Jankowski from Silver Harbor Capital and Matt Homer at Department of XYZ underscore the importance of understanding global market dynamics and geopolitical influences. “Cross-border venture capital investments decreased by 12% in 2023, reflecting the impact of geopolitical tensions on international funding” (WilmerHale 2023). These insights are crucial for funds looking to capitalize on emerging market opportunities and to navigate the complexities of international investments.
VII. Global Perspectives and Geopolitical Influences
Investment strategies are increasingly being shaped in the context of a globalized economy. The insights from Zhe Yang at Decryption Capital and Bill Detwiler from Fernbrook Management underscore the importance of understanding global market dynamics and geopolitical influences. These insights are crucial for funds looking to capitalize on emerging market opportunities and to navigate the complexities of international investments.
VIII. Innovative Approaches and Emerging Sectors
Innovative approaches in sectors like fintech, health tech, and climate tech, as discussed by Alex Friedberg from BXB Capital and Michael Luciani from Climate Capital Bio represent significant shifts in market focus. These sectors are at the forefront of leveraging technology for market disruption and offer promising avenues for investment.
IX. Conclusion
Comprehensive Market Perspective:
The 2023 State of the Market Report, enriched with diverse insights from fund managers, provides a comprehensive perspective of the current investment landscape. Highlighting cautious optimism, a focus on embracing technological innovations, and exploring untapped opportunities, the report underscores the importance of adaptive strategies, risk management, and a keen understanding of global dynamics as key drivers for successful investment in today’s market. This compilation of insights from 23 distinct funds offers a unique lens through which to view the complexities and potentials of the global market, providing invaluable guidance for navigating its evolving landscape as we progress into 2024.
