Pawn Shops, Liquor Stores, and Venture Capital: Our Outlook for 2023
Thoughts from Eric Rosenfeld and the Oregon Venture Fund
The most anticipated recession of our generation is supposed to arrive any month now. Which means it may not. Regardless, at the Oregon Venture Fund we are hoping for the best and preparing for the worst. We’ve been investing in startups since 2007 and here’s what we think may be new and different with respect to our market and strategy in 2023:
1. Increased deal flow – Economic downturns have a way of unlocking talent and generating entrepreneurs by choice…and entrepreneurs by default. During the Great Recession, the number of seed-stage venture financings nationally grew from 792 in 2007 to 1,246 in 2009, a 57% increase [Sources: Venture Capital in the Great Recession, Joelle Sostheim, Pitchbook 4/26/2019. The Ripple Effects of COVID-19, Paul Condra, Pitchbook 3/26/2020]. That said, we believe we’ll need to work harder to source potential investments in 2023 as…
- More historically underrepresented, and less-connected, entrepreneurs start businesses, and
- More founders run their startups more virtually from residences and offices outside of downtown Portland.
2. Increased quality of deal flow – Talented individuals who might normally be earning promotions and pay increases at larger tech companies may find themselves not receiving either. Again, during the Great Recession, OVF was able to back several first-time founders who were rock stars in their industries and who went on to achieve success as entrepreneurs – eg…
- Claudia & Steven Jaffe at Lumencor [funded 9/07; 14X return to date]
- Sam Blackman, Jesse Rosenzweig, Brian Lewis at Elemental Technologies [8/07; 12X]
- Eric Winquist, Derwyn Harris at Jama Software [1/09; 40X]
- David Nelsen at Giftango [9/09; 6X]
2. Less VC competition and lower valuations – During the Great Recession, pre-money valuations dropped 30%. From 2008 to 2009 the total venture capital raised per year in North America dropped from $53.2B to $22.7B and the number of active funds dropped from 443 to 338. Over the low interest rate environment of the past 10 years, more institutional capital was willing to take a risk with venture capital. Now, with higher interest rates, we expect less “easy money,” less competition bidding up valuations, and lower entry pricing.
3. A Double whammy for VC-backed startups – (a) Potential for less customer demand and therefore slower revenue growth and (b) less available venture capital to fund operating losses. Our portfolio companies not currently running at breakeven are raising capital now to carry them through 2023 and/or reducing their cash burn.
4. Larger check sizes – Funding a startup is like outfitting a caravan with sufficient water to cross a desert. For the past decade, there has been plenty of oases along the way for startups to refuel with capital. Going forward, we expect fewer and smaller oases, meaning funding rounds need to be large enough to carry companies through 2023 and beyond. In anticipation, OVF will have a record $20M+ in 2023 for first time investments in new portfolio companies and follow-on rounds with existing portfolio companies. We’ll be able to budget up to $10M per company over its life.
Like pawn shops and liquor stores, venture capital has historically done well during recessions. However, unlike pawn shops and liquor stores, we’re proud to be investing in individuals with the vision, courage, and drive to start businesses that, if successful, can make the world a better place.