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Nathan Hunt: This is The Essential Podcast from S&P Global. My name is Nathan Hunt. It's hard to remain optimistic about venture funding and technology start-ups this year. When I talk to friends who are start-up founders, they're struggling, chasing elusive term sheets, agreeing to down rounds and forced to pivot from growth at all costs to profitability at low cost.

When I talk to friends who are venture capitalists, they are struggling. It's hard to raise funds. Allocations to venture capital firms are shrinking and founders continue to demand valuations that have no relationship to market conditions.

To understand these challenging conditions, I turn to Gene Teare, Senior Data Editor at Crunchbase and a veteran technology journalist. Gene is an expert in global venture funding trends, artificial intelligence, fintech and gender equity in venture and technology. Today, I hope to ask her about all of these things. Gene, welcome to the podcast.

Gene Teare: Thank you, Nathan. It's great to be here.

Nathan Hunt: Gene, going back to mid-2022, everything I hear about venture funding is grim. What happened last year? And when should we expect things to turn around again?

Gene Teare: I think what was interesting in -- I spent a lot of time looking at the Crunchbase data set. I analyze the data to try and understand what is happening in venture. And then I talk to industry experts to see if what we see in the layer and what people are experiencing out in the industry match or if there's a disconnect. And I think what's interesting in looking at the data is it kind of gives you a reset or a reality check on a discussion that's happening.

And I think the first thing that we saw is that at the end of 2021, we saw the public markets, specifically for high-growth loss-leading technology companies begin to dive down at the end of 2021. And I think the initial reaction in the venture community was, is this a blip? Is this going to be more sustained? How does that impact the private markets? Because the private markets are somewhat protected because they're not subject to the same volatility as the public markets. And so everyone -- there was sort of a pause and a rethink.

And then what we saw is that Q1 in 2022 was incredibly strong. It was sort of off the charts as a quarter. And in part, that's because there's a data lag deals that get done at the end of the year, get announced in the first quarter. Everyone was resetting. And then what we saw in Q2 2022, you began to see the downturn come through, and we saw that at late-stage venture.

And so overall, the venture in Q2 2022, it was down by 25%, 26% when you compare it to a year ago. So not a big reset in Q2, but an indication that things were changing. And as I said, at late stage, that really started coming down in Q2 at late stage. And then the discussion in venture was, well, late stages coming down, the public markets are gone, the late-stage markets are going to be impacted. And so all of the multistage venture firms are going to refocus and even some of the alternative investors like hedge funds, were saying we're going to focus on earlier, we'll focus on early stage and seed.

And then what we saw in Q3 is that early stage started coming down as well. And so -- and then we saw a sort of a 50% reduction. And then in Q4, we saw late stage, early stage and seed come down. So basically, across the whole ecosystem, quarter-over-quarter, there was a rolling sort of thesis of late, then early then seed coming down dramatically. And so we're sort of 4 to 5 quarters into this downturn. And everything that we've seen in the last 4 quarters is kind of half from what we had a year ago from the peak.

Nathan Hunt: So I'd like to ask you a question, just a clarification since you have the ability to look at the Crunchbase data set and really understand what's happening. How much are we actually seeing like a downturn? And how much should we consider, say, 2020, 2021, beginning of 2022, a period where things were really inflated where there was a lot of money going into VC. There was a lot of money going into technology start-ups. Is it that we've really fallen off or we've just fallen off an exceptional high?

Gene Teare: When I look at it, I think both things are true. I think everyone these days is beginning to say, well, 2021 and a little bit 2020 was sort of a market blip where what we saw is venture doubled from -- we had around $330 billion invested globally in 2020, and that was seed, venture, and private equity into venture-backed. So it's sort of the whole ecosystem of these high-growth tech start-ups raised north of $300 billion. 2021 was $600 billion. So that just doubled within a year.

So clearly, and everyone thought, okay, this is the new reality. These companies are disrupting industries. So many companies are going public. This is a new reality. And then very quickly in 2022, as we said, with the market coming down, there was a reset and a rethink. So I think on the one hand, you can say that was a blip. That was crazy. It was -- everyone got sort of -- there was [ all the server ] because of the pandemic and all the shift to online services. And so in some ways, that made a lot of sense, but it was a blip and we're going back to a new normal.

I think the challenge in thinking of it that way is that in this big run up, one of the things that we've begun to look at in the data set is what is the impact for the whole industry because you've had many, many investors who raise very, very large funds across the board as well as many seed investors being funded across the board. So what happens to all those investors when they're facing a more grim market? We find in our data, there are thousands of start-ups that raised significant funding in 2021 and into 2022 because 2022 was still strong.

What happens to that sort of unprecedented number of start-ups that are now out there, have tried to extend their runway, who are now going to try and raise funding. And also, what happens to the Unicorn Board where we track, we have more than 1,400 companies. If you go back to before 2021, it was about half that number of companies, around 700-or-so companies on the Unicorn Board.

What happens to all of those companies that have these very high valuations that have raised large amounts of money, where do they go in this new market? And so I think you can look at it as it is this blip. We're not coming back to that. I think everyone is very clear that that's -- we're not going to see that for a good while. But what happens to the whole ecosystem in the aftermath of that, that rising boat. And I think that's what we're facing.

And we've seen it already in the public markets where I've looked at all the companies that went public in 2021. There was a fourfold increase of venture-backed companies in the U.S. that went public over $1 billion. And the majority of those companies, I think, more than around -- more than 60% are down below their IPO price of 65% to 70%. So not even the market hypes, but just their IPO price. So there is a fallout, I guess, is what I'm saying from this market hype. There are consequences that come out of that.

Nathan Hunt: As you’ve said earlier, the private markets are in a sense, they have a bit of a cushion on the valuation front. When you look at the public markets and the falloff and the valuation of some of the larger technology companies, do you get the sense that, that list of unicorns you guys maintain, is that due for a culling or do you not project that far?

Gene Teare: I think it is due for -- we've already seen a number of very high-profile companies raise at valuations much lower than their previous raise. I think Shein is a recent one. Stripe is another one that just -- these are some of the highest-flying tech companies. So I definitely think across the board for many and many of those companies, there is going to be a reset.

And I did some quick sort of back-of-the-napkin analysis. And if you were to sort of bring values down by about 50%, you kind of have the board, you have the amount of money going in, you have the value. So it's around north of $860 billion has been invested in these 1,400 unicorns, and it's worth just south of $5 trillion. So if you call that across the board, you're getting to half of all of those numbers, that might be a little bit more realistic in this market. I think that's true.

I think the other side of this is, though, that the venture industry is one in which there are certain companies which perform on an outsized basis. And I do think that there are a fair number of companies who are on the Unicorn Board, who have significant revenue as a company, who were planning to go public in the 2020 -- late 2021, 2022 time period, that got taken off the board. And I think all of those companies have been reorganizing, doing layoffs, creating more efficiencies, but still have significant revenue and have growth and are going to be looking to test the public markets.

So I think there is going to be -- we're not going to see what we had in 2021. But I do think that there are, I don't know, I want to say battle-ready, but companies who are significant in their markets, who have significant upside, who are going to be testing the markets in, I think, possibly towards the end of this year and into 2024. And those companies will come out at lower valuations, but are solid, more efficient than the ones that we saw before. And so I do think we are going to see the public markets come back slowly, I guess, is what I would say. So it's not all down.

Nathan Hunt: You told an interesting story about the falloff in venture capital, which started in sort of late stage, moved to sort of the middle rounds and eventually reached seed investing, you've written a couple of articles about seed investors. Recently, there was one on TSVC and one on Asymmetric Capital Partners. Are you seeing right now, any patterns in seed investment? Are there any green shoots out there?

Gene Teare: I think what's interesting about the sort of seed in early stages, when we went through the 2008 downturn, everyone said some of the most significant companies were funded at seed during that time frame and then came out. And so everyone thought, okay, we're going back to -- we're going to focus on seed and we're going to focus on early stage. And what I’ve found when I talk to investors out there who are operating at a seed stage, is the reason why there's been such a massive sort of curtailment of seed is because I think for a lot of those investors, they invested at a significantly larger pace in 2020, 2021 and into 2022.

And now what they're facing, as those companies are struggling because they're not able to get out to market or get sales because the sales environment is highly constrained. No one's buying. Those companies have raised dollars but are not able to see how they can raise the next follow-on funding. And so I think for a whole class of seed and early-stage investors, even though everyone believes these are somewhat protected from the public markets. If you can't go on to raise in a year or 2, your next significant funding. If you can't show that you have the growth metrics in order to do so, you're going to be laid to waste.

And so I think for a lot of these seed and early-stage investors, they're looking at their portfolio. They see a portfolio which is going to struggle in the next year or 2. And that raise you far more hesitant about what else you're going to invest in because are you going to invest in the same company that looked like something else when you're not sure what the market, et cetera. And so I think the whole market has become way, way, way more cautious.

We see -- when I look at investors and how much they're down by, they're down by roughly 40% to 60% on the venture side in terms of deal count. And then when you look at the crossover investors, they're down from the deal count size when you compare this year, the first half to 2022, they’re down by as much as 80% to 90%. And so I guess the shift is affected every single stage and become a reality check on every single stage, not just the late-stage sector that everyone was first focused on.

Nathan Hunt: You wrote another article recently on the Fintech Funding Crunch and it was in four charts, and I could see you drawing on the rich Crunchbase data set to produce that. The thing in your article that was really new to me was the low level of follow-on funding for fintechs, which I think is related to the point you just made.

What's driving this phenomenon? What is keeping -- we have a company that has previously been funded, previously had VCs believe in what they were going to market with, what's driving the falloff in follow-on funding.

Gene Teare: I think it's twofold. I think on the one hand, it's the fact that investors have become incredibly cautious, as I mentioned, that everyone has cut back and are far more selective about the companies they're going to invest in. Also, those companies are looking at their own portfolio and want to make sure that their existing portfolio make it through. And so there is going to be a bias and a tendency to support an existing portfolio rather than doing new investments.

You will do a new investment if it's incredibly hot and there's a lot going on. Otherwise, you're sort of putting your existing portfolio. And what we've seen in our data set, and we started writing about this first in 2022, is there are way more rounds, extension rounds, so people just topping up in existing portfolio companies. There's a lot more -- there's fundings, which are happening, which are at lower valuations. These fundings which are happening at flat valuations.

So I think the whole market has shifted away from looking at the new opportunities, unless, again, these companies are knocking it out of the park and focused on their existing portfolio. I think that's one thing that's going on. I think the other thing is that in 2021, we had many start-ups that raised huge amounts of funding. And if those companies were fast enough to put the brakes on, on hiring or to make -- to cut costs or to look at all their contracts and bring those contracts down. We've talked to many of those sort of late-stage growth companies and they still have money in the bank that they've conserved to some degree. They haven't had to use it all.

And so those companies are not going to go out to raise in this market because it's just too challenging. And so they'd rather set it out, extend their runway and prepare either to go public, get acquired if they're lucky or prepared to raise in a very, very different environment. So I think a lot of those late-stage companies, if you have funding, you're not going to go and raise in this market, especially as you're sort of resetting your fundamentals and making your business more efficient, you're not going to raise as you're going through that process.

So I think both of these things have come together, which has made some of these fintech companies, the funding to late-stage fintech come down. I do think when I did, I looked before our interview just that what are the sectors that are most robust and interesting. Fintech is down, everything is down, but it is not down as much as some of the other industries. So I think fintech is -- it's not showing as the most robust sector for funding right now. Obviously, AI is, but it is not completely fallen off a cliff. There's still a lot of belief in fintech as a sector.

Nathan Hunt: Let's jump to AI then. I'd like to ask you a bit about generative AI and venture funding. I'm going to suggest that someone with a conspiratorial mindset, might point out that generative AI suddenly became news when the valuations of big technology companies started to slip last year. Of course, I don't have a conspiratorial mindset. I'm not suggesting that they're hyping it. But I'm wondering what affect the excitement around generative AI is having in venture markets.

Gene Teare: I think there is a huge amount of excitement around generative AI. And AI has been around for a very long time. When you look at it, it's been around since the 1950s. I think investment into AI as a sector has been strong in the last decade and specifically in the last 5 years. And I think the launch of ChatGPT turned everyone's heads because this is a powerful technology, which can bring huge benefits to a lot of existing software companies as well as some of the newer ones, we can talk about that.

So I do think the excitement around generative AI and what this means for technology companies, what this means for humanity, I think, can't be underestimated. So I think the excitement is real. And I've been to a lot of VC dinners recently where they're all around AI. There's a couple of VCs in the room. There's a couple of AI start-ups. And what you hear from these people is every single CEO a year ago was focused on growth and how to grow as much as you can because the markets were valuing you up. Now they're focused on how does AI affect our business, what do we need to do around AI.

And so it becomes a product and a technology question, which I think for a lot of these CEOs is much more exciting and much more creative. So I do think this technology is going to sweep through. Not every company is an AI company, of course, but the impact of this technology will sweep through software. It will sweep through products. It will -- it impacts so many industries that we track. And so I think the excitement, I would say, is real. It will take a while to play out, but it's real.

Nathan Hunt: To the point about it taking a while to play out, you wrote another article recently about Bessemer, which is another VC, they are placing a big bet on AI. It seemed to me from your article like they were anticipating, it was going to take time for this market to really develop, that this was a very exciting technology, a potentially revolutionary technology, but that applications would take time to develop. Is that consistent with what you're hearing generally?

Gene Teare: I think yes and no because I think a lot of software companies have already deployed within 6 months of ChatGPT being launched. So there is a huge amount of shifts and changes that were happening. One of the things that Sameer Dholakia said in that interview, which I thought was very interesting is he was saying, this shift in a way is easier than the shift to the cloud because the shift to the cloud meant you have to change your server architecture, you have to commit to the cloud, you have to trust in the cloud running everything. So it’s a big shift and change for large tech companies.

He said, this time around, it's an API call to a large language model. We're all using APIs already. And so to -- obviously, there are risks that companies need to go through. They need to find the right vendors for these large language models. They need to make sure they're protecting copyright, et cetera. But the deployment of these technologies are through APIs and therefore, tend to be easier. How you use them and what you do with them is obviously going to be a big question for all these companies. But it is not a difficult technology to deploy given the skill sets that are out there, which I thought was interesting.

Nathan Hunt: Private market and venture capital optimist, I’d like to talk about dry powder, right? We've heard this over and over again, there's a tremendous amount of dry powder out there. There's money sitting on the sidelines. Do you buy that there are huge amounts of uncommitted funds waiting to flood the market and keep valuations up? Or is the idea of dry powder overblown?

Gene Teare: In 2022, when funds were raising, multistage funds are rising, they were raising larger funds at a pace within a year or 2 from their last fund, and that continued into the 2022 sort of funding environment. 2023 is looking very different. These funds are not able to raise. And I do think for many of those funds, they did deploy a lot of capital in that time frame. So I think there are some funds with dry powder, but I think that's overhyped.

And even if there is dry powder, all of their LPs are stretched at this point because of what's happening in the market. So what I am seeing on the venture side is where these very large funds would invest in a 1- to 2-year time frame, I think they're all just expanding that out to 3 to 4 years now. So what they have, they're not looking to deploy quickly, and there's less risk if you deploy over 4 years and over 2 years because you're hitting a wider range of sort of cycle of companies in a 4-year period than in a 2-year period.

So I think the dry powder, they don't have to put this money to work. I think there is some dry powder in the industry because people did raise in 2022 and late 2021 when the market started turning. But I think those funds are going to stretch out the deployment of that dry powder. So it's -- there is money in the market. There is money to invest, but we're -- there's no rush to do so.

Nathan Hunt: Changing topics a bit. With a bit of a downturn in the venture funding world, you have written and spoken a lot about the challenges women have in the world of venture capital. Do you think within this downturn, are women going to be the sort of first casualties of this funding slowdown? Do you see anything to indicate that? Or have we sort of learned the lessons of Ellen Pao and others and the VCs have gotten better on gender equality issues.

Gene Teare: I wouldn't say necessarily that women are the first casualty in a downturn because I don't think it quite works like that. I don't think that's the first sort of instance of what I see. I think what is challenging when I look at the data -- so I've been tracking this data since 2015. I spearheaded adding gender to the data set, and we did our very first reporting then looking at funding to female founders.

And we did -- we added gender to the data set just because the whole equity discussion in tech had already taken off. It was a lot around women in engineering and in engineering teams and not having very high numbers in those teams and not being treated in a certain way. And so I thought, hang on a minute, we have a global data set. We have very good data on founders. Let's see what the funding is to female founders.

And I think what's interesting to me is that as the ecosystem has grown, the numbers have grown over a decade, they edged up by points of 1%. So we don't see year-to-year huge shifts and changes in this. I look most recently, just in 2022 and female founders. So it's all female founders as well as female cofounders, any company that had a female founder. They raised around 10% of venture dollars, around 13% of deal counts, so slightly more graded towards the earlier stages than the later stages because of the difference.

I'm not sure that we'll see that necessarily those proportions necessarily come down, but we haven't seen them grow significantly. But if you go back, I was part of a company that went through the dot-com burst. And at that time, there were -- there was hardly any. There were a few high-profile women in venture. There were a few high-profile female founders that everyone pointed to, but it wasn't an across-the-board thing. They were very high-profile women in marketing, in PR and people look to them, and they saw them as leaders in the industry, but it felt very sporadic.

I think it's very different today in this past decade where there are four or more women out there. And as the ecosystem have grown, those numbers have grown. But 10%, that tells you this -- we're very far from equity, and that's not going to happen anytime soon. So we see it shift up a little bit year-over-year, but not in any significant way.

Nathan Hunt: I have some friends who are women who work in technology at very prominent tech companies, companies that extensively have a good reputation on this issue. They have some amazing and not very nice stories to tell about the experience of being a woman outside of, say, marketing or HR or one of those functions. When you think about the issues that venture capital has around gender, do you think that those issues are unique to venture capital? Or do you think that maybe VCs struggle with gender balance because they're part of the technology ecosystem, which is just bad at this in general.

Gene Teare: I think across the board in many industries, women faced challenges. I don't think it's specifically just unique to tech. I think there is a unique tech component, which is engineering, has been very dominated by men, and they're loaded in the industry. And so women might face some specific challenges to do with tech and coming in.

When I first joined -- if you went to visit a VC firm as all the men were VCs, all the women were assistants. And so there was this clear demarcation is if you're a woman, you're going into these jobs, if you're a man, you're going to these very different jobs. And I think that's very different today. If you look at most of the larger VC firms, they have junior people on the team of both genders.

And the industry, the boutique industry, it came from that tradition of being largely run by men. So that's the tradition that -- or the way it looks more than a decade ago. And so that is changing, but we still have a long way to go.

Nathan Hunt: Gene Teare, Senior Data Editor at Crunchbase. Thank you so much for joining me today and thank you for sharing all of this insight into venture capital and the technology ecosystem.

Gene Teare: Thank you, Nathan. I appreciate this. It was great preparing for this and going back and looking into the data to see if there’re newer insights I can give your audience. So I appreciate that. This has been fun.

Nathan Hunt: The Essential Podcast is produced by Patrick Moroney. At S&P Global, we accelerate progress in the world by providing intelligence that is essential for companies, governments, and individuals to make decisions with conviction. From the Majestic Heights of 55 Water Street in Manhattan, I am Nathan Hunt. Thank you for listening.

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