Early-Stage Investing Back in Favor?
Two headlines have caught my eye recently that lean toward investor discernment. Recently, the CB Insights newsletter heralded unequivocally that early-stage VC deal share had hit a 5-year high. Corporate VCs’ are now increasing their share of early-stage deals relative to mid- and late-stage deals. Business Insider also recently caught my attention with this headline: “Y Combinator pulls back from late-stage startup investing to focus on its core accelerator program, and parts ways with 17 employees”. The source? Garry Tan’s blog post on the YC website, in which he wrote:
But late-stage investing (for YC) turned out to be so different from early-stage (investing) that we found it to be a distraction from our core mission. So we're going to decrease the amount of late stage investing we do.
I call bullshit! (Let’s call it what it is.) What Tan is really saying is that in today’s market, potential YC late-stage investments will not produce the returns that early-stage investments will produce in 2023. It’s more sensible to close down the late stage investing unit now, and re-open it in a year when (we all hope) good times return.
I’m not going to declare a trend… but we’ve seen a shift to early-stage investment by institutional investors happening for a while. Seeds are hot, PE and VCs are refocusing the bulk of their investment activity on early-stage deals, and many unicorn investments – aka, the ultimate late-stage investments – have been subject to haircuts.
What’s important too note is how we got here: the 2021 funding bubble; few and far between exits in late 2022 and 2023; harder-to-do Series B+ (i.e., Series B’s, C’s, D’s, etc.) financings, and easier-to-do Seed 1’s and 2’s. VC’s have also been suspending fundraising or cutting back, and searching for alternative approaches to financing winners.
The energy right now in the investment environment is sourced from Generative AI startups leading with GPT 3.5 and 4.0 centric . There’s a glimmer of exciting and potentially impactful software offerings in the coming years that yes, could translate into improved exits.
But what of the startups funded with vintage years of 2020, 2021 and 2022? Those that happened during founders’/entrepreneurs markets are getting meager returns. Let’s not forget YC is the ultimate deal flow contrivance for investing in early-stage startups before they mature into emerging companies and unicorns. I read YC’s abandonment of late-stage investments is saying that the preponderance of startups from the vintage years of 2020-22 are DOA. Investors are ready to stock the 2023 vintage in their cellars immediately.
I’ve said what I’ve said. And yet, Silicon Valley and VC investors can be fickle. These looked over, vintage late-stage startups would be wise to buckle-down for some challenging headwinds. They can attempt innovation by adding “GPT-fairy dust” and try their best to make it through to the other side. I’ll be watching to see whether they come back into favor.