Lux Capital partner Deena Shakir joins Yahoo Finance Live’s Akiko Fujita to discuss the downturn in venture capital as well as the drop in global exit value.
AKIKO FUJITA: Despite a sharp decline in private company valuations, venture capital continues to attract significant funds, with more than $500 billion in dry capital waiting to be deployed globally, according to PitchBook. Yet venture capitalists are warning companies to cut back on growth to ride out this tech downturn. I met Lux Capital partner Deena Shakir and asked her how she advises her portfolio companies.
DEENA SHAKIR: You know, we told our companies before a lot of these letters came out to think long term, buckle up, and prepare for winter, or the storm, or whatever analogy, the related analogy to the weather you want to use. If you look at the latest LP letters we’ve published, which are mostly – some redacted – publicly available, we’ve given advice on all of those fronts. So we’re telling our companies to make sure that they’re watching the burn closely, that they’re thinking long-term and that they have plenty of reserves, that the trend is unlikely to, you know, that has may have seemed normal for the last two years of increases every three to four months at a 3 to 4x valuation may not be the case – certainly not the case in the short term – and may not even be the case at long term term.
So thinking long term about the kind of ability to survive first and then thrive.
AKIKO FUJITA: So let’s pick up on that point, because we’re coming off of a few years of just incredible growth, not only in the public markets, but also in the private market. Some would say it felt like there was no ceiling up there. Is this period over now? Is this some kind of new reality or is this just a correction we had to go through?
DEENA SHAKIR: Well, while we’d like to think we’re Nostradamus as VC, we’re not. So we can make guesses and predictions. I would say that is certainly not the case anymore. I don’t necessarily think that’s what the future will look like forever. I think there is an element of correction that we see. But I think that will continue to change. And what we’re seeing right now, as I mentioned, is a reflection of all kinds of things going on in the macro.
I don’t think it’s a reflection on the quality of the companies, the long-term viability of these companies. We continue to see amazing early-stage companies and founders starting up and innovating and – especially in the areas that we’re passionate about, in deep tech and health tech – and there’s a lot of dry capital there- down. So we see deals being made. We do business. We’re excited about the offerings across the stages. It’s just a bit of a different tone or vibe to the exuberance we’ve seen the last two years, in particular.
AKIKO FUJITA: So the business is done. The accounts aren’t necessarily down significantly, but the valuations are. How do you invest in this environment? Where do you plan to deploy your capital?
DEENA SHAKIR: Yeah. You know, I think everyone is trying to figure that out. And the closer you get to what might look like a public company, the more there’s a kind of direct comparison, if you will, with the multiples you see on the public side, which don’t look very good right now. And if you look at the previous stage, there’s still a bit of a lagging indicator, I think, of what’s happening on the public side. And that’s partly because some of the most growth-oriented investors are also looking to invest earlier.
So there is still, perhaps even more, capital to deploy in the early stages. Now, that being said, what we’ve seen through the stages over the last two years is this incredibly fast pace. You would see a pitch, and a founder would have 10 term sheets within 24 hours, and not necessarily the kind of due diligence that you would want to do or can be done. This is no longer really the case.
There are still extremely competitive offers. The best companies will continue to argue, and so on. But there’s a slowdown that’s happening, a slowdown in terms of touring pace and capital deployment, especially in the growth stage. Things are taking longer than before.
AKIKO FUJITA: It was Deena Shakir, a partner at Lux Capital. And Brian, she said, the thing I heard over and over again at the Collision tech conference – that’s where we had the conversation – is that there’s still a lot of dry powder. And that’s because you don’t just have traditional investors, but also hedge funds or private equity firms that have put their money behind these companies because they’re seeing a big return. It hasn’t necessarily gone away, but the money is going to the early stages, not the later stages, because, she says, state-owned companies aren’t doing very well.
If you’re a food delivery service, for example, those investors are going to look at what’s going on with Uber and some other names that are competitors and say, maybe now is not the time.
BRIAN CHUNG: Yeah. Well, I mean…in the fantasy interview, I think what caught my attention was surviving, not thriving. This is the environment they find themselves in right now. But that doesn’t mean VCs don’t have money to invest in growing businesses. It just means that you’re probably going to be fundraising a little less and your growth scenario is probably going to be a little less bullish than it was if you were fundraising, oddly enough, in the middle of the pandemic. So it’s going to be a story for the VCs.
AKIKO FUJITA: More declines and falling valuations.
BRIAN CHEUNG: Exactly.