A month into 2024, what's the state of the market for VCs and founders looking ahead to the rest of the year?
I am cautiously optimistic. Stock markets have rallied quite a bit in the past six months, inflation is in check across most major economies, and we are starting to see decreases in interest rates. Deal activity is picking up, there have been a few recent US IPOs, and M&A activity is happening, and pricing is down.
At the start-up level I see the state of the market as being split into two main camps. In one corner, there are businesses with attractive unit economics, sound cash management and a steady rate of growth. These are the companies that we, and most investors, are always on the lookout for as they possess the principles that we shape our portfolio companies towards having.
In the other corner, there are businesses that have had supersonic growth in recent years, particularly from 2019 - 2022 which was an especially exuberant period. Now that the circumstances are more challenging, investors will be asking tougher questions, and if the unit economics don't quite stack up, these management teams will have some work to make sure they do. In this market there is very little tolerance for companies burning excessive amounts of cash with poor unit economics
On this subject, I'm going to share some more thoughts on how VCs can help their portfolio companies through challenging periods in my next blog.
In this market however, there are a few sectors where growth and exits will be stronger. We see B2B SaaS as particularly resilient, along with education technology and some pockets of consumer where unit economics and demand continue to remain strong.
Then clearly there is AI… all of my rules above will be thrown out the window given the nascence of this space and the clear excitement to find the winners in this very big market segment. Some of my DN Capital colleagues are better placed than I am to share their views on the AI space, so look out for their perspectives a little later down the line.