This month, Utah Business partnered with Dentons Durham Jones Pinegar to host a roundtable event featuring Utah’s venture capital leaders. Moderated by Davis Warnock of Mercato Partners, they discussed deal count decline, advice for founders, exciting industry verticals and more. Here are a few highlights from the event.  

 

What are you experiencing in the bid-ask dynamic of today’s market, and how are you helping founders through this?

Matt Durham | President, Brandless | Principal, Clarke Capital Partners

At Brandless, we work with 1,000 entrepreneurs every month, so we see this landscape broadly and the impact it’s having. For both founders and investors across the industry, there’s about $300 billion of dry powder sitting on the sidelines ready for a better deal-making environment. That means deals are still happening, but may require additional flexible and creativity. The world isn’t the same as it was a year ago, but with good partners and a willingness to be transparent, mitigate risks and be solutions-oriented, investments and deals are still taking place.

Ted McAleer | Co-founder | Park City Angels

We’ve got a lot of serial entrepreneurs in Utah. One of the things we do at Park City Angels is coach them on having advisors who are 40 to 65 years of age—people with operational backgrounds that have gone through these cycles before. If all you’ve ever seen is rosiness and things moving up and to the right, sitting down with somebody that’s been around in the 2008 and 2000 markets brings a level of rational thinking. If I was running a portfolio at a VC or private equity company, I’d make sure that the young entrepreneurs have some sage advisors on their advisory board. 

Chris Anderson | Partner | Dentons Durham Jones Pinegar

In prior down cycles, I’ve seen investors get very aggressive in changing the deal terms of several multiples for liquidation preferences or direct ratchet adjustments on the conversion price. I don’t see investors rushing in to do that yet, because I think the experience from prior cycles was that those terms didn’t turn out to be good for anybody. If you have too much in your favor, if the founders just walk away, that doesn’t help anybody. They have to stay incentivized. Investors, so far, remain pretty reasonable in those terms.

Brendon Charles | VP, Relationship Manager | Hillcrest Bank

As bankers, we’re generally seeing compressed liquidity in the market and where liquidity is offered, it’s more selective. Many of the operators that I’m meeting with are highly leveraged, not from a cash flow-to-debt perspective, but really from the perspective of how much liquidity they have to cover OpEx [operating expenses]. Operators should be thoughtful around this OpEx and understand what elements are elastic versus inelastic, and keep certain facilities—either liquidity lines or cash on the balance sheet—to cover these and absorb losses during more challenging times. We still have to see what happens with the labor market, which I think is going to tell us how deep and how long whatever recession we’re in now is going to continue to be.

What are your thoughts on the deal count decline that we’ve seen since Q1 of 2022, and what does that mean for 2023 and 2024?

Jack Boren | Managing Partner | EPIC Ventures

One counter-comment to any concerns around the tightening of the volume of deals is that best-in-class businesses will be able to fundraise in any environment. That doesn’t mean they’re necessarily going to get command valuations that they’ve commanded in other eras, but we firmly believe that. We’re coaching our founders to really focus on fundamentals. They will be able to attract customers because of the product that they’ve put forth. I think we’re going to see kind of a “Tale of Two Cities” here, two worlds where those businesses that will continue to raise will command some clout in the industry, and anybody that’s wishy-washy on what they are—on their purpose, on their profit model and the fundamentals of the business—is going to have a bear of a time raising capital. 

Rachelle Morris | Managing Director | RevRoad Capital

We invest at the seed stage. The founders where we’re actually getting to a term sheet, versus founders where we’re not getting to a term sheet, are those who are able to demonstrate that they are building a company and not just selling an idea. The storytelling is obviously important, but let’s look under the hood and show how you’re going to [grow] whether you’re at $500K in ARR [annual recurring revenue] or $1 million in ARR to $10 million. You could have just hired big sales teams and focused on customer acquisition marketing, but how are you crossing the chasm into product marketing and showing intentionality around the company that you’re building? 

Carl Adams | Managing Director, Venture Investing | Sorenson Impact

Deals have been declining. I’m really interested to see if it’s because VCs aren’t doing deals or if it’s because everyone was receiving advice in early 2022 to batten down the hatches, cut your burn, extend runway and then raise in 2023. I don’t know how many bridge rounds I did in 2022 of just people saying, “Oh, it’s going to be better in 2023.” I’m really interested to see if we’re going to have a major bloodbath in the second half of 2023 because everyone just kept pushing. 

Matt Mosman | General Partner | Pelion Ventures

This would be a good question for founders to ask about venture capitalists. A stupid way to do venture capital would’ve been to deploy a bunch of money in a frothy market and then pull back now. Time diversification in your fund is important. It’s important to have money deployed in 2021. It’s important to also have money deployed in 2022, 2023 and 2024. 

Tanner Potter | Principal | Kickstart

Certainly, macro and micro expectations of what is going to happen in the economy guides our behaviors. There’s some bias that people don’t announce extension rounds and C-plus rounds very often. A lot of those have happened. For founders, do they have a high opportunistic and defensive refresh rate? They need to be cued into the capital markets and adjust how they’re doing things quickly. Some VCs can be good at opportunistic but bad at the defensive refresh rate. My advice would be to stay up to date on the market, be cued in and react quickly.

Matt Durham | President, Brandless | Principal, Clarke Capital Partners

The investment and M&A world has completely changed in 12 months. As we look to the future, we are going to continue to see deals done but not at the same pace and valuation as 12 months ago. There are very unique conditions right now. There is significant capital available for investments and transactions, but market dynamics will require companies to use a different set of metrics to evaluate deals and their business growth. There is going to continue to be a stronger focus on profitability, return on investment and cash runway than historically. The milestones for performance and the upside are now different, and there’s been a shift from a sellers or founders market to an investor or buyer market. That has significantly changed the structure of deals. At Brandless, we have experienced these shifts in real time as we’ve continued to raise capital and close transactions. To be successful in this environment, companies will need to continue to adapt and adjust strategies over the next 24 months as investment climates change.

What industry verticals or categories are you seeing, and what excites you about them?

Carl Adams | Managing Director, Venture Investing | Sorenson Impact

In Utah, we don’t do a lot of climate tech. Where I sit, because I have this broad, global deal flow coming from every continent, climate tech already had tailwinds. Then you add the Inflation Reduction Act and the war in Ukraine. I was in the Hague earlier in October and was astounded at how much capital climate funds were raising. The smallest climate fund I talked to was raising $700 million, and multiple funds were raising a few billion dollars. Major tailwinds there.

Ted McAleer | Co-founder | Park City Angels

I think a lot of folks in the room see B2B, SaaS and B2C SaaS software stuff. I’m seeing a lot of military tech. And about climate tech, in the last year, there’s been a realization that the global macroeconomic situation is not all friendly. More Americans now realize that there are bad actors. Therefore, when you start to see typical applications of software or a drone and then all of a sudden see it applied to military tech, more people understand it.

Matt Mosman | General Partner | Pelion Ventures

There are certain areas of tech that have survivability across all kinds of markets: security, fintech and healthcare tech. AI is interesting to me because it’s been the year of AI every year for the last 27 years. The other thing that I see happening in this space is there’s a group of companies that are consanguineous—founders have sprung out of their previous companies. You’ll see something just a tick off of Divvy or just a tick off of Pluralsight. These are going to be other big companies that are similar to previous excellent companies here from this area.

The tech sector has been shocked by layoffs in the last handful of quarters. What does that mean for our community? 

Rachelle Morris | Managing Director | RevRoad Capital

One thing that I feel is lacking in the Utah labor market is we don’t have tech flagships like Apple, Microsoft or Dell where people can cut their teeth. I’m not necessarily hoping that this happens, but I could see people getting laid off from younger companies and maybe taking a job at Goldman Sachs or Northrop Grumman and getting inside of a very large organization for a couple of years while they’re thinking of the company they want to launch. 

Tanner Potter | Principal | Kickstart

We’re not necessarily in a recession, as unemployment is at a 50-year low, but we have all of these tech layoffs. That’s when you realize you’re in a tech bubble. As the tech ecosystem here matures from enterprise SaaS and SMB SaaS, and as we get into consumer and hardware, you see people develop different competencies. They can then take that one step adjacently or up to deeper tech. That’s what I hope for the next decade for Utah—that we continue to develop, diversify and become a more holistic ecosystem in that way.

Jack Boren | Managing Partner | EPIC Ventures

We’re in an interesting time right now. So much emphasis is put on all of these individuals that have been laid off and how there’s got to be some innovators in there. I want to change the focus from that individual to the exceptional performer in a company that has been retained at all costs. I think so much innovation is stifled by people being paid “just enough” at their company. It’s hard for them to think about going out and chewing glass for a couple of years. But some really smart people are doing the math of, “My option pool is probably not worth what it was last month or six months ago,” and starting to think there are other ways to get ahead and innovate. We’re placing heavy emphasis on spending time with these retained, upper-mid-level and upper-level executives at local companies because we think they’re itching to do something new.

As leaders, how can we better the entrepreneurship and investment ecosystem in the state? 

Chris Anderson | Partner | Dentons Durham Jones Pinegar

When I came to Utah from California 20 years ago, I was like, “Man, things are a mess here. No investor wants to stop in Salt Lake City.” Maturity and sophistication have developed since then, where people understand venture capital and they’re not afraid to have someone come in and buy some shares. They see how they can still be successful even though they don’t own it all themselves, and they can have someone other than their relatives running the company. Lots has already happened to provide that base of understanding and maturity in the market, but we just need to continue down that path.

Peter Harris | Partner | University Growth Fund

I think Utah is the most entrepreneurial place in the country. Ninety-five percent of employed people are employed at small businesses. Historically, if you think about it, even the early pioneers were very entrepreneurial when they came here. That’s our roots. The difference is that historically, it was, “I’m going to start a small business. My dream is to have a nice house and a boat.” Really great entrepreneurs like Josh James and others have illustrated to these entrepreneurs that, “Hey, if you’re going to put in all that time and effort, you might as well build something bigger.” Over the last 14 years of investing in Utah, it’s been fun to watch this steady march upward.

I don’t really want a big company here. I want lots of Qualtrics and Pluralsights and Domos and Instructures. Eventually, maybe some of those get really big. In the meantime, I think there’s a lot of opportunity to keep supporting entrepreneurship at every level. That’s why we’re excited at University Growth Fund, working with some of the best and brightest students. Over the years, we’re seeing a transition from all of our students wanting to do investment banking to now starting companies. 

Matt Mosman | General Partner | Pelion Ventures

Part of the magic of Silicon Valley was always its compactness. You would be in a grocery store or restaurant and hear the person behind you talking about some tech thing. You can do that here—you can be in Lehi, and that’s what’s happening around you. This compact area is going to help feed a flywheel that will keep it coming.