As VCs face unprecedented challenges in 2024, with a difficult fundraising environment and increased competition, it’s more crucial than ever for firms to differentiate themselves and support their portfolio companies effectively.
At Protagona, we understand the unique needs of VCs and startups in this rapidly evolving landscape. Our deep expertise in Amazon Web Services (AWS) and our comprehensive range of technical services are designed to help VCs make informed investment decisions, optimize their portfolio companies' cloud infrastructure, and drive growth and innovation in the face of adversity.
So let’s explore the current state of venture capital, the characteristics of high-performing funds, and how Protagona can be a valuable partner in navigating these times.
The State of Venture Capital in 2024:
2023-2024: The Most Challenging Fundraising Environment in Years
VC performance in 2023 was hindered by the collapse of Silicon Valley Bank, a difficult market for exits, and a tough market for fundraising.
- Market regulation after post-Covid digitization hype: During the COVID-19 pandemic, there was a surge in investment activity, particularly in digital technologies, as businesses and consumers rapidly adopted online solutions. However, this hype led to overvaluation, market saturation, and unrealistic expectations for returns. As a result, the market is now undergoing a correction, with investors becoming more cautious and selective in their investments.
- Investors scaling back their VC investments proportionately: Just like any asset class, VC requires commitment to the long term outlook. In 2023 and 2024, we see fund investors that we’re unfamiliar and uncomfortable with startup markets pulling back their investments. In 2023, there was $170.6 billion of VC invested in 15,766 deals, which was well below the $242.2 billion in VC invested across 17,592 deals in 2022.
- Allocators into venture are trying to figure out where they want to concentrate their dollars: With the market correction and increased uncertainty, investors who allocate capital to venture funds (such as institutional investors and high-net-worth individuals) are reassessing their investment strategies.
- VCs are being forced to course correct: VCs are having to adapt to the new market realities by revising their investment strategies, focusing on capital efficiency, and supporting their portfolio companies through the challenges. This may involve making difficult decisions, such as cutting costs, restructuring, or merging underperforming startups to ensure their survival and growth prospects.
- In order to get more investment, you have to have a healthy portfolio today: In this environment, the performance of a firm's existing portfolio companies is crucial. Investors are paying close attention to how well these startups are weathering the downturn, managing their cash flow, and adapting their business models. VCs that have invested in resilient and innovative companies are better positioned to attract new capital.
- 2024 will look a lot like 2023: The competition between VCs is expected to intensify due to a confluence of factors. One major reason is that funds from previous years are still actively seeking to raise capital, leading to a crowded market. This situation is compelling VCs to differentiate themselves and their investment strategies to attract limited partners (LPs) and secure funding. As a result, VCs are carefully calibrating their fund sizes to align with their strategic objectives, sector focus, and stage preferences. Those who can demonstrate a clear and compelling vision, backed by a strong track record and a well-articulated plan for deploying capital, will be best positioned to stand out in the crowded field and attract the necessary funding to fuel their investment activities.
The Highly Effective Habits of High Performing Funds
Smaller Funds Are Outperforming Larger Funds
VCs in the $50 million to $200 million range are outperforming their larger, more tenured competitors.
This phenomenon can be attributed to several factors:
- Agility and focus: Smaller funds often have a more focused investment strategy, targeting specific sectors, stages, or geographies. This allows them to develop deep expertise and networks in their chosen areas, leading to better deal sourcing and value-add for their portfolio companies. They can also make quicker investment decisions and adapt to changing market conditions more easily than larger funds.
- Alignment of interests: Smaller funds typically have a higher proportion of the fund manager's personal capital invested, aligning their interests more closely with those of their LPs. This can lead to a stronger commitment to maximizing returns and a more hands-on approach to supporting portfolio companies.
- Lower entry valuations: Smaller funds often invest in earlier-stage startups or in less competitive markets, where entry valuations are lower. This allows them to acquire significant ownership stakes in companies with high growth potential, leading to outsized returns if these startups succeed.
- Niche opportunities: Smaller funds can target niche or emerging sectors that may be overlooked by larger funds, which often focus on more established industries. By identifying and investing in these untapped opportunities, smaller funds can generate higher returns.
- Lack of mega-deals: Larger funds may feel pressure to deploy capital in bigger deals or later-stage companies to maintain their fund size and management fees. However, these mega-deals can be highly competitive and may not always generate the best returns. Smaller funds can be more selective and disciplined in their investment approach.
Allocators Don’t Want VCs Learning on Their Dime
Allocators expect fund managers to have a proven track record, deep expertise, and a well-defined investment strategy before entrusting them with their capital.
They don’t want to bear the cost or risk associated with inexperienced or unproven VCs who are still learning the ropes. They prefer to invest in funds managed by seasoned professionals who have demonstrated their ability to identify promising startups, provide strategic guidance, and generate strong returns.
What Allocators Looks For in a Fund
When allocators, such as institutional investors or high-net-worth individuals, are considering investing in a fund, they typically focus on four key factors:
- Rationalizing existing relationships with managers: Allocators often prioritize maintaining and strengthening their relationships with fund managers they have previously invested with. They evaluate the performance of these existing relationships and assess whether the fund managers continue to align with their investment objectives and deliver satisfactory returns.
- Networks and introductions from other VCs or trusted partner: Allocators value recommendations and introductions from trusted VC peers. They rely on their networks to source new fund managers and gain insights into their reputation, track record, and investment approach. Positive endorsements from respected VCs can significantly influence an allocator's decision to invest in a particular fund.
- Grassroots - finding funds that specialize: Allocators are increasingly interested in funds that have a specialized focus, such as targeting specific sectors, technologies, or geographies. These specialized funds often have a deeper understanding of their chosen domains, enabling them to identify unique investment opportunities and provide value-add to their portfolio companies. However, there’s a fine line between being specialized and being tied to the whims of a particular market.
- Unique value proposition: Allocators look for funds that offer a compelling and differentiated value proposition. This can include a proven investment strategy, exceptional team expertise, proprietary deal flow, or a strong track record of successful exits. Funds that can articulate and demonstrate their unique edge in the competitive venture capital landscape are more likely to attract allocator interest and investment.
How Protagona Can Help VCs and Startups Thrive
How we partner with fund managers and founders:
- Cloud infrastructure optimization: Protagona helps VCs assess and optimize the cloud infrastructure of their portfolio companies. By leveraging AWS's scalable, secure, and cost-effective solutions, startups can focus on innovation and growth while minimizing technical debt and operational overhead. This means improved efficiency, faster time-to-market, and better overall performance.
- Data analytics and insights: We help VCs and their portfolio companies harness the power of data to gain valuable insights into customer behavior, market trends, and operational performance. These insights inform strategic decision-making, product development, and go-to-market strategies.
- Artificial Intelligence and Machine Learning: We help VCs identify and implement AI/ML use cases across their portfolio, enabling startups to build intelligent applications, automate processes, and create personalized customer experiences. This can be a significant differentiator in competitive markets.
- Cybersecurity and compliance: With the increasing importance of data privacy and security, VCs need to ensure that their portfolio companies are properly protected and compliant with relevant regulations. Protagona provides guidance on best practices for securing cloud environments, implementing access controls, and meeting compliance requirements such as GDPR, HIPAA, or SOC.
- Due diligence and technical assessments: When evaluating potential investments, VCs need to assess the technical capabilities and infrastructure of target companies. We provide technical due diligence services, helping VCs understand the strengths, weaknesses, and scalability of a startup's technology stack. This can inform investment decisions and help identify areas for improvement post-investment.
- Portfolio company support and mentorship: We act as technical advisors and mentors to VC portfolio companies, providing guidance on architecture design, performance optimization, and cloud best practices. We can also facilitate access to AWS funding programs, resources, training, and support designed for startups.
- Strategic partner network: We can act as a resource for VCs to recommend other technology partners with various specialities.
- Co-selling: We can work with startup founders to help co-sell their products to the AWS network and make introductions to other clients or contacts who might need their product.
