The shifting VC landscape: doubling down on diligence
Are VCs open for business?
We surveyed >80 VCs, and the 2023 venture crisis is twice as impactful as COVID to VCs in how they spend their time.
For the first time since the pandemic, both founders and VCs have once again been asking “Are VCs really open for business?”.
While the COVID era took the notoriously network-driven venture capital industry out of the board room and into the Zoom room; 2023 is being defined by a deconstruction of the “manufacturing line” of venture-backed companies with the end of the zero interest rate policy (ZIRP) era. While VCs quickly learned how to take their pitches, diligence, and networking online, this time, it is different. The rise in interest rates has likely caused a long-term structural change in the ecosystem, and the results are shocking:
- Habits formed in the COVID era around remote deals are not going away, so we are likely to see habits formed in 2023 to remain as well
- VCs have changed how they spend their time twice as much as when the pandemic hit
- The slowdown in venture deals is not due to dealflow, but changes in diligence practices
Over 3 years ago, in Q2 2020, we conducted a study analyzing investor activity as the pandemic was in full swing. Then a year later, we ran another study to see how the market had adapted to the pandemic. Here we are in 2023; another wave has hit the tech ecosystem. This time it isn’t a pandemic, but market-driven and likely quite different to what we experienced in 2020.
While the pandemic-driven pullback in VC investments lasted months with 2020 ultimately hitting VC deal count records, we have seen a 7 quarter-long decline in VC deals in North America (Pitchbook). How are VCs changing how they spend their time overall, and how have they changed the way they evaluate businesses? Are they changing how many deals they do per year, and where are they looking for investments geographically?
We surveyed over 80 VC firms, spanning all of North America, to find out.
The survey was completely anonymous and was sent out directly to individual investors by members of our team. Similar to our previous research projects, as we continue to grapple with this market downturn, it is likely that VCs will require some adaptation in the way we work for the foreseeable future. While we originally conducted this research for our own insights, we quickly realized that sharing the findings publicly would help us all as we collectively adapted to yet another ‘new normal’. This post is the first in a series where we share all of this data.
First, have COVID-era modifications evolved into lasting VC habits?
The answer is a resounding yes. While it took over a year for 97% of VCs to complete a remote deal, over two-thirds of funds still do not require their firm to meet a management team in person during diligence. This is shocking news, as 85% of respondents in 2021 said that they would go back to in-person meetings again once they were vaccinated.
Remote deal habits remain
If they aren’t spending time wining and dining founders, where have VCs shifted their time? Well, they are leaning in to support their portfolios more than ever before. In 2020, only 39% of VCs leaned in to better support their portfolio companies compared to 82% today.
Twice as many VCs are spending more time with their portfolio than in 2020. Further, they are also spending more than twice as much time on diligence than in 2021. This is a massive shift in how VCs are prioritizing their time, and it is for good reason. We are seeing record numbers of venture-backed companies go out of business — 200% more in Q3 2023 than Q3 in the pandemic. As such, VCs are flocking to support their founders like never before.
Spending increased time with the existing portfolio isn’t for a lack of new dealflow. In Q2 of 2022 over 51% of VCs had said that they saw more than a 25% decline in deals. As we all know, 2020 and 2021 ended up seeing record numbers of venture deals at record-high valuations. In contrast, 2023 has seen record-low VC deals, but our survey results show that only 36% of VCs reported seeing fewer deals in their pipeline. This indicates that dealflow has remained closer to the 2021 era, and that something must have changed in how VCs evaluate businesses.
We have the numbers: over half of VCs have reported a greater emphasis on financial due diligence in 2023, and that is just the beginning of how they have changed their ways of working.
In our next post of this series, we will surface the results on how VCs have changed their diligence processes, what they view as the most important steps within a diligence process, and a deeper analysis on how they are spending their time.
Stay tuned!
