The Current State of Venture Capital All Depends on Your Point of View

How rough is it out there for anyone in search of venture capital right now? Well, thanks in large measure to persistently high interest rates, U.S. deal values declined 13% quarter over quarter in Q2 this year and that’s an encouraging development, per data from PitchBook yesterday. Year over year, the drop is more like 48%.

A better take on how rough the VC landscape is for IT startups in particular, though, is “it depends”. Venture capital and private equity firms entered 2023 with nearly $2 trillion in “dry powder” to invest, according to S&P Global Market Intelligence, and if you’ve got the words “generative AI” in your business plan you stand a pretty decent chance of grabbing some of it.

Now’s actually a pretty good time to raise for top performers in other product categories too, according to Chad Cardenas (pictured), CEO of strategic capital investor The Syndicate Group (a.k.a. TSG). “The best companies kind of have their pick of the litter right now, because there’s so much capital on the sidelines,” he says.

And by “best” he means roughly the top two to five percent in their segment, which is actually more like elite. “They’re basically the leaders in their space,” Cardenas says. “They’re hiring. They’re growing. They’re acquiring new customers.”

Everyone else is struggling to land funding. “For the average company or the below average company, it’s very, very difficult right now,” Cardenas says.

That’s obviously grim news for the founders and employees of most young vendors, Cardenas notes. But the brutally honest trust, he continues, is it’s actually good news for MSPs, resellers, and even distributors.

“The best companies are rising to the top and the rest are kind of starting to fall by the wayside,” Cardenas says.

That’s simplifying a vendor landscape made overcrowded by zero percent interest and free-flowing money. Not long ago, Cardenas observes, there were maybe two or three companies worth knowing about in any given product category.

“A year ago, it got to the point where there’s like a dozen or 15, and they’re all kind of saying the same thing and they’re all being very well funded, maybe even overfunded, by big brand-name VCs,” Cardenas says. “The downstream effect of that is it makes the job of the average channel business that much more difficult to pick and choose which one or two or three are going to be the winners in this space.”

What’s more, he adds, fewer vendors doesn’t mean less innovation or decreased IT spending. Real innovation rolls on, and end user demand for cloud computing, cybersecurity, and other solutions isn’t sinking despite stubbornly high inflation and continued recession fears.

“It’s only increasing,” Cardenas says. “Even through all of these crazy times with the economic climate, the demand is increasing.”

Sooner or later, of course, these crazy times will be a bad memory and venture capital will start flowing again. The question is when—and how.

“I think we’re going to see different models of funding and startups getting to market,” Cardenas says. Veterans of the current startup scene, in which only the best-run companies survive, he predicts, will want to partner with funders offering concrete entrepreneurial advice in addition to money. Not all VCs fit that profile.

“On one extreme end of the spectrum you have venture entities that can provide capital and really not too much of anything else, and then on another extreme end of the spectrum you’ve got folks that provide so much strategic value to the business that the capital is basically secondary,” Cardenas says.

TSG sits in the latter camp, he continues, and differs from most VC competitors in another way as well: The money it invests is largely supplied by channel partners rather than institutional investors and mega-millionaires.

“They get the competitive advantage and the strategic differentiation of being earlier with great emerging tech, which is a massive differentiator right now in the industry,” Cardenas says of TSG’s IT provider investors. “They also get a chance to share in the value growth upside of that business along the way.” Eventually, they share in the proceeds of a private equity acquisition or IPO too.

“They’re shareholders in the business and they helped create that value over time, so they now get to benefit from that like everybody else,” Cardenas says.

A leaner crop of investment targets to choose from will help channel partners identify vendors worth betting on in that way more easily.

Hybrid work is here to stay

And yes, lots of people have been saying as much for a while, but how much time people spend in and out of the office appears to be settling into a predictable groove.

According to the latest update from WFH Research and its Survey of Working Arrangements and Attitudes, Americans who earned $10,000 or more in the prior year have been spending right around 30% of their paid full days at home since early 2022.

Just 18.9% of people whose job can be done entirely from home, it’s worth noting, actually worked entirely from home between March and June of this year, versus 34.9% entirely in the office and 46.2% somewhere in between.

The books are closed on cloud computing in 2022

And we can now officially say it was another good year.

Per IDC yesterday, global public cloud spending rose 22.9% last year to $545.8 billion. Pretty good stuff given that IT outlays overall were up in the mid-single digits, according to IDC and others.

That said, while it was still hot up in the cloud in 2022 it was noticeably less hot. Infrastructure as a service spending, for example, climbed 26.2% year over year versus 35.6% in 2021 and SaaS spending rose 18.4% versus 23.5%.

Also worth noting

Patch management vendor Action1 now offers a free (for the first 100 endpoints) tool that identifies and removes compromised instances of the MOVEit managed file transfer service.

Rackspace is partnering with C2C Global to share insights and expertise with Google Cloud partners.

Hornetsecurity has published a new “Backup Bible” offering over 150 pages of actionable best practices info.