Navigating The 2023 VC Landscape Interview: Greg Baker, Alumni Ventures

Navigating The 2023 VC Landscape Interview: Greg Baker, Alumni Ventures


The waters of this year’s venture capital (“VC”) landscape are choppy at best—regardless of whether you are an entrepreneur or investor—leaving many with a feeling of uncertainty. The fallout from COVID-19 still lingers, and although the market has rebounded over the last 18 months with record estimates of nearly $1 trillion in dry powder (i.e., available liquid capital from VC funds to invest), 2023 is off to a questionable start.

Private market alternative investments (e.g., private equity, venture capital, asset-based financing, real estate, and more) are known to be more recession-resilient than public markets due to their longer timeline for returns. Despite this resiliency, investors are being more conservative about valuations and reserving more dry powder—available liquid capital from firms for investment—for triaging existing portfolio companies over deploying into new deals.

Some Investment firms are also having difficulty raising money from limited partners (e.g., the individual angel investors, family offices, and institutional investors who provide the capital for the investment firms to deploy, known as an “LP”) for newer firms and follow-on investment for funds which have yet to show investors a return (which can take 5-7 years in private markets). Experts have even speculated an increase in zombie funds—VCs that have yet to show returns to investors—resulting in the inability to further support their portfolio companies with follow-on investments, which can be capital that startups rely on to survive.

To help chart these uncertain waters, this new series, “Navigating The 2023 VC Landscape,” will feature interviews with experienced investors for the series about their advice for startups, investors’ perspectives, and market predictions.

The first interview in this series is with Greg Baker, Managing Partner for Alumni Ventures, along with leading the alums network-focused Bascom Ventures (University of Wisconsin) and Towerview Ventures (Duke). Alumni was the third most active investor in 2021, providing various funds encompassing more than 8,000 investors, 1,000 portfolio companies, and a community of more than 600,000, many of which are connected through college networks.

Brian Penick: There are a variety of perspectives on the current market: what are your thoughts for investors and entrepreneurs?

Greg Baker: From an investing standpoint, it’s an exciting time because some investors are sitting on the sidelines, which opens up more opportunities to see deals you wouldn’t have seen. In other times, deals would be oversubscribed, or you would only find out about a it once it was too late. Valuations are low, and we’re not negotiating as many terms, so it’s attractive for investors wanting to buy low and sell high.

For entrepreneurs, these are generally more challenging than normal fundraising times. What I’ve found over the years is that great companies find money, good companies may struggle to find money but will find it if they keep working, and for the companies that can’t find any money—you might not have been able to find money in great times either, and that’s a market sign that you should probably listen. Yes, valuations are lower. But in the long term, for a very successful company, extra dilution is a rounding error to the ultimate outcome. You’re much better off taking a little more dilution and getting a little more runway because it’s uncertain which direction we will go from here. Will we go even lower, or are we at the bottom and starting to pick back up? Either way, having a little more runway gives you more options.

Penick: Given the market climate, many potential LPs are nervous, and startups find investors are more aggressive on valuations and milestones. Has your firm adapted your strategy to either LP fundraising or sourcing (investment) dealflow?

Baker: We haven’t fundamentally changed very much and stuck to our beliefs. When we started, we knew each of the individual funds would be very small. Bascom Ventures raised money from alums of the University of Wisconsin. At the time, we thought that our investors would only want us to invest in companies founded by Badgers, along with our MIT and Stanford Funds. What we found is they just want the best return they can get. They like their alma mater, but they love money. As we’ve grown, we’ve removed the boundaries of ‘I can’t invest unless there’s an alumnus in the company.’ We figured out an excellent way to invest alongside each fund so that we could write larger checks. We’ve grown to a size where we could become a lead investor. But fundamentally, we don’t think that’s where we belong—we feel we’re very complimentary to the lead investors. We believe it’s an excellent strategy for individuals to understand what they’re getting into, the strength of what we bring, and the portfolios we can put together. We have concentrated on what got us to where we were at the beginning of 2020 and continued to grow through that strange year. Last year, people got a little nervous with their funds, but we continued to be consistent, which helped investors feel comfortable knowing what they were getting from us.

From the entrepreneur’s side, we see more convertible notes as companies try to extend their runway to not take a down round, which VCs generally support. We see new ways to invest in companies we could not get into in 2019 and 2020. It would have been extraordinarily rare for us to go into a Series A to Series B bridge if we weren’t already in before the Series A, but we’re open to looking at those more because it’s a great chance to get into deals that were oversubscribed. Now we can get in because there are so few people investing.

So, there’s a little bit of a change on the investing side. But fundamentally, it’s just being consistent in what we’ve told our investors when they sign up, doing what we said we were going to do, and doing it well. Eventually, it becomes familiar to our network and builds on itself.

Penick: What best advice can you offer startups in this current climate?

Baker: It’s a variation on traction. Show me what you’ve learned from talking to your potential customers—what they want and are willing to pay for. A lot of entrepreneurs will be too internally-focused in situations like this and over-engineer products, but the reality is you don’t know what people are going to actually pay you for, which is key. They’re very few companies outside of biotech that became successful in what they started off doing. Amazon
AMZN
sells books, but that’s not exactly where they’re making the bulk of their money. I want to see that your team has talked to customers and can respond to the feedback they’ve given you. Sales typically trump all, but I want to make sure that you’re listening to your customers because you have to deliver a product that people are willing to pay for now, as opposed to what you think they want.

Penick: What best advice can you offer any VCs/LPs in this current climate?

Baker: The last year has shown that the public markets can take a very humbling turn. There are good and bad years in venture capital, but the private markets generally outperform public markets. It’s a great diversification because there’s such a limited correlation between the outcomes of private and public markets, and most investments are kind of on sale, so it’s a great time to get in.

Penick: Based on your expert opinion, what will happen this year? Do you believe a recession is coming? What does your prediction mean for both entrepreneurs and investors?

Where are we headed? Medium-term: we’re going up and to the right. Short term: I don’t think I care [laughs]. We’re certainly not at a peak, but are we at the trough? There are a lot of headwinds that can be caught and a lot of decisions that are being made that could drive us further negatively. Will there be a minor recession? Probably, but It depends on the definition of a recession. Will it be a painful next six months? For a lot of people, yes. For some people, they won’t notice. I think in 2024, 2025, and 2026 we will start accelerating up like the US and global economies always do. When will it drop down again? The last recession was about 12 years, so let’s say 8 years? I think fundamentally, things go up and to the right, and nothing I’ve seen drastically changes that.

I don’t like investing in minor ripples. If you time the market perfectly, great, but I think more people have lost a fortune trying to do that than have just said okay, ‘it’s going to go up and to the right at some point.’ We’re investing in companies whose payoff is 5, 6, or 7 years down the road. As an investor, I don’t really care too much about what happens in August. If I’m an entrepreneur, maybe I picked the wrong time to do this. But if I waited and the innovation passed me by, I would have missed the window anyway.

Thank you to Greg Baker from Alumni Ventures for his time and perspective. Please stay tuned for more articles from my “Navigating The 2023 VC Landscape” series by following me on Forbes.com.

Legal Disclaimer: I am a partner at the venture capital firms LOUD Capital and Legacy Entertainment Ventures. For journalistic integrity, I have not included my perspective within my colleagues’ responses for this article to remain unbiased.

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