Table of contents (Confidential)

Our thoughts on the macro and fund future

Dear partners welcome to the quarterly DVC business update. It looks like we were absolutely right with our economic predictions from the previous quarter, hope this trend continues, so we can make some side income monetizing our quarterly reports to help survive the inflation.

To be fair, inflation does not look that bad and is actually neither good nor bad at all. We view inflation mostly from its impact on businesses and startups and as a form of wealth redistribution - from lenders to borrowers and from savers to earners.

Here’s a quick recap of what we said would happen in the last report so we can catch up to where we are:

So as we can see now, all of the mentioned above is actually happening and, in some places, is intensified by the war in Ukraine and tensions with China over Taiwan. One of the significant developments was the new semiconductor trade regulation by the administration of President Biden, which in effect, limited the ability of US companies, US persons, and any companies that rely on American technology to sell advanced semiconductor chips and components to China. This is likely to send shockwaves in the tech sector, resulting in further turmoil in the consumer electronics sector.

How does it all affect early-stage startups?

This hasn’t changed much since last quarter either - we see the current time as bearing some of the biggest opportunities for early-stage startups. This opinion of ours is seconded by the Crunchbase report on funding in Q3. Despite the slower summer (almost nothing happened for the two summer months), the amount of early-stage funding has barely reduced compared to the crazy 2021 and increased compared with 2019 and 2018. However, the number of such deals has gone down by almost 40%, so the average Pre-Seed/Seed deal size has increased from $1.32M in Q3 21 to $2.06M this quarter.

https://lh6.googleusercontent.com/-vVlAVVUy-jn5uOovkjU8jlhIGEPOFkMVXVbttRvR8_Q5jzmSCj2hGsZUccL66iVj2bKOEgVFYFYs88iji0cYvIXWzftpg3lM8zjFS-5hWaAVaUR-X52aW1YL3X91WLZsuCLAv2DsQzEmjWeiERT1HyrUY4ZAnN6SZ-uEig-exs8r5oZ66CBX5ddeg

The A rounds also look the least impacted by the overall market slowdown. The total amount of funding in Series A deals has reduced 23% year over year (compared to a 54% decline for Series B deals). An average round size for both A and B deals fell from $22M in Q3 21 to $18.7M, primarily because of the reduction in Series B funding.

https://lh4.googleusercontent.com/-mkIcHjtJHnmkfrWn9kTFzlc6TMveH2qCMPWrnb69m6rvUoEMqHonF_xgXJRZ-goDccre3vtHq5XTs_1p5Eaj3c1oX6SEL-Mo3oOs-TOyqbrY6E4v0Xij4sE_dcqcINE67Xi1kceSMIg_1rcdaGK1Jt-EsfndHW9DeEtidEYG3IfzZ5cyRMHHx2Fxw

The later stages took the hardest hits during this quarter. The global tech growth and late-stage investments took a 63% dip (compared to the same quarter last year), and Q3 2022 brought the world just 37 new unicorn companies (compared to 103 last quarter and 163 in Q3 2021), basically returning to the levels of the pandemic Q2 2020.

However, lots of new and existing funds are topping their coffers as more and more dry powder arrives into Venture Capital following the record fundraises of 2021 and 2022. Most of the tier-1 VCs we talked to think that this will create some pressure to increase the amounts invested in 2023. This year most of the VCs are adjusting their focus towards earlier-stage companies, industries that require the most efficiency boosts and, generally, away from marketing-intensive consumer tech or blitzscaling models. This is where the absolute majority of our portfolio is, so we should be in a good place.

In a recent Crunchbase article, MGV Managing Partner Marc Schroder argues, that for early-stage VC this year is 2008 all over again - the valuations are lower, and VCs can get really good deals with startups that have a strong tailwind from the economy:

“There are many companies in the seed through Series B phase that are well positioned to survive (and potentially even thrive) as the labor supply opens up and competition diminishes. [...] These investments will be their marquis positions moving through this downturn and into the next wave of growth, high valuations and froth.”