Founders and investors alike are bracing for a tough 2023 as the economy shows few signs of improving. But there are a lot of questions up in the air: Will the truckload of dry powder VCs have make its way to the market? Are there going to be more layoffs if the pressure on valuations persists? What’s in store for AI?
We can answer some questions, though: Some trends are bound to stay, like interest in artificial intelligence, and crypto will continue to be under scrutiny, even as the market looks to the future. There are other aspects of the venture world that will probably not change, like the lack of funding for minority and women founders.
To find out how minority investors are planning for 2023, we spoke with three active Black investors. For Xfund’s vice president, Jadyn Bryden, the creator economy is one hot spot worth watching in the coming months. “I’m expecting to see continued movement in the creator economy as more people venture out to build their own brands and rely on new tools for content creation and monetization,” she said.
Alexis Alston, principal at Lightship Capital, feels the future will be favorable for companies that build tech to help others do business and cut costs: “As fast-growing tech darlings begin to cut back on overhead expenses, I think we will see a strong shift toward companies relying more on sales optimization and content creation tools as a substitute for previously heavily redundant teams.”
But the investors were pessimistic about capital allocation to Black founders improving next year.
Richard Kerby, general partner at Equal Ventures, is hopeful that more diverse founders would get funding next year, but doesn’t expect a huge change. “I think a lot of the narrative that many investors put out there about investing in more Black founders was mostly just talk and not a lot of substance or actual dollars flowing to Black founders.”
We spoke with:
- Alexis Alston, principal, Lightship Capital
- Richard Kerby, general partner, Equal Ventures
- Jadyn Bryden, vice president, Xfund
Alexis Alston, principal, Lightship Capital
Which sectors will you continue to keep an eye on, and which trends do you expect to take off next year? Why?
I’ve always been interested in the increasingly expanding applications of AI, including generative AI, natural language processing and deep learning. I’m looking forward to seeing how AI can contribute to scaling previously human-led areas of business, such as sales, social media, marketing and content development.
As fast-growing tech darlings begin to cut back on overhead expenses, I think we will see a strong shift toward companies relying more on sales optimization and content creation tools as a substitute for previously heavily redundant teams.
What is the most pressing political issue you are keeping tabs on, and what impact does it have on you as an investor? Would you back a startup that addresses any of these issues?
There is a deep undertone that is reverberating right now around the expectations of or the lack of political oversight for more nascent tech and financial products. Around everything from crowdfunding to crypto, there is a deep lack of oversight that is only now beginning to cause a ripple effect for many of our institutional and consumer investors.
As an investor, the lack of oversight has led to ultra-heightened valuations and unrealistic expectations of exit potential within these nascent markets. Ultimately, the everyday angel investor (who tends to be more representative of the general population than institutional investors) gets the short end of the stick every time.
Given that the percentage of venture capital going to Black founders has rarely exceeded 1%, do you feel next year will be any different? Why or why not?
I am not confident that next year will be any different. If anything, I am very concerned that the number will drop in 2023 as institutional funds either tighten their purse strings or begin to seek criteria for founders that often exclude Black founders.
Given that many investors have resumed their pre-pandemic in-person activities, I am concerned that much of this deal-making will go back to the golf course, the country club or other spaces that have traditionally been largely exclusive of Black founder communities.
As a Black investor, how optimistic are you that LPs will continue prioritizing backing diverse firms and fund managers amid economic uncertainty?
Unfortunately, I am pessimistic about LPs’ desire and commitment to funding diverse fund managers in 2023. We have already seen VC funds being pulled back from Black founders, and I am expecting to see this trend replicated with Black fund managers.
Anecdotally, many of the Fortune 500 companies that made grandiose commitments to fund more diverse founders and fund managers have quietly pulled back on those initiatives. I’m expecting LPs to elevate and fund “safer bets,” such as traditional majority funds, Black funds led by celebrities or those with the loudest voices in the Twittersphere — as opposed to people doing the real work.
What kind of legislation do you think the industry needs to drive transparency and accountability on the part of LPs and institutional investors?
I would love to see legislation that supports incentives for LPs who choose to invest in diverse fund managers. I’m excited to see how initiatives such as the State Small Business Credit Initiative can unlock greater opportunities for historically overlooked and emerging fund managers across the U.S. and even support the development of real tech ecosystems in communities that have yet to find their niche.
How do you prefer to receive pitches? What’s the most important thing a founder should know before they get on a call with you?
We have an open portal for all founders to submit pitches, and I review each of them myself.
The most important thing a founder should know is to know our thesis. Often, founders are disappointed if we pass, but the majority of the time, we pass on the deal because they are out of our thesis. I always tell people that finding an investor is like finding a life partner — not every fund is designed for every founder, and that’s okay.
Richard Kerby, general partner, Equal Ventures
Which sectors will you continue to keep an eye on, and which trends do you expect to take off next year? Why?
We have been spending a lot of time exploring vertical software solutions with transactional business models and will continue to do so. What that looks like in practice is software that provides some sort of workflow improvement to a category that enables a company to monetize via a variety of financial services, such as payments, payroll, insurance, commissions, take rates, etc.
Some of the sectors that we will be exploring include supply chain, logistics, insurance, construction and e-commerce enablement.
Given that the percentage of venture capital going to Black founders has rarely exceeded 1%, do you feel next year will be any different? Why or why not?
I think that there will be a larger number of Black founders who are able to raise capital next year, but unfortunately, I do not believe that it will be a material change. I think a lot of the narrative that many investors put out there about investing in more Black founders was mostly just talk and not a lot of substance or actual dollars flowing to Black founders.
I think LPs could play a role in increasing diversity in the venture ecosystem as a whole by pressing GPs on the issue, but that has yet to occur. I believe as long as GPs are not penalized for investing in a diverse pool of founders, they will not do it.
As a Black investor, how optimistic are you that LPs will continue prioritizing backing diverse firms and fund managers amid economic uncertainty?
I have seen more LPs actively seeking out diverse managers, which has been great to see, but we still have a very long way to go.
Additionally, during an economic downturn, LPs generally stop looking for new managers to invest in, whether they are diverse or not, which is disheartening.
What kind of legislation do you think the industry needs to drive transparency and accountability on the part of LPs and institutional investors?
I am not sure that legislation will solve the lack of diversity in the market, but I do think that permanent pools of capital dedicated to diverse managers are important for increasing the diversity of managers.
Additionally, the makeup of those in positions to make LP investments needs to become more diversified. It is not a coincidence that both the universe of GPs and the universe of LPs are not diverse.
What’s the most important thing a founder should know before they get on a call with you?
I’m always trying to understand how well they know their market and why their solution is the best for the problem they are trying to solve
Jadyn Bryden, vice president, Xfund
Which sectors will you continue to keep an eye on, and which trends do you expect to take off next year? Why?
I’ll continue watching the development of generative AI in various applications. Next year, I’m expecting to see continued movement in the creator economy as more people venture out to build their own brands and rely on new tools for content creation and monetization.
Given that the percentage of venture capital going to Black founders has rarely exceeded 1%, do you feel next year will be any different? Why or why not?
Next year, more venture capital dollars will go to Black founders because there are increasingly more diverse investors each year.
It is a slow progression, but amazing communities like BLCKVC help support Black people who want to go into VC or are already investing. Having Black decision-makers at the table can be a great way to make sure that Black founders have representation across the board.
As a Black investor, how optimistic are you that LPs will continue prioritizing backing diverse firms and fund managers amid economic uncertainty?
As a Black investor, I hope to see LPs continue to back diverse firms amid economic uncertainty. Having a diverse portfolio is a cornerstone of good business, and likewise, having a diverse set of investors at the table is a way to improve the performance of a fund.
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