Temperature Check: How did early-stage investors navigate uncertainty in 2023?

The VC world was pretty quiet this year, particularly for those investing in and watching later-stage ventures. Venture capital funding globally dropped by nearly half in the first half of 2023, according to data from research firm PitchBook. That lack of enthusiasm certainly hit the Southeast, as later, bigger rounds were few and far between.

But early-stage, seed, and pre-seed startups offered a rare glimmer of hope.

Early-stage investors we talked to across the Southeast had strong deal flow and were willing to write checks into companies with strong financials and business models that could withstand economic uncertainty.

As we wrap up the year, we wanted to hear what was top of mind for these investors. Partners from Valor Ventures, Circadian Ventures, and Front Porch Venture Partners shared their thoughts on how the year went and what big opportunities they see in the early-stage startup space.

Here is what stood out to us when we spoke to these founders:

DEAL FLOW DURING TURBULENT TIMES

Lisa Calhoun, founding managing partner at Atlanta-based Valor Ventures, said that the firm saw its “best deal flow yet” this year with over 3,000 seed and pre-seed startups in the South reaching out to talk about investment opportunities. Mike Dowdle also saw strong deal flow coming into his firm Atlanta-based Circadian Ventures, something he says was spurred by a record number of people starting companies after layoffs hit lots of tech firms over the last 18 months.

Gregg Bordes, Managing Partner at Raleigh-Durham’s Front Porch Venture Partners, echoed the same idea. Deal flow was strong for his firm, something he attributes to the fact that valuations and other deal terms settled at a “more reasonable place” just as many other VCs hit the brakes on deploying capital.

“Front Porch has never seen more broad based and attractive deal flow than in 2023. Our flexible strategy, which allows us the opportunity to see many other venture firm's attractive 'insider' rounds, was a key driver of our success this year,” Bordes told Hypepotamus.

A YEAR IN INVESTMENTS

But deal flow is just one part of the equation. Investors, of course, have to actually ‘put their money where their mouth is’ and write checks.

“Investors are being more selective and only the highest quality companies are getting funded right now. It’s a tough market for companies that haven’t found product market fit or not showing a strong growth rate,” added Dowdle.

In general, checks were harder to come by this year given the rocky macroeconomic conditions. But investors still saw plenty of investable companies.

“Outsized venture returns are produced when capital is deployed in tough markets, and that historical perspective was a driving force in Front Porch investing in 9 startups and 8 venture funds in calendar year 2023,” added Bordes over at Front Porch Venture Partners. The firm invested in startups across industries this year, including those in Enterprise SaaS, robotics, HealthTech, and CPG.

Calhoun at Valor Ventures told Hypepotamus that the firm invested in seven startups this year, with the plan to keep up that pace in 2024. Those included regional startups like Arpio (Durham), Love to Ride (Atlanta), Aetos Imaging (Atlanta), and CareWork (Port Orange, Florida), per available Crunchbase data.

Other firms, like Circadian Ventures, focused on helping their existing portfolio companies navigate the turbulent environment of 2023. Dowdle said that the firm spent the year helping its 13 current investments “extend runway and prioritize how they best optimize their business for efficiency.”

While Circadian only made two new investments this year (half of what they did in 2022), Dowdle added that the firm made “a couple of follow-on investments in some of our highest performing companies that just needed a bit more capital to hit their next major milestones.”

AI RULES THE EARLY STAGE SCENE

On a national level, 2023 might just be considered ‘The Year of AI.’ The debate remains whether or not we are in an ‘AI Bubble’ right now, but the number of AI and AI-related startups certainly continues to grow.

The early-stage investors we talked to saw plenty of opportunities with AI, but not necessarily in areas you might first think.

“We’re seeing many start-ups present themselves as “AI” companies when, reality is, they’re just incorporating AI into their offerings. All companies will find ways to use AI, but that doesn’t make them an “AI” company,” Dowdle told Hypepotamus. “The last investment we made was Precog in Boulder. They create data connectors to any and every API. They build in “hours” versus the weeks it typically takes, and they now have the largest number of data connectors on the market – all built using AI.”

AI is nothing new to the investment team over at Valor Ventures. Calhoun said that the team made its first AI-focused investment in 2017 into Funding U, a credit risk management platform in Atlanta. Since then, she said that most of the firm’s investments have been into “AI-forward” startups.

But Valor has taken their focus on AI up a notch recently with Vic, a genAI bot developed by the firm internally.

“[Vic] helps us prioritize investment opportunities and accelerate communications with our own investors,” Calhoun told Hypepotamus.

A YEAR IN REVIEW

As we wrap up the year, we are curating a list of the biggest stories of the year. These are the three early-stage investing stories that were our most read of the year:

• Cofounders Capital, an early-stage VC firm in North Carolina, closed a $50 million fund in March of this year. The fund, the third in the company’s history, is also the largest amount raised by David Gardner, Tim McLoughlin, and Tobi Walter.
• Also in March of this year Drive Capital announced its $80 million fund. Although the fund is based in Ohio, Drive hired Avoilan Bingham as its General Manager for the Atlanta startup market.
• Early-stage fund VentureSouth made its 100th investment this year, which went into Darby, a Greenville-based at-home care delivery platform.