Edith Yeung, general partner at Race Capital, and Larry Aschebrook, founder and managing partner of G Squared, speak during a CNBC moderated panel at Web Summit 2024 in Lisbon, Portugal.
Rita Franca | Nurfoto | Getty Images
LISBON, Portugal – Times are tough for the venture capital industry right now, as a lack of blockbuster IPOs and mergers and acquisitions have sucked liquidity out of the market, while buzzy artificial intelligence startups dominate the spotlight.
At the Web Summit technology conference in Lisbon, two venture investors – whose portfolios include multibillion-dollar AI startups Databricks Anthropic and Groq – said things have become much more difficult because they are unable to invest some of their long-term to capitalize on investments. term bets.
“If you talk about the presidential election in the US, the economics are stupid. And in the venture capital world, it’s really all about liquidity,” says Edith Yeung, general partner at Race Capital, an early-stage venture capital firm based in Silicon Valley. Valley, said earlier this week on a CNBC moderated panel.
Liquidity is the holy grail for VCs, startup founders, and early-career employees because it gives them the opportunity to realize gains — or, if things go wrong, losses — on their investments.
When a VC makes an equity investment and the value of their stake increases, it is only a profit on paper. But when a startup makes an IPO or sells to another company, its equity stake is converted into cash, allowing it to make new investments.
Yeung said the lack of IPOs in recent years has created a “very difficult” environment for venture capital.
At the same time, however, there is a rush of investors to get into vibrant AI companies.
“What’s really crazy is that OpenAI’s dominance in recent years has really been driven by Big Techs, the Microsofts of the world,” said Yeung, referring to ChatGPT maker OpenAI’s seismic $157 billion valuation. OpenAI is backed by Microsoft, which has made a multibillion-dollar investment in the company.
‘The IPO market is canceled’
Larry Aschebrook, founder and managing partner of late-stage VC firm G Squared, agrees that the hunt for liquidity is becoming increasingly difficult — even as companies like OpenAI see blockbuster funding rounds, which he called “a little crazy.” .
“You have funds, founders and employees looking for liquidity because the IPO market isn’t happening. And then you have funding rounds from generations of companies,” Aschebrook said on the panel.
As important as these deals are, Aschebrook suggested they don’t help investors by tying up even more money in illiquid, private stocks. G Squared was an early backer of Anthropic, a foundational AI modeling startup that competed with Microsoft-backed OpenAI.
Using a seething analogy, Aschebrook suggested that venture capitalists are deprived of lucrative stock sales that would lead them to realize returns. “If you want to cook something, you better sell some shares,” he added.
Looking for opportunities outside OpenAI
Yeung and Aschebrook both said they are excited about opportunities beyond artificial intelligence, such as cybersecurity, enterprise software and crypto.
At Race Capital, Yeung said she sees opportunities to make money from investments in sectors like business and infrastructure – and not necessarily always AI.
“The most important thing for us is that we don’t think about what’s going to happen, not necessarily in terms of an exit in two or three years, we’re really going for the long term,” Yeung said.
“I think for 2025, as president [Donald] Trump could make a comeback, there are a few other industries that I think are quite interesting. Certainly, crypto is certainly already making a comeback.”
At G Squared, meanwhile, cybersecurity company Wiz is a key portfolio investment that has seen OpenAI levels of growth, according to Aschebrook.
The startup, which turned down a $23 billion takeover offer from Google, reached the $500 million annual recurring revenue (ARR) milestone just four years after its founding.
Wiz now aims to reach $1 billion in ARR by 2025, doubling this year’s figure, Roy Reznik, the company’s co-founder and vice president of research and development, told CNBC last month.
“I think there are a lot of logos… that are not in the press that are grossing $5 billion in two weeks, that are doing well in our portfolios, that are the stars of tomorrow, today,” Aschebrook said.