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Venture capital: ‘There is a slowdown that’s happening,’ Lux Capital partner says

Lux Capital Partner Deena Shakir joins Yahoo Finance Live's Akiko Fujita to discuss the venture capital slowdown as well as the decline of global exit value.

Video Transcript

[MUSIC PLAYING]

AKIKO FUJITA: Despite a steep drop in the valuations of privately-held companies, venture capital continues to attract significant funds, with more than $500 billion of dry capital waiting to be deployed globally, according to PitchBook. Still, VC investors are warning companies to scale back growth to ride out this tech downturn. I sat down with the partner of Lux Capital Deena Shakir and asked her about how she's advising her portfolio companies.

DEENA SHAKIR: You know, we've been telling our companies since before a lot of those letters came out to be thinking long term, to be buckling up and getting prepared for the winter, or the storm, or whatever analogy, weather-related analogy you want to use. If you look at the last LP letters that we published, which are mostly-- some redacted-- publicly available, we have been advising on all of those fronts. So we're telling our companies to make sure that they are keeping a close eye on burn, that they're thinking long term and have plenty of reserves, that it is unlikely that the trend, you know, that may have seemed normal for the last couple of years of raising every three to four months at a 3 to 4x valuation is perhaps not going to be the case-- certainly not going to be the case in the near term-- and perhaps not even the case in the long term.

So thinking long term about the sort of ability to survive first and then thrive.

AKIKO FUJITA: So let's pick up on that point, because we are coming off of a few years of just incredible growth, not just in the public markets, but on the private side as well. Some would argue that it sort of felt like there was no ceiling up there. Is that period over now? Is this kind of the new reality, or is this just a correction that we needed to go through?

DEENA SHAKIR: Well, as much as we'd like to think that we're Nostradamus as VCs, we're not. So we can make guesses and predictions. I will say it's certainly not anymore right now. I don't necessarily think this is what the future is going to look like forever. I think there is an element of correction that we are seeing. But I do think it will continue to change. And what we are seeing right now, as I mentioned, is a reflection of all sorts of things that are happening in the macro.

I don't think it's a reflection on the quality of the companies, the long-term viability of these companies. We're continuing to see incredible early-stage companies and founders who are starting and innovating and-- especially in the areas that we're excited about, in deep tech and health tech-- and there's a lot of dry capital out there. So we're seeing deals get done. We're doing deals. We're excited about deals across stages. It's just a little bit of a different tone or vibe than the exuberance that we saw in the last couple of years, especially.

AKIKO FUJITA: So the deals are done. The counts aren't necessarily down significantly, but the valuations are. How do you invest in that environment? Where are you thinking about deploying your capital?

DEENA SHAKIR: Yeah. You know, I think everyone's trying to figure this out. And the closer you get to what might look like a public company, the more there's sort of a direct comp, if you will, against the multiples you're seeing on the public side, which don't look very good right now. And as you look at earlier stage, there's still a bit of a lagging indicator, I think, of what's happening on the public side. And part of that is also because some of the more growth-oriented investors are looking to invest earlier as well.

So there is still, perhaps even more, capital to be deployed at the earlier stages. Now, that being said, what we saw across stages in the last couple of years was this incredibly fast pace. You'd see a pitch, and a founder would have 10 term sheets within 24 hours, and not necessarily the type of diligence that you would want to do or that can be done. That's not really happening anymore.

There are still some extremely competitive deals. The best companies will continue to be vied for, and so on. But there is a slowdown that's happening, a slow down in terms of the pace of doing rounds and in terms of the capital deployment, especially at the growth stage. Things are taking longer than they did before.

AKIKO FUJITA: That was Deena Shakir, a partner at Lux Capital. And Brian, she said it, the thing I kept hearing over and over at Collision tech conference-- it's where we had the conversation-- is that there's still a lot of dry powder. And that's because you've got not just traditional investors, but hedge funds or private equity firms that have put their money behind these companies because they see a significant return. That hasn't necessarily gone away, but the money is going towards early stage, not later stage, because, to her point, public companies aren't doing really well.

If you're a food delivery service, for example, these investors are going to look at what's happening with Uber and some other names that are competitors and say, maybe this is not the time.

BRIAN CHEUNG: Yeah. Well, I mean-- in the fantastic interview, I think what caught my eye was survive, not thrive. That's the environment that they're in right now. But that does not mean that VCs don't have money to put into growth companies. It just means that you're going to probably fundraise a little bit less and your growth scenario probably is going to be a little bit less bullish than it was if you were doing fundraising, weirdly enough, during the middle of the pandemic. So that's going to be a story for the VCs.

AKIKO FUJITA: More down rounds and valuations cut.

BRIAN CHEUNG: Exactly.