As a hectic year for Central Florida startup investment activity winds down, investors see a tighter market but plenty of opportunities for metro Orlando firms ahead in 2023.
Why this story matters: Investment capital raised by local tech companies can result in high-tech, high-wage job creation and the development of solutions that help other businesses.
This year has been an erratic one for companies raising capital.
In Q2, metro Orlando companies hauled in the most venture money in any quarter on record: $320.7 million, according to PitchBook and the National Venture Capital Association. However, the next quarter that total plunged 93% to $22.6 million as economic headwinds slowed venture capital deployment across the U.S.
Here, partners at three venture firms headquartered in, or active in, Central Florida share with Orlando Inno their expectations for venture funds aiming to raise money next year and the companies that need that money invested back into them.
What are your expectations for venture firms and funds that aim to raise money in 2023?
Nekeshia Woods, partner, Winter Park-based Parkway Venture Capital: "Venture firms will have to contend with macro headwinds heading into 2023, including inflation, a developing energy crisis, the war in the Ukraine and growing trade tensions, to name a few. The severity and duration of these headwinds in 2023 still remains unclear. Today, fundraising is strong, having raised $150 billion nationwide by Q3 2022, exceeding the $147 billion 2021 full-year figure. However, there is still a momentum atrophy in raising capital. In 2023, we expect to see the new normal for venture fundraising start to take shape. For instance, large and small investors can be expected to align with venture firms that have a more differentiated investment thesis, e.g. deep tech, emerging science, etc. There is an anticipation the long-term allocations outlook remains positive and, while some portfolios will lower their venture allocation, significant swings in allocations are not expected."
Kathy Chiu, managing partner, Orlando-based DeepWork Capital: "The first three quarters of 2022 shows it coming off of the frothiness of 2021. It's expected this 'venture capital winter' will continue throughout 2023. Since private market valuation downdraft lags that of the public markets, many allocators would see their portfolio having an increased percentage in venture capital/private equity, hence the hesitance to allocate more to private markets. Having said that, many LPs do realize the best vintage year funds come out of down markets like this. So specific investment discussions do not necessarily all reflect the overall trends for smaller funds with sound strategy and less reliance on large allocations."
Mark Volchek, managing partner, Fort Lauderdale-based Las Olas Venture Capital: "For us, it’s a great time to be investing. We just closed a $50 million fund in the spring. Two-thirds of that is dry powder. We’re seeing we maybe can get companies six to 12 months later, but at the same pre-seed valuations."
What’s your outlook for startups fundraising in 2023?
Woods: "The recent bull market for venture has left firms with significant amounts of dry powder. In 2023, venture firms will be well-funded to make investments in entrepreneurs and companies at healthier valuations. Well-capitalized firms will drive funding rounds to be closer to value, where you are less likely to see a company raising a seed round for $7 million-$10 million with just a pitch deck. Late-stage venture, those companies close to an exit, is likely to trend downward in 2023, and those venture firms may look at investing in more earlier stage companies. The closer a company is to an exit, the closer the valuation is tied to the public markets, and the further away a company is to an exit, the valuation becomes increasingly uncorrelated to the public markets. We already are starting to see this trend. In Q3 2022, $40 billion was invested in late-stage venture-backed and private equity-backed companies, which was down 63% year-over-year."
Chiu: "Being downstream from the VC and PE firms, quality startups still can raise, because the funds raised by VC/PE funds in the frothy 2021 still need to be deployed. However, anticipating less supply of capital, investment firms are likely to become more price-sensitive, so startups will need to be prepared for lower valuation-to-financial-metrics multiples. For those who want to minimize dilution, this may mean figuring out ways to finance with alternative sources like venture debt, vendor financing (e.g. long payment terms or in-kind investments) or customer financing (like up front non-recurring engineering fees for development). One silver lining for markets like Florida is that startups here never experienced the level of frothiness experienced in, say, the Bay Area. As a result, entrepreneurs here tend to be capital-efficient, which is a great survivor trait in this market. When this winter season is over, they just might be the ones left standing to take advantage of this weed-out process."
Volchek: "We're seeing A and B rounds are more difficult. We’re seeing less in terms of mark-ups. The way that translates into startups is capital is just tighter, every $1 million of fundraising is more dilution. That will help capital-efficient companies. That will be a good thing for most companies in Orlando or in our portfolio; they are pretty capital-efficient. They may have to tighten their spending or grow less than they need to, but they still can get the capital."
Sign up here for The Beat, Orlando Inno’s free newsletter. And be sure to follow us on LinkedIn, Facebook and Twitter.
