The venture capital sector had two bumper years in a row in 2020 and 2021, with record levels of fundraising, investment and exits. However, like the rest of the investing world, the market has cooled in the 2022 economy. Bobby Franklin, president and CEO of the National Venture Capital Association, talks with us about how the current economic climate is affecting the VC-startup ecosystem, and how startup leaders and investors are looking at their prospects.
Bobby also talks with us about how VCs are approaching their ESG goals, which cities and regions are seeing more VC investment activity, the JOBS Act 4.0 and the push to establish a US startup visa.
Key talking points:
How the market conditions of 2022 have affected venture capital investment activity (0:26)
Where the rising hubs for VC activity are (2:35)
What sectors are likely to show strong growth going forward (4:26)
How startups and VCs are looking at their prospects for going public as the IPO and SPAC markets slow to a crawl (5:58)
Why VCs strongly support the establishment of a US startup visa (8:11)
How the Jobs Act 4.0 would affect the VC sector (11:24)
How VCs are approaching their ESG goals (13:40)
The potential upside of tough times (21:11)
If you'd like to learn more about what policy initiatives are of high importance to the venture capital industry, check out NVCA's Venture Capitol podcast, hosted by Bobby.
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(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
Colin Hogan 00:14
Hello, everyone and welcome to the Modern Money SmartPod. I'm Colin Hogan.
Sean McMahon 00:19
And I'm Sean McMahon.
Colin Hogan 00:21
Today, we're going to take a look at the venture capital sector and the effect this year's market volatility is having on the entrepreneur ecosystem.
Sean McMahon 00:28
And we're doing that with the help of one of the most qualified people around to take us through that topic. Bobby Franklin, Bobby is the president and CEO of the National Venture Capital Association.
Colin Hogan 00:39
He's also going to talk with us about how VCs are approaching their own ESG goals, as well as policy issues like the Jobs Act 4.0. And why VCs are so supportive of the establishment of a US startup visa.
Sean McMahon 00:52
Yep, Bob is gonna help us cover a lot of ground so we better get to it. Let's go.
Colin Hogan 01:05
Hello, everyone, and welcome to another episode of The Modern Money SmartPod. I'm Colin Hogan, joined by my co host, Sean McMahon. And today we're very excited to welcome onto the podcast Bobby Franklin, President and CEO of the National Venture Capital Association. Bobby, how are you doing today?
Bobby Franklin 01:21
I'm doing great. Thanks for having me.
Colin Hogan 01:23
Thanks for joining us. So we wanted to start things off just by kind of getting the lay of the land of the VC sector right now, we know we're coming off of a couple of really good years. But also markets are maybe telling a different story this year. So nbca, last month put out its first quarter of venture monitor report with PitchBook. So could you maybe walk us through some highlights?
Bobby Franklin 01:45
Yeah, I think you you teed that question up perfectly, right? Because we, in the venture industry over the last two years, I remember two years ago, we set records, right. And it was the most invested in the most raised and the biggest exits and everything. And we thought, Wow, that's great. And then the next year, and here we are, in a pandemic, it was even bigger. And when you reach so have a couple of year period where you're hitting all time records, then of course, the question is okay, doesn't have to come down. And I think that's what everybody was sort of looking for. And that's before what we have seen more recently in the public markets where everything is, is significantly changing. And, and we know that will have an impact. So I would say sort of a tale of two stories, one, what you would have expected following record numbers set in almost every metric. And in addition to that now, as we see across the board kind of markets being reset, and I'm not a market expert, so I hope you're not going to ask me a lot about current market structure. But those are the two things we're sort of thinking about. So when you look at the first quarter numbers, we do see it it came down and on the run rate of the first quarter, it doesn't appear that we were on track to set yet a third record year of kind of records in terms of exit activity or investment activity, or fundraising and things like that. And so that's what I think everybody's sort of thinking about. Alright, how's it going to reset? And now with this added change in the current markets, what's that going
Colin Hogan 03:26
to look like? So one of the things I I usually like to really look at in the venture monitor is where the dollars are flowing, you know, outside of Silicon Valley, what other hubs out there might be on the rise. So what metro areas are you seeing is kind of the emerging hubs right now?
Bobby Franklin 03:45
Well, it's a great question. And we love it when emerging hubs are having a lot of activity. I mean, we say this to our even to our members who are in the what we call the epicenter, sort of the Bay Area in New York and, and Massachusetts, we say, hey, just so you know, we want this to be spread out across the country and not just be dominated in three jurisdictions. So the other places and just thinking kind of left, right across the country, we see a lot of activity in Seattle. We see a lot activity in Southern California, Los Angeles over the last few years has picked up Denver has had a lot of activity, the Denver kind of Boulder area, a lot of stories have been written about Austin, Texas about what's happened there and whether or not a lot of folks have you know, famously left California to go to Austin, and I think you're starting to see some of that in the data. Chicago has a lot of activity Philadelphia, Atlanta. Certainly even here in the DC area where I'm located. We've seen kind of an increase activity. And then similar to Austin, I think a lot of headlines have been around what's happening down in Miami and speaking to somebody the other day that is from Chile, and he was talking about how So many of the investors in Latin America do that from Miami. I mean, we know it's a hub, a transportation hub to Latin America, but now it seems to be a capital hub. So Bobby, are
Sean McMahon 05:11
there any sectors you're seeing that, you know, have, you know, promise going forward? Are you gonna be able to sustain that growth? You talked about,
Bobby Franklin 05:18
you know, one thing that we talked policymakers here in Washington all the time, and I think too many times, they sort of put us in this bucket of, oh, that's tech, or that's social media, or that's, you know, just a very narrow area. And of course, we're up there often trying to paint a different picture, we obviously talk about life science investing, and everything that's happening with drug discovery, or medical devices and healthcare services in lots of different areas. And certainly, during the pandemic, you know, we have been talking a lot about Madonna, Madonna was created out of a venture capital firm, in its entirety. And so that's something that, you know, we like to talk about, but I think what we're seeing now is a lot of money going into clean tech, and solutions to solve the climate crisis. And, and certainly, we have that story to tell policymakers that it's unlikely that either incumbents or as we like to refer to them sometimes as the beltway bandits, who figure out how to go get government money, whenever there's a pot of money, it's unlikely that they're going to be solving a lot of these things. It's going to take entrepreneurs and the investors that support those entrepreneurs to think, new and different ways or, or strategies of carbon capture or hydrogen, or, you know, some of the biggest challenges that we face in terms of the climate crisis.
Sean McMahon 06:48
All right. And so that's at the front end of this investment cycle. But what about things at the back end? Kind of the accident? Right, so I know, you mentioned earlier, you're not a market structure expert. You know, I understand that and markets been doing some crazy stuff, the last, you know, few weeks or a few months, you know, but the IPO market is, you know, gonna say it's kind of stalled out. Right, and definitely the stock market's cooled off. So, so what are some of these big startups and their VC backers, you know, what are they seeing as their endgame? Well,
Bobby Franklin 07:13
I think a lot of them are going to have to sit and wait a little bit longer and figure out for many of them what that end game is going to be. You're right, the IPO market is showing signs that it's, we usually refer to it as a window is the IPO window open or closed. And it seems that it's at least on its way, to kind of shutting and, and maybe with more recent news of the markets, it'll close all together, I think there's, there's still hope around mergers and acquisitions. At the same time, for policy makers, there's a lot of activity around making it more difficult for larger companies to purchase other companies. And, you know, our message to policymakers here in Washington is that you have to understand, we understand you may be mad at big tech, or may be mad at a handful of companies. But at the end of the day, not every company they buy was meant to be a public company, or even has an idea that they would somehow be a competitor to that company. But the fact that there are companies willing to purchase other companies helps the flywheel effect in the entrepreneurial ecosystem. It's good when companies get acquired and an entrepreneur gets an exit, and they many times go out and start another one. I mean, serial entrepreneurs are some of the most successful entrepreneurs that we have in our country, and allowing them the opportunity to go repeat, rinse, wash, and repeat, is a good thing. It's good for investors, it's good for the limited partners, the pension funds, the endowments, the other says make those investments, they get a nice return to help them. And it's good for our country, because another idea of a product or service is more likely to come to market to serve a need or solve a problem.
Colin Hogan 09:00
So kind of also on the policy side of things I wanted to talk to you about the startup visa. And VCE has been a very outspoken advocate for a US startup visa. Can you talk to us about what that is? How it differs from other visas and why it's so important to the startup ecosystem?
Bobby Franklin 09:17
Absolutely. And that it Listen, there were folks working on this before I got in VCA. And unfortunately, we just not yet been able to get it across the goal line. But the idea is rooted in data. So the idea is that if you look at some of the most successful US companies, they have a founder or co founder that was foreign born, and obviously gets even bigger if you talk about, you know, kind of first generation Americans. So there's a very strong rooted in data correlation between those willing to leave their country and an entrepreneurial spirit willing to take a chance and start an enterprise and so You see that in the data and it's very compelling. So then you ask yourself, Okay, how is it that an entrepreneur can come to the US? And the answer so far has been, they have to be really creative. There are Oh visas, and there are EB five visas. And there are all these other categories. But there is not a category for an entrepreneur. And as we say, when we talk to members of Congress, and by the way, this is an issue that is supported on both sides of the aisle. They get it. And it's really easy to get when you say, Okay, there's this really phenomenal entrepreneur in some other country. And they actually want to come to the United States and start an American new company that will create new American jobs, new economic activity for our country. Do we want them to come here or not? And the answer is resoundingly, of course. And most of them say, let's roll out the red carpet, let's make sure they come here. But the reality is, there's not a dedicated visa for this type of activity. And so we have worked on this for years. The problem is, is even though this idea supported by both sides of the aisle, at the end of the day, immigration is a very controversial issue. And so whether you're talking about dreamers or real family reunification, or border walls or border security, I mean, you get a lot of really strong reactions. And so it's difficult for policymakers to let something go, that is non controversial, because they think it's a bargaining chip for the things that they have disagreements on. So we keep pushing it, we keep pushing it, it in its current form, there was a bill that Congresswoman Zoe Lofgren introduced called the like act. And it was actually at the end of the day, put in the competition bill that passed the House. And so it's something that is in conference between the House and the Senate. And we're very hopeful. And we are certainly advocating that the conference agreement include that in its final version,
Sean McMahon 12:10
you mentioned the startup visa is something that enjoys bipartisan support, you know, despite some of the political roadblocks that get in the way. Another thing that seems to enjoy bipartisan support was JOBS Act 4.0. So how's that gonna have the most impact on the PC sector?
Bobby Franklin 12:26
Well, you know, look, I love the Jobs Act activity. First of all, we just had the 10th anniversary of the original JOBS Act. And you ask yourself, why is it four point? Have we had one JOBS Act? And now, you know, we haven't had another one. It's because there been a lot of iterations. And I think that's positive, because what it says is that there are members of Congress that are willing to look at what could potentially help more companies be created more companies go on to the public markets, or companies, you know, have access to that additional capital to continue to grow and create jobs. There are a lot of ideas that are included there. The one that we focus the most on is something that's called the deal Act, which has been introduced as a separate bill, in previous congresses. But it is something we think is really important to make sure that we kind of update the definition of what a venture capital firm is. A lot has changed since the SEC sort of defined what a venture capital firm is. And we want to make sure that you can make investments in other venture funds, that you can make secondary investments. I mean, if companies are staying private longer, it's a healthy thing, if those early employees or founders have a little opportunity to maybe sell some of their stocks, since they haven't yet had a big exit opportunity. And right now, the way it's defined, it sort of penalizes the venture capital firm, if they do participate in secondaries, even though at the end of the day, they're doing the same thing. They're helping entrepreneurs and startup companies succeed. So we certainly want to see the DOL act. But there are other provisions that are continued to be talked about that we also support.
Colin Hogan 14:20
So one topic that is, you know, really big on this podcast that we talk about a lot is ESG. I'm sure we could talk for hours about startups in ESG. But I was wondering if maybe we could start just talking about VCs and how VCs go about meeting their ESG goals?
Bobby Franklin 14:39
You know, it's a great question, and it's one that we talk a lot about inside and, and the reason we talk a lot about it is because one of the biggest challenges we have when it comes to public policy in areas that we engage in, is normally policy makers. They do their best sometimes but they really do Don't understand our industry. And it'd be, they'd be hard pressed to actually tell you how a venture capital firm is different than a private equity firm or is different than a, even a hedge fund. Or in some cases, even an investment bank or Wall Street or anything else. And so they come to these questions sometimes and want to throw everything in the same bucket just because it's easier, just treat it all the same. And ESG is one of those where, in some respects, you know, you think about ESG, and you think about, okay, and I've had this conversation with people, I've said, If companies could start thinking about ESG, earlier in their lifecycle, it'd be better. Okay. Makes sense. But on the other end of the spectrum, when you're early stage investors, and when you know that, in those early stages, more than half of your investments are going to go to zero, and there is not going to be a company at the end of the day. You have to ask yourself, Okay, could we be trying to force some one size fits all thing on early stage companies? That just doesn't make sense. And so that's a, that's a healthy conversation. What's the magic time? I don't know. But we should have thoughtful consideration about that. On the other hand, you asked earlier about investment themes, and I talked about climate, here is a whole category of investment, that is all about the E in ESG, that that's likely going to see some of the best solutions to tackle climate. So shouldn't the venture industry and its entrepreneurs get credit for like creating this whole category of trying to address the environmental challenges that we have? And that's looking at it completely differently? Then, you know, what's the company doing? Or what are what how's the VC thinking about the investments it's making? And what are their ESG obligations? And all that kind of stuff? Like, wait a minute, this whole category is E, and trying to solve environmental challenges? So it's a it's certainly a complicated question. As we all know, it's, you know, more developed conversation and places like Europe than it has in the US. But I guess my only point is that there are other ways to think about ESG, than just putting everybody in the same sort of, you know, category of like, well, you report on your ESG. Well, maybe that's not the focus that it should be for a very early stage company, meaning a few people a dog in a garage, trying to create a company, or even when you have category of entrepreneurs and investors who are trying to completely solve the environmental issue, how do you get credit for that?
Sean McMahon 17:56
So I mean, it sounds to me like I take your point on, you know, trying to maybe avoiding putting everyone in the same box. And so, you know, the SEC has issued a proposed rule on climate disclosure. comment period just got extended, obviously, that's for, you know, companies once they've gone public, and, you know, reporting and things like that. But do you have any viewpoint on that? And is that going to kind of, let's just be honest, or any companies would think about going public, they might not? Because they don't want to fall into that regulatory burden of trying to report out all this ESG data?
Bobby Franklin 18:25
I'm sure there are going to be companies that that gives them one more thing to give them pause. Right. That's why when we talk about JOBS Act, 4.0. And other things, I feel like we should be thinking about and discussing what's going to help companies get to public markets, how can we increase the number of IPOs? How can we increase the opportunities for exits for investors and for the limited partners that make investments in these funds? How can we have more carrots out there as opposed to thinking about sticks, particularly when you know that, you know, having more carrots for companies to grow and, and take on more capital might actually get us to where we want to go? In the case of the environmental challenges that we have better than, you know, some regulatory burden that is put on companies before they go public?
Sean McMahon 19:20
Any any creative carrots out there that you know of? Or in a dream world you'd you'd create?
Bobby Franklin 19:24
I feel like I'm just trying to beat back sticks these days and carrots. But look, they're always I mean, like I've mentioned the deal act in 4.0. I mean, there's there are opportunities. I'll use another one. I mean, the competitiveness bill, the acronym now as you seek, it's gone through multiple main changes that started as the Endless Frontier act essentially people call it the competition bill. Some people call it the China bill. It is essentially a generational array. investments into kind of basic science and attacking some of the challenges that we have around chips and chip manufacturing around other areas that we as a country should be leading in, around innovation, whether it's AI or machine learning or different things. And so this bill has now a version has been passed on the House version has been passed in the Senate, there is a conference going on something we haven't seen in a while in Washington. And the hope is that we can get the differences ironed out and get this across the goal line, because it is full of carrots. It's it's full of opportunity for the US to kind of redouble our efforts on being an innovation leader around the world of last few decades, kind of the basic r&d spending by the US government has fallen compared to what it was before, as a percentage of GDP and lots of different ways to measure it. And so this is a recognition by both sides of the aisle that you know, what, if we're going to compete against other countries, we need to really double down and make a serious investment, a bigger investment than we have been making. And let's all so try to kind of attack some of these other areas that we know it's going to be important for us to be leader in.
Colin Hogan 21:22
So Bobby, one of the things we usually wrap up these conversations with is asking our guests if they have any bold predictions for what's to come. So we're kind of wondering, what do you see for the VC sector for the rest of this year, or next year?
Bobby Franklin 21:37
I think, where I sit today and looking at the public markets and sort of the shake up that's happening there, and knowing that what happens in the public markets certainly has impact on the way VCs think about valuing companies and things like that. I mean, I'm hearing from a lot of my members that are stepping back and trying to think about, okay, what is the new normal for valuing an investment? And a lot of them are looking at their portfolio companies, and they're saying, okay, they just had this, you know, round raised at this valuation, I'm not sure they're gonna be able to continue on that path, that that same trajectory, and maybe we have some down rounds, and maybe it's difficult. I'm talking to other members that say, you know, gosh, I was in the middle of raising a new fund. And now, some of my LPs are trying to figure out what's happening in the markets and whether or not they can continue to have the same commitment that they were talking about. So I guess what I would predict is there going to be some tough times coming up in the entrepreneurial ecosystem? The good news is that when you look back in history, some of the most interesting, successful and best companies are built in tough times. And so on the one hand, you think, gosh, there's going to be a lot of pain that goes around. On the other hand, you think, wow, what amazing company is going to be built. And that's just kind of an interesting dichotomy to keep in mind.
Sean McMahon 23:13
So Bobby, I understand you all, NVCA just recently launched your own podcast, what can you tell me about that?
Bobby Franklin 23:19
Well, thanks for asking we we decided that it was a good time to do a podcast and really talk about the intersection between public policy and the entrepreneurial ecosystem. Use it as an opportunity to talk to policymakers talk to investors, and others just kind of illuminate what's happening at this intersection. So we've got a few episodes out. It's called venture capital. And we have to say it's an O and capital, as in Capitol Hill, not not capital dollars. And that's sort of our play on words. But you can check it out at our website in vce.org. Look for the podcast button at the top.
Sean McMahon 24:01
Great, well, we'll link to it in our show notes as well. So I appreciate that.
Colin Hogan 24:06
Well, Bobby, thank you for joining us.
Bobby Franklin 24:08
Let me just say thank you, Colin. Thank you, Shawn. It's been a pleasure to be with you today.
Colin Hogan 24:12
Thanks for having Thank you.
Sean McMahon 24:18
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