Attracting venture capital firms’ interest has always been challenging for startup founders. As a panel of VCs noted at Alloy 2024, economic headwinds, the crowded AI technology market, and VCs' reluctance to make bold bets have only made it harder for early-stage startups to stand out from the crowd. However, they noted savvy founders can get investors’ attention by showing they are passionate about growing and scaling their businesses.

‍Metaimpact VP of Enterprise Alliances Nammy Vedire hosted a panel discussion with High Alpha Partner and Co-founder Mike Fitzgerald and Cercano Management’s (formerly part of Microsoft Founder Paul Allen's family office) Daley Ervin to touch on the investing trends each sees in the VC landscape today and what types of startups, founders, and technologies are garnering the most interest from investors heading into 2025.

Key Takeaways

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• Nammy kicked off the conversation by noting how the startup environment is volatile in one sense and booming in another. Many early-stage ventures launched since 2022 are now cash-strapped, with more than half shutting down. Meanwhile, artificial intelligence startups continue to attract interest from outside investors eager to enter the AI space, despite the liquidity crunch in the aftermath of the zero-interest-rate policy (ZIRP).

• Daley discussed how he’s seeing a lot of startup founders leave their companies, mostly due to a lack of passion and enjoyment with running their companies. Despite the exit of many early-stage entrepreneurs, he added the trend has helped his firm recognize the need to identify “hungry” entrepreneurs who are excited about what they're doing in a tough business climate — and those who “terrify” him, based on the prospect of competing with their companies in the market.

• Mike indicated that, while it’s important to have that product-market fit and an amazing team in place for startups to get the attention of investors today, the top trait many firms now look for is strong leadership. Finding founders who are on a mission to make big waves in their respective spaces is something High Alpha continues to look out for.

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Watch the entire Alloy 2024 session below to get more insights from Nammy, Mike, and Daley on the past, present, and future of startup investing, including AI’s impact on investors’ decision-making in the year ahead.

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Sign up for our Wavelength newsletter to access additional Alloy 2024 content, including recaps of our other sessions and keynotes.

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Transcript

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Nammy Vedire: So we're here today to talk about VCs’ perspectives and what they're looking for in 2025. And, I have to say, I gave Lauren and Elliott a hard time when they shared that was the topic of our panel, because, let's be honest: We don't know what's coming for the rest of 2024, let alone what 2025 is going to look like.

So, why don't we start there? What has happened so far in the tumultuous years since 2022 and the dropoff that we've seen in venture funding? It’s been fairly flat activity wise since 2022.

Some stats that I've read that have been pretty good. Fairly surprising is that now that the startups that have raised in the last two years are running out of money. The stats say that there are about three companies closing every day now. So that's 60% of startups closing.

Then, on the other side, you read about these ginormous funding rounds that AI companies are leading. It's sort of hard to wrap your head around what the VC landscape looks like.

There's, of course, the liquidity crunch with the whole zero-interest-rate period, the ZIRP era. I love this term that I heard, ‘Zombiecorns.’ That is all the unicorns whose valuations are not holding anymore.

Both of you are investors in this market. Help us understand what your perspectives are when you're looking at these types of companies. What makes for a good investment today? And has that changed from two years ago? 

Mike Fitzgerald: Okay. Yeah, that's good. That's a good setup. I mean, a couple of things that I would offer you know, we do very early-stage investing at High Alpha, and we've been doing it for about 10 years. And, in the last 24 months, we have had more shutdowns in our portfolio than we have in the eight years previous combined, so this is real.

What you've described and what the statistics show in our experiences is real. While that's, on one level, disheartening, it also shows the numbers of ventures they do. Kind of averages out over time.

What I would say about our world today in 2024 is this: If you are building an early-stage business-to-business software company, and you are winning business, you are able to sell your solution into an enterprise.

That's where we operate as a B2B venture studio. Then, you need to feel very good about what you have. Companies are not experimenting the way that they did maybe three, four years ago.  There's not kind of excess budget to say, ‘Hey, let's try this,’ or, ‘Let's try that.’

So, for the companies that have started in the last 12, 24 months or started this year that are out seeking capital, if you can tell a story of customers buying your solution and using it and being upset if you were to take it away, you know, those are the those are the signals that that that we look for. And I think that is happening more and more, just because the market has kind of tightened up a little bit.

So it's difficult when companies have to wind down or close. But it's also, I think, an era that we'll look back on in, in these vintages, and see some really incredible companies born because there's just, there's nowhere to hide. If you're winning business today you have something I think that's going to prove to be pretty special.

Daley Ervin: So at Cercano, we have all asset classes. We also have a big team that does investment into funds as well. So we have about 80 fund manager relationships. So we get to see that side as well.

One thing that we've seen is that VC used to be a cottage industry that was high margin. And during the ZIRP period, we went into kind of a commoditized industry with very, very low margin.

And there's a lot of funds that are being closed down. They're not going to be able to raise fund two and fund three. They invested in companies that would never be funded again. And I feel like the system is kind of like washing itself out.

It's a service industry. It’s hard to scale. So when you see these massive platforms with hundreds of millions of dollars, that's very hard to do in a really good way. And if you're kind of fishing in where every other investor is fishing, you're gonna get marginal turns. We've kind of seen that with our own LP portfolio.

And on the startup side, we're seeing a lot of people who no longer think running a startup or running a company is fun, and they're getting out. So what we're seeing now is really hungry entrepreneurs that are excited about what they're doing, that are willing to start a startup in the, in a difficult time.

And those are the ones that, you know, we typically like to back now — that generally want to be here, not just because it was easy or not just because it was fun. 

Nammy Vedire: You know, Mike, the point that you brought up about experiments, one of the experiences that we saw became norm during the ZIRP era was this whole PLG idea, product-led growth. In order to fund that entire go-to-market motion, you had VC dollars coming in. That's not the case anymore.

We're not in the era where you can pour a lot of money onto the fuel and then say, ‘Grow at all costs.’ We're more focused on profitability. How does that affect you both as investors?

Also, talk to us a little bit about your own LP dynamics, because Mike, for you and High Alpha, you have an LP base, but at Cercano daily, there is one LP, in some sense, and you don't actually have a larger base to cater to.

What are the differences that you see coming out of that?

Daley Ervin: So Cercano, we have about $14 billion to $15 billion under management. We do all asset classes. When they look at venture capital, they're like, ‘You are the risk-on asset. Safe bets right down the middle of the fairway is not what we want to do.’

So the stuff that is not grow-at-all-costs, but we want to be able to take markets. We want companies that want to be the only in a category. If there is a market map already for your category, it's too late for us. And so we're willing to fund the growth and the experiments in order to get to the next stage. 

And I think that's what VC is about. For us, the best ideas and the best entrepreneurs are going to get the most funding and they're going to continue to get, you know, more funding kind of going forward.

I think there's a lot of those ideas that are still out there that are going to be funded very easily. It's the marginal ideas that are taking a tiny slice of another slice of a, you know, of an already established market. Those you need to run efficiently. And those are the ones that are saying, ‘Hey, get to profitability, et cetera.’

Those are the companies that don't have a chance at being a category leader, a category owner, the ones that do have, you know an ability to take a category, we're going to put tens of millions of dollars into it, and a lot of funds are going to do that as well, but that's kind of how we look at VC from.

Our allocation within Cercano is that you need to be on the edge of every single vertical where there's one lonely person in a garage looking at an idea. That's where the returns are coming from. They're not coming from established markets where you've got, you know, a 10% better product.

Mike Fitzgerald: We raised our fourth fund and closed that earlier this year. Our biggest fund was $125 million.

Nammy: Congratulations. 

Mike Fitzgerald: Thank you. Yeah. But it was very interesting. You know, we were going in to meet our LPs, most of whom are institutions, similar to what Daley’s talking about, and we're doing this on the backdrop of closing and winding down a number of companies, which we hadn't done in the first eight years of our existence.

So it was really interesting to me that the sophisticated LPs understand this. They knew this was coming. They were waiting for this to come, waiting for this to happen. And their encouragement to us was, ‘Look, we're putting money with you because you invest at the earliest stage because you don't wait for a market map to occur. And we want you to keep doing that, which is good. Because that's the only thing we know how to do.’ So we needed to hear that.

But it is a combination, then, of finding that founder, that founding team, who was going to do this no matter what. Whether they were here 10 years ago or 10 years from now, this was the business they were meant to start and we hope that their timing is right, and we hope that they don't quit and they just keep moving forward.

But those founders are really independent of what the funding environment is. Are they raising at this valuation or that valuation? They're there to solve a problem, and it's what they think about when they wake up in the morning. It's what they think about when they go to bed at night. And we just hope we can become better and better at being in a relationship with those people and them wanting to work with us.

Nammy Vedire: So the thread here seems to be that this inception stage that we're in, it matters, and supporting entrepreneurs there also matters as VCs.

Mike, let's lean into your B2B background, both at ExactTarget and Octiv. That's your background and you at High Alpha invest in those types of companies. High Alpha has a very unique venture studio model, and you mentioned this idea of finding this ‘Goldilocks zone’ of where you'd like to back those types of founders.

Tell us a little bit more about that. 

Mike Fitzgerald: Yeah, I think any investor is going to have their kind of strike zone where something is either too early or too late for them. Doesn't mean it's a bad business. It just means it may not be the best fit for them.

For us, I think what we've learned is, back to this idea or this persona of the founder who I can tell when somebody walks in, usually they're looking to see whether we are smart enough to keep up with them. ‘They are going to do this, right?’ They're not worried. ‘Am I going to get funded?’ They're just wondering, ‘Are you the one that's going to match with me?’

And that's an intoxicating thing. It doesn't happen often, but when it does, you know that's really what we look for. This is — and we talk about this in our investment committee — is this person going to do this regardless of whether we're here or not?

And that's not always the case. They're great people with good ideas and very hard workers. But, you know, we really look for that person who's just really on a mission.

Now, we want there to be a sizable market. We want there to be a nice team around them. We want there to be maybe some evidence that a customer wants what it is that they're selling, of course. But if we wait to check all of those boxes, then we're not early stage investors.

We still have to say no to a lot of people and a lot of ideas, but when we get that when we get that person that's just on a mission, with or without us, that's a pretty good indication that we want to lean in further.

Nammy Vedire: And Daley, on the consumer side, which is where your background is from — Airbnb, Nucleus, Student.com — despite the brief foray into enterprise asset at Engage, what does inception-stage investing in consumer look like?

Daley Ervin: It looks similar because we’re generalists by nature. We invest across all asset classes, but it comes down to the founder who'll show us a world that doesn't exist, that they believe to be true. And their willingness to run through walls to get there is either with us or without us.

When you talk about that special entrepreneur, we have probably like 400-500 meetings a year with new founders, And I have to make three to four decisions a year, max. And that's how infrequently it happens where we don't want to let that founder out of the room in order to fund them.

And that's such a magical feeling: when it's kind of like chasing the dragon a little bit, but there's also something in there that I love to kind of test myself. I feel like I'm decently capable, if I were to put down everything I'm doing right now, use my network to hire a dope team.

‘Would I jump into that industry and compete against that founder?’ And if I wouldn't be terrified to do so, we do not back that founder. And so that's one of our litmus tests.

But whether it's consumer or enterprise, it comes down to the founder, seeing something that we don't see and transferring that excitement to us in the partnership to absolutely back this founder for the next decade or so.

Mike Fitzgerald: That’s good. I like that. I like that framework of would you be excited to compete because you think you could beat them or would you be terrified to compete because they're that good. That's a good framework. 

Nammy Vedire: And Daley, I know you recently took a group of founders and VCs climbing the Tetons. What is that about? And how does that fit into this litmus test that you were alluding to? 

Daley Ervin: So, well, there's a lot of people in VC that we, it's really hard to get to know people, especially as you get older, and the way that I've gotten to know my best friends and the people that mean the most to me is by doing something really hard, really new, and something outdoors.

And so we started this kind of this collective of VCs that I knew but I didn't really know that well. We may have done a deal together or we may have worked on a board together, but we've never actually spent a lot of time together.

So, I brought six VCs to Jackson, Wyoming, to climb the Grand Teton. So this is roped up 3,000-foot dropoffs. We had to do like two days of training and also all this other stuff, and then like a 10-hour hike and 14-hour climbing days. And you get to know someone very well, if they're on the end of the rope with you. If you have to do something really hard, it's kind of like peeling back the onion.

Everyone is on their best behavior at a conference like this, when we're networking outside, but when you're terrified, when you're hungry, when you're getting hailed on, that's kind of that true person that kind of comes out. So I try to create these experiences with founders and also other VCs.

‘Let's go do something really difficult together, and let's see if we actually want to work with each other.’ That's such a good way to fast-track a relationship, but also a partnership that, if you can trust someone with your life, you can trust someone on a board. You can trust someone when things go wrong, that they show up in a better, better place than, than, than where they started.

So that’s like a little side thing that that I do, but it's a very interesting way to kind of get to know someone. And when I think about joining the board of a startup, most board relationships last longer than marriages. And most of the time you meet with them three or four times and that's it.

You're not doing really anything else with that entrepreneur in order to really understand, you know, how they live, breathe and think. So you don't meet their spouse. You don't meet their kids. You don't understand what drives them other than, other than creating a company.

So this is a way to kind of short-circuit that process and get to know people and understand it. ‘Man, if shit really hits the fan, you know, I want this person on the end of my rope.’

Nammy Vedire: That's hard. I'm sure we're all looking for a list where we can sign up for something like that, because it is true. Starting a company, being on a board, being in an investment relationship, all of those are actually relationships, and how we find time to invest in those relationships is so important.

You know, no conversation today in technology — and, as Elliott so eloquently pointed out, AI is center stage. So Mike, I'll start with you. If we could even broaden our aperture back from this world of software that we live in, AI will likely have to change how we do everything across bits or atoms.

And what I mean by that is how do you build data centers, the infrastructure, how do they get their energy to, to support AI infrastructure? You know, you know, Benioff was bristling this weekend over a 16z's Valley of Death of a Salesforce and how that shows up and how AI is going to change how we do everything and go to market and sales.

When you wrap your head around that entire space, what perspective do you have for firms building in AI? 

Mike Fitzgerald: This is one of the reasons that I love what I do and what we do. It is so exciting. I mean, I remember a couple of years ago, when we were raising our second or third fund and people say, ‘When are we going to run out of B2B ideas?’ It just seems a little tired.

And they're, they're serious. These are sophisticated people, right, that deploy a lot of capital. And I don't know if they were testing us or what, but I mean, what's happening is just the next, it's just the next cycle, right?

It's talking about the industrial revolution. I mean, and there will always be people who, we'll speak and write about the demise of this and the difficulty of this. I very much see the glass half full. I think there's tremendous, tremendous opportunity.

You know, I've got three kids in their twenties, and what they are going to have an opportunity to do over the next, whatever, 40, 50 years as productive members of society, it's mind-blowing. I think it's really, really energizing, exciting. There will, of course, be problems and challenges, but  I think, as an investor, when we meet with somebody, we do not ask for an AI strategy. We do not ask for their take. I just like to see how they think about building their business in this world.

And for some of us who are around back in the late ‘90s, you know, IBM talked about e-business and was there an e-business and eventually that language just went away. It's just business.

So our lens with an investor had — again, as I mentioned, we're early stage, we're very focused on B2B — we don't ask for their take on AI. We just want to see how they present their solution. And the good ones will weave that into not only how they intend to build their team, how they intend to serve their customer, how they intend to compete with incumbents or new entrants. I mean, they weave that into their entire story.

So you know, that's why I'm quite optimistic about this. And I think it will just start a whole new wave of amazing companies that are going to be built. 

Nammy Vedire: And, and that's in the B2B side of the world. So Daley, only you can get me to say fart on the stage, but you said that we're in the farts-app stage on the consumer tech when it comes to AI, what does that mean? 

Mike Fitzgerald: Yeah, Daley. What does that mean? We don't talk like that in B2B. 

Daley Ervin: So if you think about the AI is certainly a thing and it will be a thing and it's, and I feel like it is definitely the wave you know, that's here.

And if you look back, it was web, it was mobile, it was cloud. When you think about a mobile, which is probably the most pivotal time for my entrepreneurial career, you know, the App Store came out in 2008. The first apps to make a bunch of money where the very low-hanging fruit, funny little apps, like the farts app: You press a button and it makes a squeaky fart or whatever. It was hilarious.

And that was the number-one-, the number-two-grossing app was one that you could take a picture and it turned your face into a fat face. Those are the first things that we're seeing make money two or three years later. This is when people use the full function of the iPhone to create, you know, the future of the mobile economy.

You think of Airbnb, you think of Uber. They took advantage of a GPS being in a supercomputer in your pocket right now. I think it was November 2022, the first ChatGPT came out. Right now, we're seeing very well-funded companies that are doing the first part of the application layer that I would deem kind of, you know, I've probably seen a hundred different transcribing sales tools. Like they'll listen to your conversation and they'll put it into your CRM or something like that.

You're seeing all these very easy, straightforward, not-super-thoughtful businesses that focus on taking, using AI to basically take information and put it somewhere else. That's the fart-app stage.

When I think about AI and the strategy that we're kind of employing is that I'm hanging around the hoop application layer is going to be built out. We don't know what that looks like being a generalist investor, we are just waiting to get a really good rebound of something that you're taking the core technology of all the GPTs that are happening and, and the models.

Using that technology and coming up with a far out thought that we would have never thought we, you couldn't expect Airbnb, couldn't expect Uber, you couldn't expect Lyft and Instacart coming from the mobile phone three years after the app store opened. So that's, I think, where we're at when we think about our investment strategy.

I also think about how AI is certainly going to be a thing that's going to be at least 50% of our investments going forward. The other side is if that's that side, let's assume that productivity goes up. Let's say it's 20%, say it's 50%. Let's just assume that happens on the antithesis of, you know, machines taking over what happens to the consumer experience.

On the personal side, are we gonna have more time or are we gonna have less time? So I'm thinking about when this pendulum swings, people are gonna have more time.

Let's fast forward five, 10 years. What are they gonna be doing? What's gonna be most important for consumers? And, you know, other than technology, I think it's gonna be health, it's gonna be your community, it's gonna be your family, it's gonna be your friends, it's gonna be your offline experiences.

You're just gonna have more time to do those things. So we're pointing. Kind of you know, our binoculars in, in, in two different ways. And, and it's kind of a barbell strategy and it's like, all right, machines are going to take over. That's going to be fantastic. New business created. And then all this extra time, consumers are going to be doing something completely different than they're doing now.

It's not going to be the next social media platform. It's going to be something else. And we don't know what that is yet, but you know, that's kind of how we view it. And so offline investments, you know, we think about brick and mortar. We think of CPG, we think of other things that are going to be important for consumers.

Nammy Vedire: Both of you highlighted building in a very different environment in difficult times and finding founders that are mission oriented and will build ideas despite or in spite of, or despite your investments or lack thereof. How do you find them? What can the founders in the room do to differentiate themselves?

Startups are hard by default. Category creation is doubly hard. What do they say? What do they do? How do they show up that makes them stand out? 

‍Mike Fitzgerald: Yeah, the thing that stands out to me most is is storytelling. So whether that's a Zoom call, whether that's an introduction and meet somebody at an event, whether it's somebody that says, ‘Hey, I'm coming to town and I want to meet with you,’ or whether we're going to town to meet with somebody.

At the earliest stage for us, somebody who can who can tell a story right, who can take the infant mortality rate in Iceland and weave that into we then into a story beautifully seriously that that that person in our view is is going to adapt well when the market tells them they've got to go a different direction or when a customer says, ‘Hey, this isn't working anymore,’ which is inevitably going to happen if you're investing at a very early stage or you're building a business at a very early stage, that is going to happen.

It's about the only thing that you can say with certainty. And that person who is an effective storyteller is going to be a good team leader. They're going to be a good fundraiser. And you know, that's, that's one of the signals that we'll look for, whether it's in-person or digital. I agree with all, 

Daley Ervin: I agree with all that. It's great. I'll give one thing. I know we're at time.

The one thing that I love seeing with new founders is this concept of being a historian. And I'll give an example of one of our portfolio companies, but in order to break the rules, you need to know the rules, you need to know how the game has been played historically in order to not follow most of the rules that have come before it.

And I'll think of a founder that we backed here in Atlanta, the founder of switch yards. He knows everything about coworking. He knows everything about the third place. He sent me the book of the guy who invented the term third place. He knows the history of Starbucks. He knows how people have congregated centrally to do work, you know, over the course of time.

And then he did the exact opposite with building switch yards and the company is. You know, absolutely taking off, but he's one where every time I try to push him on something, he's like, ‘Oh, that was done in 1980. This is how they did it.’ And it's so impressive to kind of see that and all of our best investments.

That was one of the core tenants of all of the best founders that we've seen is that they knew their industry backwards forwards. They knew when to break rules. They knew when to kind of adhere and they knew what they needed to learn. And that's always, that leaves us so impressed.