Venture Dallas 2022, a regional conference for technology startups – many in fintech and B2B software – and the financial sponsors who invest in them, did not disappoint. In its own ‘Texas-ee’ kind of way, Venture Dallas delivered with plenty of sizzle, and plenty of steak.
On the ‘sizzle’ front, the day featured marquee speakers and entrepreneurial royalty Troy Aikman and Mark Cuban, in back-to-back sessions. Their segments were rife with inspiring stories of the ‘failure begets success’ kind. And celebrity aside, I admit that seeing and hearing them tell these stories in person, really increased the power of the messaging – the in-person dynamic goes a long way toward humanizing them, providing a connection to the listener that’s more real, relatable, and ultimately, greater in value, in that the listener, rightly or wrongly, is more apt to be convinced that he or she can achieve the same.
But…
As much as I enjoyed listening to Mark Cuban and Troy Aikman (minus the annoying Joe Buck), I found tremendous value in the panels that preceded them. Most notably, those comprised of early stage investors – venture capital firms, angel investors, and family offices – who shared a wealth of useful and timely insights. What they collectively had to say about investing under current macro conditions was invaluable – by way of their changing investment theses, valuation methodologies and perceptions, and expectations of returns in the next five years. And, that many of these early stage investors are actively seeking assets in financial technology and B2B software, made it particularly relevant to me.
So, without further ado, here’s some ‘steak’ from the Venture Dallas conference that will feed your mind, and hopefully, the way you think about your firm’s go-forward strategy in a challenging funding environment.
The Cycle – almost universally, every financial sponsor acknowledged that we’re in a down cycle – economically – which requires startups seeking funding to have their ‘house in order’. This idiom doesn’t mean what it used to mean – organized books and financials. What it means today, and more importantly, to the funding community, is that for early stage founders, there needs to be a credible pathway to profitability in 12 – 18 months. The days of early-stage funders writing checks for ‘great ideas with potential’ are over – there needs to be a viable business there today, or at most, very shortly.
Valuations – interestingly on this front, the financial sponsors were parroting something I’ve been saying for a few months now. Valuations are – generally -moving downward, but the magnitude of multiple contraction on non-free cash flowing businesses is significantly greater than that of businesses turning, or about to turn, a profit. Further, there are particular types of assets that are not only holding their valuation, but in some cases, seeing it increase, as high demand continues to drive an imbalance between available money – there’s still a tremendous amount of capital sitting in the coffers of funds – and the paucity of quality assets. The demand is so strong that it’s offsetting the higher cost of capital. This, in turn, is creating support for continuing high valuations in fintech – embedded finance and insurtech in particular – and SaaS, where later-stage, growth equity shops are chasing any species of mission critical, B2B enterprise software.
Timing and Fit – to me, this was the single most interesting take away from Venture Dallas. There was – thankfully – a panel of family office presenters that made a pretty compelling argument as to why they’re an attractive partner for startups and founders in the current topsy-turvy economic environment. Their pitch – simplified – is that in this period of transition, when traditional private market investors, like venture capital and growth equity shops, are negotiating their way through markdowns on existing holdings, more expensive leverage, and unrelenting competition for scarce, quality assets, return on equity expectations have become quite stringent. This forces them to demand higher returns from portfolio companies in shorter time frames. Family offices, in comparison, don’t serve as many masters as these others do – namely, LPs – and therefore, can be much more accommodating in regards to ROE and timeframe.
This pitch plays for me – at least for now. However, there are still some unique challenges with family offices that even they will readily admit to. For one, there’s identifying a family office with domain expertise that maps to a founder’s startup. Secondly, they can be – literally – hard to find, as many family offices don’t actively or outwardly promote themselves.
Takeaway…
Venture Dallas was an extremely valuable event. The breadth and depth of panelist expertise exceeded any I’ve witnessed this year.
And, yes, I was also inspired by the success stories of the celebrity ‘sizzle’.
So, I complement the organizers. Venture Dallas busted the trope of “all sizzle, no steak”…
…it successfully delivered on both.
