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Venture Deals in LA Are Slowing Down, And Other Takeaways From Our Quarterly VC Survey
It looks like venture deals are stagnating in Los Angeles.
That’s according to dot.LA’s most recent quarterly VC sentiment survey, in which we asked L.A.-based venture capitalists for their take on the current state of the market. This time, roughly 83% of respondents reported that the number of deals they made in L.A. either stayed the same or declined in the first quarter of 2022 (58% said they stayed the same compared to the fourth quarter of 2021, while 25% said they decreased).
That’s not hugely surprising given the sluggish dynamics gripping the venture capital world at large these days, due to macroeconomic factors including the ongoing stock market correction, inflation and Russia’s invasion of Ukraine. While startups and VC investors haven’t been hit as hard as public companies, it looks like the ripple effects are beginning to bleed into the private capital markets.
Image courtesy of Hagan Blount
In addition to slowing deal volumes, most investors said they’re seeing startup valuations lose momentum, as well: Roughly 81% said valuations either stayed the same or decreased from the previous quarter, with nearly 39% noting a decline.
Should that sentiment continue moving forward, it could spell bad news for startups as far as raising the money they need for growth, investors said.
“If I was a startup right now, I would be making sure I have plenty of runway,” said Krisztina ‘Z’ Holly, a venture partner at Good Growth Capital. “When it looks like there's some potential challenges ahead in the market, it’s good to fill your war chest.”
Among VC respondents, about 86% said they believed that valuations in the first quarter were too high—one potential reason why deals slowed down in the first quarter, according to TenOneTen Ventures partner Minnie Ingersoll. She noted that L.A.’s growing startup scene features more early-stage ventures, whose valuations haven’t come down the way later-stage startup valuations have.
“I would say we are just more cautious about taking meetings where the valuations are at pre-correction levels,” Ingersoll said. “We didn’t take meetings because their valuations weren’t in line with where we thought the market was.”
While most respondents said the Russia-Ukraine war didn’t have much impact on their investment strategies, some 22% said it did have an effect—with one VC noting they had to pass on a deal in Russia that they liked.
Is There a Flight Out of Los Angeles?
Los Angeles was heralded as the third-largest startup ecosystem in the U.S. at the beginning of the year, behind only San Francisco and New York. Yet nearly one-third (31%) of VC respondents said that at least one of their portfolio companies had left L.A. within the past year. It won’t come as a huge surprise that the city of Austin, Texas has been one of the prime beneficiaries of this shift—with roughly half of those who reported that a portfolio company had left L.A. identifying Austin as the destination.
The tech industry’s much-hyped “exodus” from California has been widely reported on, especially as more companies have embraced the work-from-home lifestyle and also opted to move their operations to lower-cost cities and states. Most notably, Elon Musk has recently moved two of his companies, electric automaker Tesla and tunnel infrastructure startup The Boring Company, from California to Texas (with both of those firms moving in and around Austin).
“In today's competitive market with lots of capital to invest, we think the next generation of successful VCs are going to be diverse in markets (not just Silicon Valley)... [and] have access to undiscovered founders from everywhere,” said one survey respondent.
NFTs Aren’t Popular With VCs—But Web 3 Is
“It’s the future,” according to one respondent. “Buckle up and get on board.”
Are NFTs...
More than 71% of VC survey respondents said they were bullish on Web3—the new blockchain-enabled iteration of the internet, which promises decentralization and a whole range of applications involving cryptocurrencies, NFTs, DeFi and more. It’s the same sentiment informing Santa Monica-based VC firm M13’s new $400 million fund, which considers Web3 a core piece of its investment thesis.
In Q2 2022, do you expect your portfolio companies to:
L.A. is home to an ever-growing cadre of Web3-focused startups operating across the realms of finance, entertainment and other industries. But while local investors are willing to pour money into blockchain-related ventures, one segment of the space continues to evoke skepticism: Only 18% of respondents would describe NFTs as “a good investment,” while 33% thought they were “bad” investments and 39% said they were unsure.
As in our last survey several months ago, it appears that NFTs continue to divide opinion, with respondents expressing differing perspectives on their value and utility. One referred to them as “get rich quick schemes,” but added that the art pieces and social communities that emerge from them may be valuable. Another said that “NFTs as a digital medium are a legitimate thing”—but noted the vast majority are “awful investments with no intrinsic value.”
Graphics courtesy of Hagan Blount.
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Melanie Stricklan co-founder and CEO of El Segundo-based Slingshot Aerospace, credits Helms with helping launch the startup that counts NASA among its clients. To date, the company has raised over $17 million from investors including L.A.-based Stage Venture Partners and Noname Ventures. And Helms' guidance and insight has been key to that.
"She is a pioneer. She made way for lots of other women to go to service academies and after that to pursue engineering degrees like she did," Stricklan told dot.LA. "She was the first military woman in space; the first woman to inhabit the ISS."
Slingshot Aerospace CEO Melanie Stricklan (L) and Lt. Gen. Susan Helms (R).
Stricklan, who was an Air Force military officer for over two decades before she took her degree in aeronautical space engineering to found Slingshot Aerospace in 2017, met Helms when she was Stricklan's superior in the service.
Helms' mentorship has helped Stricklan and Slingshot secure contracts from NASA, the U.S. Space Force and Air Force, as well as private contractors like Boeing, Northrop Grumman and BAE Systems.
But Helms also boosted Stricklan's confidence as she helped develop Slingshot Aerospace.
The company sells two products. Slingshot Laboratory is a mixed-reality space simulation training tool that can be used by NASA astronauts and K-12 students. Although it's still in beta mode, it's being used to train university students and the Space Force Guardians.
Then there's Slingshot Orbital, an air traffic control-like system for space travel. The system gives the government a more accurate idea of exactly what's going on up there, without having to actually send more crafts into space. Helms talks about Slingshot as if she's making a pitch for her own company. Slingshot Orbital, she said, is key to protecting the U.S. from foreign threats in space as access to the stars becomes more democratized.
"Space has now become so accessible, you have to start thinking of it as a place where conflict could take place," Helms said. "Therefore, you have to focus on it with resources and defensive strategies."
Both point out that every launch produces debris, and even an accidental collision with another country's tech could have disastrous consequences.
"Space is one of the most critical environments to make accurate decisions in, especially with all of the hundreds of new satellites increasingly filling orbits," Stricklan said. "(There's) millions of pieces of debris... It's not a hair-on-fire moment, space is big."
Both have been working in the industry to help the next generation of women in space
"We're no longer hitchhiking on Russian rockets, which I love," Stricklan said. "I love the fact that women are leading the charge," Stricklan said.
Most major aerospace firms now have a woman in their C-suite — Leanne Caret is the CEO of Boeing Defense, Space and Security; and Marilyn Hewson ran Lockheed Martin for seven years until June 2020.
"Elon gets a lot of credit for what SpaceX is doing but [its CEO] Gwynne Shotwell is terrific. When we got our ticket back as a U.S. entity to go into space on the first privatized ride, she helped Elon get there," Stricklan said.
In 2019, 75% of all the major science divisions in NASA were run by women, the organization said. This includes Sandra Cauffman, a Costa Rican-born engineer who was the first woman to be appointed to the NASA Inventions and Contributions Board in 1994.
Helms now serves as the vice president of Texas-based Astra Femina, a nonprofit dedicated to encouraging young women to pursue careers in space. Astra Femina was founded by Sandra Magnus, a former Department of Defense chief engineer and one of the few astronauts to fly on the final Space Shuttle mission in 2011.
"Some of them have to just see it to be it," Stricklan said about young women interested in the field.
Helms won't be satisfied until there's finally a woman who sets foot on the moon.
"The astronaut office was 25% female when I showed up," Helms said. "What I'm looking for are the days when it's 50/50. There's people that say, why go back to the moon if we've already been there, and my answer is well, only 50% of you have been there. When you talk about human exploration, you're talking about humans in general."
The anniversary has her feeling nostalgic.
"I'm feeling kind of sad that the spacecraft I flew on that day isn't around anymore," Helms said. " I usually don't think about the anniversary that much, but since it's the 20 year anniversary and it sets us on International Women's Day in particular, it seems especially poignant."
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