Fund Update — Q3 2023
Previous quarterly update:
Fund Update Q2 2023
Q3 2023 Portfolio Company Highlights
FinSMEs
Breck Dumas
Q3 2023 Venture Investments
Global Predictions (Seed, New)
We were thrilled to invest in Global Predictions' seed round. They are the first and only SEC-regulated AI financial advisor for individual use. The goal is to give individual and retail investors hedge-fund caliber models to empower investment decisions and level the playing field.
The predictive and AI recommendation elements are ahead of the curve from what we've seen in the market, especially for self-directed investors. And these models will continue to grow. Their flagship product PortfolioPilot is already seeing major traction after launching this year with $6B of assets represented on the platform.
The team has backgrounds in both deep tech (e.g. Iris Automation) and finance (e.g. Bridgewater).
We are also paying customers and users of the product, as we love using what we invest in! Check them out here.
*We are working on closing out a number of additional deals that will roll into Q4 but overall, we are seeing quality seed rounds starting to surface. More on that below.
Market Overview
Q3 seemed to pass by quickly and much of the rally in public markets and tech stocks slowed down and went sideways. Investors continue recalibrating risk and liquidity with an eye on macro. As predicted, inflation had a slightly stickier print between its overall decline. We still believe inflation will continue to go down from here, with a few 'sideways' prints between that may stir markets up. By this time next year, inflation is likely to be the least of concerns in the market.
The key thing about interest rate raises is not the speed in which interest rates are increased, but how long they remain heightened. The longer interest rates remain high, the higher the probability of lagged impacts and a recession. We are still in a holding pattern between these lagged effects potentially taking place. We think of this year as a grace period of sorts, with the next few quarters starting to define clearer economic path ahead.
If there is an economic slowdown or recession, it is likely to be uneven – just as the Russell indexes paint a different picture than Nasdaq and the tech sector. The middle class and small business sectors are likely to continue being most impacted by the economic situation, having been damaged by high inflation, prior COVID closures, higher taxes, and now moving into tougher borrowing conditions. Mortgage rates hitting 8% has also hampered demand in the housing market, yet home prices have not fully corrected. Interest rate effects take time to materialize and all of this is of course relative to the prior pricing boom we experienced across all markets.
In general, we see the remainder of 2023 staying in this market "grace period" where liquidity continues sloshing back and forth between assets with some sector-localized outperformance. 2024 will be the year where potential lagged indicators may take effect. This does not mean the market has to put in a new bottom next year, but choppy waters ahead are likely. A "soft landing" has become a subjective term in ways and even if there is a technical recession or a recession or major issues within sectors, it may not be called that if indexes and employment numbers hold up. Big tech stocks will continue being a safe haven of sorts in either situation and in terms of private markets, we believe those have mostly come to a valuation bottom zone.
Venture
The 2023 year vintage for venture capital, especially the first half, is unlikely to be killer by any means. Up until recently, valuations were mostly still finding themselves. Many entrepreneurs raised out of panic or in preparation for a slowdown/recession, there were countless bridge rounds being raised on bad terms, some rushed into the market for the wrong reasons (i.e. thinking they could catch the tail end of demand), and perhaps most importantly, customers and go-to-market were not being prioritized.
With that said, our velocity is starting to pick up again as we enter Q4. We are starting to see the dust settle and quality come back into the mix. Through the next 6-12 months, we are likely to be more active on the venture side than the prior year+. Early stage teams are starting to prioritize becoming cash flow positive and product market fit before celebrating their fundraise and looking at the next round's markup. We are glad to see that era mostly fading (until next time, I suppose). Although certain funds who raised giant funds last year (we won't name names) continue flooding the market with big checks at high valuations, most pre-seed and seed rounds are now where they should be, hovering around $10M or below.
Seed rounds seem to be the last thing to "bottom" in a market, while equities and later stage deals have much quicker price discovery, all likely due to liquidity. We think entrepreneurs are now close to having an optimal mindset for raising capital and going to market compared to 6 or even 18-24 months ago. People are looking to solve real problems now with real business models and the zero interest rate phase of 'luxury think' is on the way out.
The noise around AI has been hard to stomach at times as we see a high velocity of deal flow there, particularly when many of the products are essentially ChatGPT wrappers. We've avoided the hype and remained sober, choosing wisely which AI deals we go into. Prior to investing, being in the big data space at its precipice and for a decade+ has very useful here, as we see some similarities and analogies in B2B and enterprise AI narratives in particular.
As discussed in prior posts, our focus in 2023 has been more around supporting our existing portfolio companies on both go-to-market and funding. That will continue of course, but we expect to see substantially more new deal participation as well.
Crypto
Our bigger focus over the last 9-12 months was on the liquid side of the fund. With every venture deal, we have to benchmark it against our potential crypto performance, which really adds scrutiny to each deal. As we have mentioned in prior posts, since Q4 last year, we've been buying Bitcoin as a core holding and ramping up our position. As a risk-adjusted bet in crypto (and actually the broader market), it stands out from the pack, particularly as some regulatory risk still looms for the rest of the space. If/when a Bitcoin ETF is accepted (which we believe is actually high probability in Q1 2024), then it will not only rally and capture many new inflows, but also be an even better risk-adjusted bet during the current economic and regulatory period. As risk comes back into the market, this will shift.
Aside from this, the only other new position we have added since is Solana, multiple times through the year. Solana was one of our larger wins last cycle. We were not part of their pre-launch token sales, but we were substantial market buyers of Solana in late 2020 and 2021. Having liquid SOL last cycle also gave us tons of optionality (no vest period) and while we did exit a substantial % of our position at various levels between ~$120-$215, we still hold an original allocation and continue to add once again.
We plan to make a separate post talking in more detail why we are bullish on Solana but in a nutshell, the community is very strong and it feels like where Ethereum was in its prior relative nascent period. Lots of energy, and the shakeout of FTX and subsequent survival of the ecosystem is only going to strengthen it. The resilience Solana has shown does not get enough praise. The next challenge looks to be on the regulatory side, as Solana is indeed mentioned as one asset of many in the Coinbase/Binance cases. Large regulatory decisions will come down to Congress, as discussed in our prior post "Unprecedented?" and with all things considered, we are fairly optimistic on outcomes there.
Having all focus going to scaling and building a robust layer 1 is also a principle we believe is very important for many use-cases and it just makes logical sense for applications. We are frankly exhausted by all the L2 (and now even L3!) narratives in the Ethereum ecosystem and as its one of our largest positions, we are hoping more attention will go to base layer scaling. When Ethereum block space becomes more saturated, we don't deny L2+ narratives will pick up again and perhaps ZK-rollups will find a place. But you have to ask yourself – do all these layers with their own unique assets and rails and technical jargon really make sense for the average user? And will it really solve fees, speed, and scale? Only time will tell.
Aside from our core BTC, ETH, and SOL, we have a few early-stage token projects, some of which are slated to launch next year, and we will begin moving further downstream into altcoins when the time is right (maybe mid/late 2024 or into 2025 – but that will always be a moving target).
While 2024 may not be the year of redemption for markets yet, we look at it as a major setup year for bigger things with multiple catalysts and more clarity on the horizon. We have been positioning for this for over a year and will continue our slow and steady accumulation into next year, 2025, and beyond.
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