Q3 2023 Quarterly VC Update: Genevieve Kinney on the State of Venture Capital Investing

In conjunction with our Q3 2023 Venture Financing Report, I sat down with Genevieve Kinney of General Catalyst to get her take on the state of venture capital investing.

Key insights from Genevieve Kinney

On the initial public offering (IPO) markets as we look ahead to 2024: “We think some of the larger enterprise companies will wait on additional clarity in the economic environment to make moves on an IPO … we expect to see more significant activity in the early second half of 2024, as companies seek to go public in advance of the 2024 election and when we have another two quarters of economic data. Performance of public companies and the broader equity market will be key factors in companies’ willingness to go public; however, public investors will need to grapple with investment opportunities in undervalued stocks with proven track records and new issues that have – unfortunately – had spotty trading records when looking at recent IPOs. We think the bar is very high for companies that are looking to maximize value at IPO and maintain consistent trading performance, and those that aren’t in a rush will continue to wait it out until Q4 2024 or, more likely, 2025.”

On the less-than-positive changes in the software as a service (SaaS) industry: “The democratization of the SaaS business model has enabled tech ecosystems to form and flourish around the world, but increased competition and investor sophistication has continued to make funding more difficult to obtain. The positive is that many companies in this newer SaaS cohort are stronger, more efficient and more profitable than those before them.”

On the trend of mid-stage rounds being down: “Market uncertainty over the fundamental stability of the economy, direction of monetary policy and outlook for corporate earnings have made mid-stage growth (particularly Series B) challenging to underwrite over the last six months. With limited execution proof points in the businesses, and a longer path to exit with an unclear view on where multiples stabilize, we have seen investors move in a barbell fashion to earlier, founder investments, or enter into later-stage businesses that may be doing down or structured rounds or offering secondary at a discount. In both cases, investors have been looking to mitigate their risk in either capital invested or valuation.”

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You have an educational background in government, culture and politics. What motivated you to pivot in your career to venture capital/finance?

I originally thought I would work at a place like the World Bank or International Monetary Fund, but I ultimately chose to work in the private sector for its intensity and impact, as well as to gain exposure to some of the most influential people and companies around the world. I ended up graduating from Georgetown University at a very challenging time in the economy, and with no background in finance, I felt very lucky to have the opportunity to work at one of the largest banking institutions in the US. While it was far from what I studied in the classroom, it gave me a front-row seat to (at that time, unraveling of!) the global economy, along with a much deeper understanding of the complexities and drivers of international business and capital markets.

When I moved into a hedge fund a few years later, understanding geopolitics, macroeconomics and monetary policy was of paramount importance – and really brought together some of what I had learned at Georgetown and the crash course I got in financial services right after college. I’m incredibly grateful for all the opportunities I was given there to see various parts of the business and build the foundation for the career I have today.

As I tell undergraduates, the path can be quite winding, and if I’m being honest, I’ve felt underprepared for every job I’ve ever had. That has been a hugely motivating factor driving me to learn as quickly as possible. If you continue to pursue your intellectual interests and seek opportunities to learn from the most experienced and intelligent people you can, it will open doors you never would have imagined down the line.

You support General Catalyst’s “global resilience” initiative by assessing new investment opportunities in climate and energy. What qualities do you look for when determining which firms have the most potential?

Our global resilience (GR) strategy at General Catalyst (GC) is based on a macro-informed thesis that we are entering a new world order defined by re-globalization, and that countries/regions will want to build more dynamic and resilient systems across their most critical industries – notably, defense, industrial and energy. While we believe these geopolitical tailwinds and the caliber of founders tackling these challenges make this a truly transformative time to modernize each of these industries, none of these sectors fall into “traditional” venture capital playbooks or investment styles. As we have seen in our Health Assurance practice, building in some of these regulated, often asset-heavy spaces requires much greater levels of capital, longer investment horizons, radical collaboration with existing industry and public sector partners, and creativity of approach. While the requirements are much more challenging, the ability to truly re-architect core parts of the way our societies work is incredibly exciting and presents tremendous opportunities to build truly mission-driven, generational companies.

While traditional qualities – such as the caliber and experience of the founding teams, size of market opportunity, product strategy and business model, and core unit economics – all remain fundamental factors in our investment criteria, when assessing opportunities in GR, there are some unique aspects that we need to spend a lot of time critically thinking about before getting comfortable with an investment. Some of those areas are the regulatory headwinds or tailwinds that could impact a business’ strategy and ability to execute, the type of risks we are underwriting – whether science, engineering or regulatory, the future financing strategy, and the quality of commercial traction given much different contracting structures and agreements than we are used to seeing in traditional venture sectors. What are the specifics of those contracts? Any outs or risks? What are the customers entitled to? How does any licensing work? What intellectual property protections are in place or should be in place? These are important questions to think through, and we look for management teams that demonstrate this degree of mindfulness of impact when executing their visions.

Finally, but most importantly, the core investment principle of GC is that of responsible innovation, which firmly guides our investment framework in these more complex spaces. Responsible innovation is the antidote to the “move fast and break things” era that was defined by unsustainable disruption. We place paramount importance on investing in intentional founders whose mindsets and mechanisms align with our commitment to responsible innovation and who have considered the societal impacts and potential unintended consequences of their companies and innovations. At GC, we take this commitment very seriously, given the incredible impact these companies could have on individuals and the societies in which they are building. We also firmly believe that the only companies that will be capable of compounding over time are those that society allows to do so – companies that are ultimately improving the societies in which they operate. Some people roll their eyes when we talk about responsible innovation, as if we’re trying to be impact investors. While we are acutely cognizant and respectful of the impact of these businesses, there is an enormous financial incentive to invest in and build companies that operate in the best interests of society, and that guides every single investment we make at GC – global resilience or otherwise.

What positive and less-than-positive changes have you seen in the SaaS industry since you began working within the sector?

Founders and investors have become much more sophisticated in their understanding of the most effective operating models and financial profiles for SaaS companies, and the ease of implementation and use has accelerated the growth of these businesses around the world. This has really “democratized” the industry, creating market opportunities and allowing new software ecosystems to form around the world. I think this has been an incredibly exciting and positive evolution of the industry over the last decade. One of the best SaaS companies that I have ever worked with is an edtech company based in Brazil. Its entire value proposition was based on the efficiency and scalability of the SaaS model, which opened many strategic doors for them down the line.

The SaaS model also has brought a fresh perspective and an enormous amount of opportunities to various “traditional” industries – particularly, in our GR sectors, like defense, industrial automation, climate and energy – where we are now seeing a real need for software-based systems that will help operate, orchestrate and manage these complex systems.

Of course, on the flip side, democratization also has led to increased competition. Ten years ago, best-in-class SaaS companies were true “unicorns” – and their scarcity made it easier to secure funding. Today, the bar is so much higher on both the commercial and funding sides. Commercially, customers have an abundance of enterprise software options to choose from and integrate with, so new offerings must provide significant incremental value and be very easy to deploy and use – especially in models that rely on efficient land and expansion. Similarly, investors have become much more discerning when selecting which companies to support in the space, since the barriers to entry and ability to provide value to customers are so much lower with these models. Providing a differentiated value proposition and an ability to grow and continue to service customers is much more challenging for becoming – and remaining – an enduring SaaS business today.

What do you enjoy about working with companies that are further along in their development?

Many investors enjoy the rush of investing and dealmaking, but I find the collaborative nature of working with our portfolio companies equally enriching. Learning and working toward the same goal with no pretense or “selling” creates powerful alignment and excellent opportunities to learn, as we are all working toward the same goal. Prior to my investing role at GC, I worked as an investment banker advising companies that were looking to go public. These were the “latest” stage companies you would find in the venture space – Series D businesses and beyond that were typically raising money and going public to materially expand their product strategies and/or reach. It has been exciting to bring this experience to my later-stage portfolio work at GC and blend it with a typically earlier-stage investment focus.

Mid-to-late-stage companies sit at an interesting inflection point. They have conquered the difficult task of surviving the early stages and proving their business models are viable. I find it fascinating to help companies envision and navigate their second and third acts, tackling the challenges of expanding into new markets and products while maintaining core strengths. And this goes for founders, teams and talent within organizations, as well. Seeing how founders evolve and build experienced teams around them is fascinating, and I have really come to appreciate just how important it is for companies to choose investors that they believe are long-term aligned and committed to helping them build their businesses. Moreover, I enjoy thinking about valuation and how public investors think about various industries and companies and what they find risky and valuable. That becomes much more relevant to later-stage businesses, which is another reason I enjoy working with companies at this stage.

Pre-money valuations and median amounts raised are generally up for early- and late-stage rounds but are generally down for mid-stage rounds. What would you say accounts for that trend? What are the implications?

Over the last year+, we have been in a period of prolonged macro uncertainty, which has subdued overall risk appetite. While it hasn’t fully halted deals or investments, it has affected the risk environment and complexion of deals. Across the last year, every incremental investment dollar has faced increased consideration and scrutiny. As a result, we have seen that investors are either going very early, placing their faith and more limited amounts of capital behind founders they have strong conviction in, or they’re seeking attractively valued opportunities in the later stages, where they can make data-driven underwriting decisions based on historical performance and execution. The mid-stage has been tricky because companies in that range typically have neither of those risk-adjusted characteristics – you need to commit much more meaningful amounts of capital but don’t really have substantial data to gain firm conviction in the outlook, particularly in the uncertain macro environment we have found ourselves in.

This barbell trend reflects the “wait and see” stance the market has adopted over the past few quarters, as we digest macroeconomic data and gain a clearer understanding of the economy, monetary policies and company earnings. This doesn’t just impact existing portfolio companies or new prospects, but also the funding environment for many private equity and venture capital funds themselves – so the impacts are really comprehensive and have markedly changed the overall market tone.

While deals are certainly still getting done, and the data is more favorable than it was in Q4 2022 or Q1 2023, investors have been much more discerning and selective in assessing and valuing quality. There is a much more palpable reverence for the incremental new dollar of investment, which has moved investors to focus on best-in-class companies and founders with proven track records, strong traction and solid unit economics. These businesses continue to be extremely – if not even more – competitive, and these companies continue to command meaningful valuation premiums.

I think as we continue to see positive economic data, greater levels of certainty around rates and a reset in the IPO markets, we will see risk appetite across the board in venture capital meaningfully pick up. Hopefully soon!

What are your thoughts on the IPO markets as we look ahead to 2024?

While I think everyone was excited to see a “return” of the IPO markets this year, I think we are still six months away from really seeing a meaningful boost in activity in the tech IPO markets.  The companies that went public this year were all quite unique, each with specific reasons for wading into an untested market, and the deals were highly structured with cornerstone investors to ensure initial trading went well. After-market trading, on the other hand, has been tough, which will likely deter many companies from going public in the first quarter or first half of 2024.

As we move into summer 2024, we should see much more activity as companies look to take advantage of the pre-election window, but it will be interesting to see where public market sentiment is at that time, particularly as it relates to the appetite for IPO investing versus opportunities to invest in existing (and potentially still relatively undervalued) companies with proven public track records. It only takes a few positive outcomes to really turn the tide on IPO sentiment, and I hope we see a more consistent rebound in late 2024 and really 2025, as a result.

About Genevieve Kinney

Genevieve Kinney is an investor at General Catalyst, where she works with late-stage portfolio companies across industries while seeking new investment opportunities in climate and energy, as part of General Catalyst’s “Global Resilience” strategy. Before joining General Catalyst, Genevieve took tech companies public at Morgan Stanley.

Genevieve’s practice is informed by her undergraduate education at Georgetown University, where she studied Government, French, and Culture and Politics. Her holistic perspectives regarding the complex political and cultural factors affecting business decision-making have made her a critical asset to innovative companies around the world.

Genevieve obtained her MBA at Columbia Business School. She serves as an honorary co-chair of the Apollo Circle at the Metropolitan Museum of Art.

About General Catalyst

General Catalyst is a venture capital firm that invests in powerful, positive change that endures – for our entrepreneurs, our investors, our people and society. With offices in San Francisco, Palo Alto, New York City, London, and Boston, we support founders with a long-term view who challenge the status quo, partnering with them from seed to growth stage and beyond to build companies that withstand the test of time.