In conjunction with our Q4 2023 Venture Financing Report, I sat down with Bobby Yazdani to get his take on the state of venture capital investing.

Key insights from Bobby Yazdani

On underwriters' ongoing hesitation to invest: "[C]oming off of 2022 and 2023, I think people are just gun-shy to underwrite investments. It's an emotional reaction to two years of brutality. So, it's not the lack of available capital – it's more the emotions of the capital that's involved."

On growing as a leader and an investor: "Experiencing failures over the past 30 years, I had the opportunity to learn a lot. And that has helped me establish a methodology in terms of my selection and underwriting processes."

On adding value to a professional environment: "I don't want to occupy a room because I have the loudest voice. I want to occupy a room because I have something worthwhile to offer in terms of my knowledge and my know-how."

Questions

  1. Q4 2023 marked the lowest deal volume and invested capital since Q1 2017 and the conclusion of an upward trend in invested capital. What do you believe are the implications for the funding landscape?

There are a lot of contradictory facts, right? We have the highest dry powder we've ever had – about $400 billion of dry powder. So, the question is, why is that dry powder not being invested? I believe that it's not financially driven, but that it's driven by psychology. And coming off of 2022 and 2023, I think people are just gun-shy to underwrite investments. It's an emotional reaction to two years of brutality. So, it's not the lack of available capital – it's more the emotions of the capital that's involved.

Going from the highs of 2021 to the lows of 2023, you have this wide swing. People are still in a state of shock, and the sentiment is still super negative. You still have layoffs in tech. We're going through this consolidation phase in the industry, and when you're in this consolidation phase, the sentiment is very negative.

So, what does it take to turn the corner? The sentiment must turn, and it will turn. Some events always turn the sentiment. Opening the IPOs and increasing M&A activity and transactions – I think those two things could turn the sentiment positively.

  1. Given the significant decrease in invested capital observed across all stages of financing, particularly with a substantial drop in Series D and later rounds from $2.2 billion in Q3 2023 to only $451.7 million in Q4 2023, what advice would you give to a company navigating these changes in 2024?

You've got to conserve capital. You must realize there may be a scarcity of capital, and you have to maybe compromise all of those ambitious plans and focus on current fundamentals to make sure your business survives this period. The survivors of this period will be incredible companies. So – surviving first is more important than being romantic.

  1. With investments in more than 200 companies since 1989, how have changes in economic, regulatory or geopolitical landscapes influenced your investment decisions and overall strategy? Are there specific industries or technologies that you've consistently found to be rewarding investments over the years?

Experiencing failures over the past 30 years, I had the opportunity to learn a lot. And that has helped me establish a methodology in terms of my selection and underwriting processes. I teach my team how to use this framework to invest, and it has yielded very good results for us – it's our secret sauce. We are not arbitrators of events or relationships but fundamental investors; we invest on a fundamental basis and follow a methodology to underwrite.

The mandate of our firm is a very simple one – we focus on investments in the United States. That's where our comfort is. Our focus is B2B (business-to-business) enterprise technology because we are believers that companies have to increase their productivity and performance by continuously investing in technology. That's never going to go out of fashion, and it's not correlated to economic activity – when things get hard, you have to find technologies or approaches that give you a competitive advantage. So, on a fundamental basis, we think that the digitalization of the economy and the government is still in the early stages. It's not correlated with economics – it's simply correlated with innovation, know-how, and the ability to evolve and change businesses to adopt this new technology.

  1. Can you reflect on any lessons learned from the transition from a private venture to a publicly traded company, and how do those lessons inform your investment decisions today?

We are thematic investors. So, when we invest in cybersecurity or next-generation data centers, our research covers all names that are participating in the market. We don't necessarily look at the world through stages of the companies, but more with a thematic lens to understand our participants independent of their stage. This allows us to fully understand the value that ultimately gets delivered to the customers and to question whether an investment is justifiable in terms of that value.

To underwrite an investment, there are always questions: Why this company, and why now? To answer these questions and fully understand why this thing needs to exist in the universe, you have to really understand the landscape.

  1. In the modern enterprise technology realm, what trends do you find particularly exciting or promising? What challenges do you foresee in the current market for enterprise technology investments?

All industries have gone through a "bubble" period where there's a looseness and lack of fiduciary responsibility – there are ups and downs. We have had some exuberances in our industry that are being cleaned up, and there are these consolidation phases that take the insufficiencies out, reset expectations, and recalibrate the best players and the weak players. We are going through a consolidation and resetting phase, and many things will be recalibrated in this period, from excessive investment in companies that don't deserve it to too much availability of capital in the hands of inexperienced people. Similarly, there's a resetting that's going on for the investors where they're saying: "Well, show me the actual returns rather than the theory of returns." Everyone will face the realities that are ahead of us.

This consolidation phase just takes time, and I think the enthusiasm and optimism will come back. At the end of the day, this is America, and this is the world of entrepreneurship and change. We love underdogs – we love to see underdogs win, and we invest in underdogs. I'm in the business of underdogs. We want to see the underdogs get back to winning streaks, and we will. But we also must go through this period of consolidation and this cleanup phase, which is happening in real time. I believe that, as a society and as a country, we're so blessed by the discovery and innovation of our culture and all the brains that are constantly thinking of breakthroughs. These breakthroughs and discoveries – and our ongoing desire to challenge the status quo as a culture – these two things are persistent in America. We are going through a consolidation phase, but it will end. One day, we will wake up, and it will feel very different.

  1. What advice do you find yourself frequently giving to entrepreneurs, regardless of the industry or technology they are involved in? How has your approach to mentorship evolved over the years, and what lessons have you learned?

My humble immigrant background has taught me that I have nothing to lose, only things to gain. All my professional life, I have had to add value to my environment to justify my existence. And the only way to add value to my companies, my team and every interaction is to offer my knowledge. It's a mindset – I don't want to occupy a room because I have the loudest voice. I want to occupy a room because I have something worthwhile to offer in terms of my knowledge and my know-how. We are a knowledge-based firm, and our work is about knowledge capital. The capital by itself is not sufficient.

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