As we are midway through Q3 2023, I wanted to take a moment to share some learnings and highlight a few opportunities as we look ahead to the rest of the year and into 2024. At 500 Global, we’re fortunate to have an exceptional team of partners around the world who spot emerging trends, identify market opportunities, and find high-potential entrepreneurs who are solving big problems. This reach provides us with both global and hyperlocal perspectives that fuel our investment strategy across the firm.  

I recently sat down with Ed Ludlow at the Bloomberg TV studios in San Francisco to reflect on the perspectives that have shaped our strategy as we celebrated our 13th anniversary. 

From an ecosystem standpoint, nearly five months since the collapse of Silicon Valley Bank (SVB), the banking situation for the tech ecosystem appears to have stabilized. SVB is now part of First Citizens Bank, and operating as usual, including resuming their venture debt practice – albeit at a slower pace. First Republic was acquired by JP Morgan. Notably, larger banking institutions like JP Morgan and HSBC have been building out their venture practice. Additionally, challenger banks like Mercury (a 500 Global portfolio company) have seen an opportunity to grow their business from new clients. Based on observations from our own portfolio and fellow investors, prudent strategies in the current environment include diversification of banking relationships and enhancing internal expertise in managing financials and forecasting needs for liquidity.

Venture Funding Insights:
The venture capital landscape has been marked by continuous change over the past 18 months. While VC funding for US startups fell 48% YoY in Q2, it is still on track to match 2020 levels. We’ve also seen declines in venture-backed private company funding across stages, on a global scale, yet early stage funding is still higher than pre-pandemic levels at $17B for Q2 according to Dealroom.  

We’ve also noticed a marked shift in investor sentiment away from growth and leaning into profitability – notably companies with strong fundamentals and positive unit economics. This includes one of our portfolio companies, Indonesian aquaculture startup, eFishery, in which we were one of their early institutional investors in 2018 and also participated in their recent Series D. Since 2019, eFishery has operated profitably with a unique model that includes elements of hardware, software, data, ecommerce, and fintech. Witnessing these successful financing rounds for larger deals is generating excitement among the team as we anticipate a thawing of deal activity. 

What I’m most excited about as we look across the landscape is that these changes to capital availability, the cost of that capital, and focus on stronger fundamentals have invigorated the entrepreneurial ecosystem, fostering new opportunities for innovation and growth. We have seen inspiring resilience and ingenuity from entrepreneurs as they navigate the challenges of Series B and beyond. While raising capital for these later stages has been more demanding, we firmly believe that the tenacity and vision of our founders will prevail.

Focus on Growth and Talent:
Current market conditions have sparked a positive transformation in the growth strategies of startups. Founders are revisiting their scrappy roots and embracing innovative approaches to achieve sustainable growth. And we are witnessing a surge in demand for “growth hackers,” who are instrumental in driving organic growth, without solely relying on paid acquisition channels.

The shift towards focusing on Product-Market Fit (PMF) and fundamental growth principles is refreshing. We’ve seen tremendous value in going back to basics, emphasizing the importance of building both strong foundations and lasting customer relationships. This approach plays well into the strengths of 500 Global, as we remain known for our strong support of founders at the PMF stage of their growth. 

We have also witnessed fascinating adaptations in growth strategies. Founders engaging in mergers with non-tech entities – like clinics in the case of Carbon Health –  to bolster earnings and profitability demonstrates that creativity and adaptability can lead to more sustainable business models.

Impact on Valuations and Investment Strategies:
The impact of recent valuation adjustments has led to a recalibration of expectations, ultimately driving a more balanced and informed investment approach. This presents an excellent opportunity for investors to discover hidden gems and promising ventures that offer substantial potential for growth.

We believe the next great technology companies are being founded and built now. As we’ve seen, great companies are formed during times of crisis and upheaval. One example of this – the Dot Com boom & bust in the early 2000s gave rise to a company where I started my career – Google. 500 Global was launched just a couple years after the 2008 global financial crisis and backed companies that were founded during or shortly after. This includes companies like Credit Karma, Talkdesk, Twilio, Sendgrid, and more. Like the shifts to the Internet and to mobile and cloud, we see more consequential shifts coming in the form of AI that present emerging opportunities.

AI Innovation:
AI has been dominating the headlines and headspaces of founders and investors. In Q1 2023 alone, roughly $1.7B was invested into generative AI companies across 46 deals according to Pitchbook. We have been keeping a close eye on how companies within the 500 Global portfolio have leveraged AI to enhance their core offering, launch new products and features, enhance their customer experience, increase productivity and cost efficiencies, and more. For example, earlier this year Canva launched a suite of AI-powered design tools. Grab has been utilizing AI for their heat maps, and is now further leveraging generative AI for efficiency and productivity gains, as well as LLMs for content translation. Talkdesk, an early adopter of conversational AI to help deliver better customer experiences, announced Automatic summary – their first generative AI-powered feature. And Shippo built a generative AI system in-house to expedite their everyday processes. Overall, we have observed an increasing number of portfolio companies reporting the use or implementation of LLMs or Generative AI, such as ChatGPT, in their products.

In closing, we are inspired by the resilience and ingenuity of entrepreneurs and excited by the immense potential for growth. We firmly believe that challenging times breed innovation and opportunity. 500 Global is well positioned to capitalize on these developments and excited for the future.

Thank you,
Christine Tsai
CEO and Founding Partner, 500 Global