Growth Deserves a Premium

Andrew Barber — April 15, 2023

2023 is proving to be a very difficult year for Venture Capital managers and their investors.

According to Pitchbook data, the median late-stage valuation fell nearly 17 percent from the 2022 full-year average. Critically, fundraising was challenged during the period, with less than $12 billion in fresh capital flowing into funds. As a result, the pace of deals has slowed significantly. Still, in a challenging environment, some VC managers continue to invest, with some seeking to capitalize on the current volatility.   

In a wide-ranging interview with Gravity Exists, John Frankel, founding Partner of ff Venture Capital, explained how his firm continues to find compelling opportunities.

Frankel and his partners launched ff in 2008 after he spent decades at Goldman Sachs in various capital markets roles. The firm has built a successful track record as an investor in young companies, including Indiegogo, Livefyre, and Authorea.  

“We invest at the earliest stages,” said Frankel. “Usually, it’s just four or five people. It may be pre-revenue.” 

ff typically invests in seed rounds and continues to participate until series B. 

Frankel noted that Venture Capital is not a homogeneous space when discussing the tough market for startups. According to him, late-stage growth investing became a momentum strategy in the years before 2022, but investors now feel the brunt of the pain in the early-stage segment. 

“Because they were momentum investing, they were paying 10 times revenue, so the next round could be 15 times revenue, so the next round could be 20 times revenue,” Frankel said. “And we’re now at the part of the cycle where that doesn’t work.”

This does not mean that startups aren’t raising money. 

According to Frankel, even venture managers who are not under pressure are both slower to invest and more selective due to macro uncertainty. However, there is still significant capital available to founders with compelling opportunities. 

“We were approached by a half dozen companies in Q3 last year who said, ‘Maybe we shouldn’t start raising capital now.’” Frankel said he and his team pushed back. “No, absolutely, there are people out there; they have money. You [have] a great story, [and] you may need to talk to four times as many investors as you would have previously but go out there and raise.”

Frankel reported that all of these startups had raised capital, with three oversubscribed for the round. 

“Capital is out there, but you have to do a lot more work to get it.”

Identifying non-cyclical businesses is a key investment criterion for ff, but it is increasingly looking abroad to find them. 

ff opened a base in Warsaw four years ago, and European investment commenced a year later. Frankel said that being a US firm with a footprint in Europe is paying big dividends. According to him, ff’s role as a bridge between European founders and US investors allows the firm to facilitate a flow of ideas, products, and talent between the two markets. 

Frankel and his team recently launched a firm focused on investments in Ukraine — a wager on the future of the beleaguered nation’s economy. 

“The war will end at some point, and I’m an optimist,” he said. “I believe Russia is going to be defeated, and I believe Ukraine is going to win.” 

However, he pointed out that any resolution may be far off. “War has this ugly dynamic. They tend to go on far longer than anyone ever thought when they started.”

Despite the massive risks, Frankel views the investment opportunities in Ukraine bolstered by the resilience of the embattled nation’s people. “For a lot of folks who aren’t in the frontline, building their business is the best way they can help Ukraine by attracting foreign currency to help carry the country once it reaches peace.”