Edith Young, general partner at Race Capital, and Larry Ashbrook, founder and managing partner of G Squared, speak during a CNBC-moderated panel at Web Summit 2024 in Lisbon, Portugal.
Rita Franca | norphoto | Getty Images
LISBON, PORTUGAL – It's a tough time for the venture capital industry right now, as a dearth of blockbuster initial public offerings and mergers and acquisitions activity has sucked liquidity from the market, while buzzy AI startups dominate attention.
At the Web Summit technology conference in Lisbon, two venture investors — whose portfolios include the likes of multi-billion-dollar AI startups Databricks Anthropic and Groq — said things have become more difficult because they are unable to make money on some of their long-term investments. Range bets.
“In the United States, when you talk about the presidential election, it's stupid economics. And in the venture capital world, it's really all about stupid liquidity,” said Edith Young, general partner at Race Capital, an early-stage venture capital firm based in In silicon. Valley, in a panel moderated by CNBC earlier this week.
Liquidity is the holy grail for venture capitalists, startup founders and early employees because it gives them the opportunity to realize gains — or losses if things go wrong — on their investments.
When a venture capitalist makes an equity investment and the value of his stake increases, it is just a gain on paper. But when a startup makes an IPO or sells to another company, its equity stake is converted into cash — enabling it to make new investments.
The lack of IPOs over the past two years has created a “very difficult” environment for venture capital, Young said.
However, at the same time, there has been a rush from investors to get into crowded AI companies.
“What's really crazy is that in the last few years, OpenAI's dominance has been defined by the big tech companies, Microsoft OpenAI is backed by Microsoft, which has made a multibillion-dollar investment in the company, Young said, referring to the seismic valuation of OpenAI, the creator of ChatGPT, at $157 billion.
“IPO market not happening”
Larry Ashbrook, founder and managing partner at venture capital firm G Squared, agreed that the hunt for liquidity is becoming more difficult – although the likes of OpenAI are seeing massive funding rounds, which he described as “a little crazy”.
“You have money and founders and employees looking for liquidity because the IPO market isn't happening,” Ashbrook said on the panel. “And then you have financing rounds going on for types of companies across generations.”
Although these deals are important, Ashbrook noted that they do not help investors because more money is tied up in illiquid, privately held stocks. G Squared counts itself as an early backer of Anthropic, an AI modeling startup that competes with Microsoft-backed OpenAI.
Using a cooking analogy, Ashbrook suggested that venture capitalists are deprived of profitable stock sales that could generate returns. “If you want to cook some dinner, you better sell some inventory,” he added.
Find opportunities beyond OpenAI
Both Young and Ashbrook said they are excited about opportunities beyond artificial intelligence, such as cybersecurity, enterprise software and cryptocurrencies.
At Race Capital, Young said she sees opportunities to make money from investments in sectors including enterprise and infrastructure — not necessarily always artificial intelligence.
“The key thing for us is not to think about what's going to happen, not necessarily in terms of getting out in two or three years, we're really in the long term,” Young said.
“I think in 2025, if President (Donald) Trump can come back, there are a few other industries that I think are very interesting. And cryptocurrencies are certainly coming back already.”
Meanwhile, at G Squared, cybersecurity firm Wiz is a key investment in the portfolio that has seen OpenAI-level growth, according to Aschebrook.
The startup, which rejected a $23 billion takeover offer from Google, reached $500 million in annual recurring revenue (ARR) just four years after its founding.
Wiz is now looking to reach $1 billion in ARR in 2025, doubling from this year, Roy Reznik, the company's co-founder and vice president of research and development, told CNBC last month.
Ashbrook said: “I think there are many slogans… that have not been published in the press and that raise $5 billion in two weeks, and that are achieving good results in our investment portfolios, and they are the stars of tomorrow and today.”
