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2023 Annual Letter

Dear Z2Sixty Ventures community,

Looking back on 2023, we are proud and excited about Z2Sixty Ventures’ progress as a firm.  Amid a very challenging market for venture capital and startups, we identified and backed 4 new exciting companies involved in semiconductors, smart cities, aging society, and digital health and continued to support existing investments.

The overall macroeconomic environment showed signs of stabilization in a continued higher interest rate environment to manage inflation.  However, continued conflicts in Ukraine and the Middle East could still bring broader geopolitical risk and macro uncertainty. 

Venture capital overall in 2023 continued the slowdown from 2022.  Deal activity and valuations faced continued pressure.  LPs in venture funds continue to look for realizations while also taking advantage of other alternative assets.

The Macroeconomic Environment Stabilized in 2023

  • The Federal Reserve continued to raise the fed funds rate another 100 basis points in 2023 after already raising it 425 basis points in 2022 in order to tackle inflation. 

  • As a result, we saw a slower rise in consumer prices of 3.4% across all items from December 2022 to December 2023 vs 6.5% the prior year and 7.0% in 2021.

  • Meanwhile, the US unemployment rate remained steady in 2023 with the rate at 3.7% in December, indicating a robust labor market.

  • It was a strong year for US public markets, with the S&P 500, Nasdaq, and the Dow up 24%, 42%, and 37%, respectively, as valuations began to normalize towards historic levels. 

  • However, capital markets and transaction activity remained muted in 2023.  Notable exceptions included the IPOs of Nextracker, ARM, Klaviyo, and Instacart.  Opening day returns were below the historical average and this has similarly been the case for longer term trading. 

  • On the M&A side, the number of US completed merger and acquisition deals over $100M was down 30% compared to 2022.  

  • Overall, there is a foundation of strong growth.  Real US GDP increased 2.5% in 2023 compared to a 1.9% increase in 2022.

For 2024, private sector forecasters expect inflation to be below 2.4% but foresee it to continue to be above the long-run target of 2% for a period of time.

VC Activity Remains Challenged

Against the backdrop of rising interest rates, venture capital and startup activity remained challenging for a second year in a row, even with broader economic growth and support for megatrends, such as generative AI.  In March of last year, we saw the unexpected collapse of Silicon Valley Bank (“SVB”).  As a long-time provider of venture debt to the startup community, the loss of SVB caused further anxiety about the health of the ecosystem.  Meanwhile, limited partners (“LPs”) in VC funds and other alternative assets have lowered their interest in VC in 2023.  With the increase in interest rates as well as demand for liquidity on existing fund investments, we saw more interest in funds raising secondary funds or private credit.  Overall, VC funds in the US raised ~$53 billion last year vs. ~147 billion in 2022 (64% decrease).  As a result, we anticipate the fundraising landscape to be increasingly competitive as LPs balance allocation limits across more offerings.

Fundraising for seed to Series C was down in 2023, both in terms of the number of deals and capital raised.  Median deal size and median post-money valuations were also significantly down across stages, with the exception of seed deals, which saw higher deal sizes and slightly higher valuations.  While valuations at the seed stage aren’t generally tied as much to revenue relative to later stages, we expect some correction to occur in 2024 in order to drive increased activity at the early stage.

Allocating Capital in 2023 and Further Organizational Investment

In 2023, we made investments in 5 startups, including 1 follow-on investment.  This brings our total warehoused investments to 6 startups for Fund I.  We cannot publicly share our portfolio performance, but we remain excited about our portfolio companies. We continue to look for new investment opportunities while also supporting our existing portfolio founders and teams to drive performance and growth. 

We’ve also continued to strengthen our platform in 2023 to ensure we can execute efficiently in a disciplined manner, while still keeping an eye on expense management.  Portfolio construction and risk management are important factors for delivering superior relative performance across market cycles, and we will build on the successes and learnings from last year going forward.

Venture investment and portfolio management is all about how we allocate capital to founders and startups.  Our mindset when we started warehousing was to allocate capital as if we are deploying check sizes in line with our planned fund size.  We take pride in our ability to secure those allocations from founders.  In some cases, we wrote smaller checks given liquidity constraints with the intention of participating more fully once Fund I closes. 

Our First Annual Meeting

Late last year, we held our first annual meeting in Chicago.  We had a successful turnout and several of our startup speakers shared their stories alongside some of our network advisors.  Many will note that we held an annual meeting before even closing the fund.  We did so in order to tell the story beyond just the pitch deck.  We wanted to share what Z2Sixty Ventures is building and also highlight the incredible founders we’re backing.  And although I’m a solo GP, I wanted to highlight the reach and network that Z2Sixty Ventures offers.  We have a network of very experienced, smart, and talented world-class professionals (from mid-level domain and industry experts to C-suite/senior-level advisors from banking, consulting, and law) which we have leveraged to help drive growth and improved performance at our portfolio companies.  You can read more about the event here or see a short recap video.

2024 Outlook and Focus

Looking towards 2024, Z2Sixty Ventures’ goal is to continue to deploy capital in the sectors where we have deep industry expertise, experience, and networks and to generate excess returns on a risk-adjusted basis.  We plan to remain focused on investing in long-term horizon opportunities, rather than focusing on the short-term.  We do this by backing bold founders we believe are building businesses that will create a smarter, more sustainable, and more impactful society.  We’re optimistic that these startups can become global businesses over the long term.

Deciding which startups to invest in at the early stage can be challenging because of the lack of historical financial data at scale that can typically serve to help determine the financial attractiveness of a business.  Instead, one is putting more emphasis on qualitative analysis, including the strength of the founder and management team and new technology (i.e., benefits, alternatives, ease of adoption, technology moat, etc.).

For my part, we are also leveraging our experience from years in investment banking to conduct quantitative analysis to help inform a framework on the market, growth, profitability, and exit scenarios for what the startup can become from inception to commercialization. 

When choosing investments, we consider not only the financial return but also the impact that comes from playing a small but active role in bringing the next world-class organization and its products to market.  For example, we invested in ReConceive AI because it’s not only solving the challenge of scaling artificial intelligence but also the growing energy demands required.

Stepping back and looking at the overall outlook for VC and startups, we are headed for some interesting times.  More capital will be moving towards alternative assets, including venture capital, not just from institutional investors but also high net-worth individuals and families, given the generational wealth transfer.  Against the backdrop of many investors turning to other asset classes, we believe the best opportunities remain in venture capital and backing amazing founders. 

Overall, we believe that discipline drives success. We continue to build Z2Sixty Ventures into a world-class investment firm and an impactful partner to founders.  We will take steps in 2024 to increase the Z2Sixty Ventures brand, including deploying capital, and we feel good about the warehoused investments we've made, which should translate well into momentum for fundraising.



Hernando Bunuan

Founder & Managing Partner

January 31, 2024


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