The firm’s founder says retrenchment in venture investing will hit startups hard and lift AI-enabled businesses above the rest by Laura Kreutzer

Article Hosted on WSJ Pro Private Equity Here.

Formed in 2013, Alpha Partners has spent years using its capital to take advantage of rights held by early investors to make follow-on investments in startups. So-called pro-rata rights entitle early investors to participate in later investment rounds in the companies they back, which can open a window for New York-based Alpha Partners when a rights holder finds itself strapped for cash. The firm typically acquires the investment rights to back startups in later-stage rounds, while often agreeing to share some of the economic upside with the original rights holders.

WSJ Pro Private Equity connected with Alpha Partners’ founder and Managing Partner, Steve Brotman, who shared his thoughts about the challenges facing startups in the year ahead and the opportunities that may develop for firms like his. Responses have been edited for length and clarity.

WSJ Pro: What surprised you the most about venture/growth investing last year?

Mr. Brotman: In the first half of 2022 and the prior two years, spurred on by the ultralow interest-rate
environment, there was a lack of discipline among all actors in the tech ecosystem. Suppliers of capital,
particularly institutional limited partners, increased their allocations to venture and growth investing primarily
into large mega funds over $1 billion [in size], which often underperform. VC and PE firms accommodated by
getting bigger and loosening their traditional underwriting norms. They deployed faster at ever higher
valuations, oftentimes with little diligence in unproven sectors like blockchain and crypto. This oversupply was
exacerbated by nontraditional investors in the asset class, including hedge funds, corporations, mutual funds
and buyout firms, which accounted for two-thirds of all investments in the venture and growth sector. The FTX
[cryptocurrency exchange] situation exemplified the very worst of all these dynamics at play. The depth of the
rot revealed in the investment allocation process across the board is the most surprising part of 2022.

WSJ Pro: What do you see as the biggest challenge (or challenges) facing venture/growth investors in the
year ahead and why?

Mr. Brotman: With two-thirds of capital providers shifting their focus elsewhere, access to capital to fund
growth will be the biggest challenge for investors’ portfolios over the next few years. The next biggest
challenge to their portfolios will be customer acquisition and growth amidst a gloomier economy. This will
impact growth-stage companies but will hit early-stage companies even harder as investors, enterprises and
consumers will have less experimental or frivolous dollars to spend. Further, these participants will gravitate to
more established companies over startups as survivability becomes paramount. Hence, we expect to see a
Darwinian culling of the herd.

WSJ Pro: How do you see the firm’s opportunities evolving this year compared with 2022?

Mr. Brotman: With the two-thirds reduction in capital availability and increase in visibility of the true winners in
the tech sector, our opportunity set will dramatically expand. In terms of sectors, we will continue to stick to our
focus of investing in essential tech sectors like healthcare tech, cybersecurity, robotics, mobility and “must
have” enterprise software and services. Further, just as being app-, web-, and internet-enabled was critical in
the prior two decades, being [artificial intelligence]-enabled will be a crucial company differentiator. Companies
with both AI capabilities and large proprietary data sets will emerge as the leaders of this new era.

Save the Date: AlphaMarket, October 16, 2024.