Atman February 2024 Update
Navigating Through Changing Tides
Dear Investors,
As we mark two years into the most significant contraction of the innovation economy since the dot-com bubble, we share reflections on our journey, the challenges we’ve faced, the resilience we’ve shown, and the cautious optimism that guides our steps forward.
New portfolio company: Hark
We’re excited to share the 5th investment in the fund. The Seed Plus round is led by Ocean’s Ventures, with the participation of M13, RiverPark Ventures, Lightbank, Everywhere Ventures, and several others.
Hark is a technology platform developing the next-generation customer communication platform. The company is focused on solving the pain point of customer service, converting it into a data tool for growth and retention by personalizing and streamlining the customer service experience. The business model prioritizes asynchronous audio/video interactions by leveraging AI classification for quicker feedback loops, actionable insights, and advanced Voice of Customer (VoC) analysis. Using LLMs and underlying AI, the technology merges customer insights with sales data, enabling all business departments to understand and obtain actionable insights from customer communication and transforming it into a revenue-generating channel.
Hark is developing a proprietary Context Score where early results show ~30% more context in customer support tickets. Hark’s approach is centered around enhancing the depth and insight of every interaction, by controlling the entire experience from customer intake to analytics they ensure comprehensive and actionable insights for the brand. This leads to unparalleled efficiency for agents, increased customer satisfaction, and problem-solving from the source. Ultimately increasing retention and revenue generation.
We are excited to welcome Hark, Fran Brzyski and the team to our portfolio!
Signs of normalization amidst the constant contraction in late-stage
We’ve reached a pivotal point, observing signs of normalization after enduring the rollercoaster of market valuations. Late-stage valuations have hit a plateau, showing stability at a lower level. We have reached the bottom but have not yet shown signs of bouncing back. For over two years, we’ve received discounted offers from some of the sector’s most sought-after names. This stability, albeit at a reduced valuation, signals a market finding its footing in new realities. The bottom is here but there is not a bounce back (yet).
Despite these signs of stabilization, the path ahead remains uncertain as the private market system takes much longer to clean itself. There are about 900+ unicorns that raised in 2020–2022 and still have record cash runway. Instead of seeing a mountain of closures and downturns, the combination of drastic reductions in operational expenses and increased productivity gave extended life to several companies that should have already been in liquidation territory. This ultimately delayed inevitable down rounds, closures, and the pressing need for fundraising. There is more havoc to come.
Public markets and big tech’s influence & the repricing of AI
Despite the U.S. economy’s remarkable performance in 2023 — with low unemployment, strong stock market gains, and GDP growth doubling the typical expansion rate — the success hasn’t felt as widespread. This discrepancy partly lies in the divergence between companies that have effectively harnessed AI for productivity and value generation and those still categorized merely as technology firms.
Primary metrics that affect the VC market are interest rates, public market performance, available capital (dry powder), and new company formation. These indicators provide a framework for understanding the broader economic environment and our place within it.
The resilience of public markets, reaching record highs, has been a silver lining. Big Tech, in particular, has played a pivotal role in sustaining the financing ecosystem for VC and late-stage technology ventures. This dynamic underscores the interconnectedness of our financial ecosystems and the pivotal role of major technology players in market stability. The Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla are all at record highs while private valuations continue to suffer.
Recent earnings calls have pushed companies like Confluent, Cloudflare, ServiceNow, and Microsoft to record new highs. A new paradigm is clear: companies capturing the AI opportunity are trading 2.5x higher than peers that have failed to do so — this dynamic also permeates into the private markets, with AI-related companies managing to command significant premiums towards their valuations, mostly due to their expected growth rate.
Having an AI strategy will soon be like having a website; if your company isn’t leveraging the productivity gains of LLMs, there won’t be much growth to be captured, and you will be completely left out of the game.
As the venture capital landscape is realigning with its foundational principle, pursuing highly scalable businesses poised to disrupt large markets, a cautionary tale, is a must when funding new companies: the importance of balance between growth and a path to profitability. Investors are more discerning, emphasizing sustainable business models over rapid expansion at any cost.
A new question we must ask ourselves when partnering with a new company: is it possible that this is the last round of financing for this company? What must be true to find a profitable path with the current financing round?
With VC fundraising sinking to a six-year low and first-time funds not being able to reach their targets, we are grateful for our LPs’ constant support and trust.
