‘There will be a reckoning’ given high valuations, 645 Ventures co-founder says

645 Ventures Co-Founder Nnamdi Okike joins Yahoo Finance Live to discuss tech investing, SPACs, Web3, and the metaverse.

Video Transcript

JULIE HYMAN: We also have been watching very closely what’s going on in venture capital markets. As we have seen this public market volatility, we’ve also been sort of talking to people about what’s happening in the private markets. We’re joined now by Nnamdi Okike. He– of 645 Ventures. He’s a co-founder there. Nnamdi, thank you so much for being here. We were just talking–

NNAMDI OKIKE: Thanks for having me.

JULIE HYMAN: We were just talking with a private company founder about what he’s seeing in terms of funding and valuations. And I’m curious, from your perspective, where we are in this cycle, which seemed like a big boom cycle, and now we’re coming off of that, certainly in public markets. And private markets, it seems like we’re seeing some parallels.

NNAMDI OKIKE: Yeah, we’ve had more and more capital into the system in the private markets, which has pushed valuations up. We invest in seed and series A companies, and at our stages, you’re seeing valuations continuing to go up. There’s more and more capital in the system. I think what you saw last year was venture funds raised twice the amount of funding in 2021 that they raised in 2020, which is really kind of causing valuations to go up across the board.

Now you are seeing, in the later stage, valuations starting to come down as a result of funds like Tiger and CO2 starting to re-trade on valuations. And so there’s two countervailing factors– the supply of capital coming into the market and then what you’re seeing at the late stage, as well as the public companies. And it’s creating for an interesting dynamic.

JULIE HYMAN: And I’m curious what the reckoning is going to be, or if there’s going to be one, right? We’re seeing the reckoning happen in the public markets, right? Some of these companies that were infused with a lot of capital and private markets came public. You know, they– we’ve seen quite a few crashes in them. Is that what we’re going to continue to see? Or how does this all play out?

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NNAMDI OKIKE: I think it’s hard to say. Typically, there’s a delay, so what happens in the public markets gradually filters into the private markets. And it takes a while to get to the early stage. I do believe that at some point, there will be a reckoning because it’s hard to believe that these valuations are sustainable, as well as the pace of funding and how quickly rounds are getting done and the prices of those rounds.

So I do think there will be a correction at some point, but it’s very hard to predict when that will happen. And I think you did see in 2021, a lot of private companies being able to get out and get to public offerings and M&A. And so there has been liquidity for the venture market considerably. So I think it will take some time for that all to filter through. But I do think over time, you will see a little bit of a correction in terms of the prices. And that will filter down to where we invest, which is the early stage of venture.

BRIAN SOZZI: How has this changed environment– how has this changed how you go about finding a potential good investment?

NNAMDI OKIKE: You know, so our model remains pretty consistent. We have a model that uses proprietary software and technology to help us go find companies. We use an internal platform called Voyager that helps us identify exceptional companies early. Those companies now in our portfolio include businesses like FiscalNote, which is now over a billion dollar valuation, Panther Labs, which is also over a billion, and Iterable, which is over a $2 billion valuation. So our outbound sourcing model leveraging technology and software remains pretty consistent.

We have to remain disciplined. So we always have to make sure we’re investing in companies that are at prices that are reasonable and that can validate the long-term proposition that they’re aiming for. But our model remains very consistent. If anything, it just means we have to look more for companies, and sometimes deals are a little bit more competitive, but our model is pretty consistent to what it’s always been.

JULIE HYMAN: And Nnamdi, you guys have also been looking at some of the so-called Web3 and Metaverse plays as well. And I have to say, from a journalist perspective, it’s really difficult to tell what’s, quote unquote, “real” and what’s not, if real is even a word you can apply when you’re talking Metaverse. So first of all, I would ask, what does Web3 mean to you? And secondly, how do you tell the wheat from the chaff, when there is just– it’s like a fire hose of startups in that space?

NNAMDI OKIKE: Yeah, you’re right. It is definitely a fire hose, and there’s a lot of companies that may not have so much substance. And there’s a lot of noise in the market. When we think about Web3, we think about companies where there is really no middleman. So there is software that really controls the business model and controls the approach and creates autonomy in terms of how an organization runs. You might have heard of DAOs, Decentralized Autonomous Organizations, which are an example of Web3 entities.

We really focus on companies that are the arms merchants selling into Web3 that provide the infrastructure and the technology to enable it. So one good example of it is a business called Solidus Labs in our portfolio. They provide software for risk monitoring and management. So they enable companies to prevent fraud and to reduce fraud in things like crypto trading, DeFi, in other areas. So it’s a good example of a company that’s kind of making a more transparent market and preventing things like we saw last week when there was the $4 billion kind of crypto theft. And so Solidus is a company we think is really well-positioned as an arms merchant.

I’d mention a second one, a company called Scion Digital, also in our portfolio, one of our most recent investments. They provide software for decentralized finance. So they enable traditional companies like banks, auto dealers, a range of different companies, to have an on-ramp onto DeFi. So they’re also an infrastructure software company. So our approach is to focus on companies that are really creating the rails in the infrastructure to enable these business models to really grow and thrive over the long-term.

JULIE HYMAN: And what’s interesting about this whole Web3 universe, if you will, is that the idea– and this is something I’ve talked to investors in this space about before– the idea, of course, is that it’s more democratic, that it’s more designed for everyone. But there are some who have criticized this space as the funding really goes through a few central channels. And as, you know, a firm that is not one of the biggest players in the space, I’m curious how you view that criticism.

NNAMDI OKIKE: I think there is some merit to that criticism in the sense that a lot of the biggest firms have been investing in the biggest Web3 companies and have been profiting from those companies in terms of their appreciation and the token offerings and those types of events. So I think you’re right that the promise has not yet been fully realized in terms of true decentralization and enabling the individual or the small business to really benefit.

I think there are some exceptions to that. You are seeing creators being able to start companies and generate revenues from their creations more effectively. So if you think about NFT creation, for example, and some of the companies that have been– or the individuals, I should say, that have benefited from being able to create NFTs and sell those NFTs, that’s one example of kind of where more entrepreneurship is happening. So I think it will take some time for the benefits and the long-term prospects of Web3 to really kind of make their mark for smaller businesses, smaller individuals.

I think the way we look at it as a fund as an up and comer is, again, we want to invest in companies that have long-term great business models and that are sustainable. So we shied away from investing in token offerings several years ago. We really stayed on the sidelines, and we were looking for companies with very good software models, Sas software revenue that were really consistent with what we’ve always invested in.

And so as we started to see those in the kind of second wave of crypto and crypto infrastructure, that’s when we started to get more involved. So I think to your point, there is a lot of promise. I think a lot of the promise hasn’t yet been realized, but I’m pretty optimistic overall about where the industry is going.

JULIE HYMAN: I also wanted to talk to you about when we talk about democratization of the financial world. As a person of color in this industry, I’m curious about where you think we are in the evolution of diversity and inclusion within finance broadly and within venture capital more narrowly.

NNAMDI OKIKE: Well, I think there have been some promising strides. I think in our industry, there are more and more funds that are started by diverse founders, whether they be African-American founders, like our firm, founded by myself and my colleague, Aaron Holiday. And there’s been several firms that have been focused– been founded by minorities over the past couple of years. Those include Harlem Capital, as an example, as well as more firms started by women. So if you think about Forerunner Ventures, one of the top performers in the industry, or Acrew, there are more and more diverse firms that are starting to grow and invest in great companies, which I think is a real positive.

I think on the entrepreneurs side, although the numbers still leave a lot to be desired in terms of the percentage of companies that are being invested in that are founded by diverse founders or female founders, I think there is some progress happening there. And there is an acknowledgment that there is a problem in terms of how much capital has gone to diverse founders in an effort to really alleviate that. And so I think you are seeing more progress.

I think the real progress, though, will be in the long-term return. So as we think about our firm, we think a lot about being a top performer. And our first two funds have been top quartile performers. And we think a lot about performance really is what is going to solve that problem, and over the long-term, enable more capital to go to diverse firms and diverse founders. So performance is key for us. And I think that’s what will hopefully start to balance the playing field a bit.

JULIE HYMAN: Nnamdi, thank you so much for taking the time to talk to us today. And we hope to stay in touch and have you on again in the not so distant future. Nnamdi Okike is co-founder of 645 Ventures. Thank you for being here.