Q3 2022 Quarterly VC Update: Sunil Dhaliwal on the State of Venture Capital Investing | Cooley LLP

In conjunction with our Q3 Venture Financing Report, I sat down with Sunil Dhaliwal of Amplify Partners to get his take on the state of venture capital investing.

Key insights from Sunil Dhaliwal

On the outlook of the private market: “Private markets activity typically trails the activity of the public markets by about six months, so it’s reasonable to think that we will continue to see both a slowdown in activity and a pullback in valuations continuing for the two quarters.”

On Amplify’s relationship with its portfolio companies: “The most notable change at Amplify over the past three years has been our continued investment in our Build Team. … [A]s a result, we are in a better position to support those companies with both solutions for business problems and capital for growth.”

On the impact of AI on other industries: “For the longest time, most AI impact has been focused on things that live within a computer. … We remain incredibly excited about how AI will impact the physical world.”

Do you see the trends in Q3 data continuing through the end of the year and, if so, do you feel Amplify is well positioned to stay ahead of the curve by investing in early-stage companies?

We expect the slowdown we saw in the Q2 and Q3 data to continue in Q4. The late-stage investors responsible for the largest rounds have pulled back significantly, which will continue to depress the overall amount of venture capital dollars deployed. Remember: Private markets activity typically trails the activity of the public markets by about six months, so it’s reasonable to think that we will continue to see both a slowdown in activity and a pullback in valuations continuing for the two quarters.

Because Amplify is focused on backing founders at the earliest stages, often before companies are formed, we have a particularly long-term view of venture investing. The process of building relationships with the best technical founders and investing early really hasn’t changed, so we’re pretty comfortable with our position in the market.

Given the state of private and public markets, are you seeing a shift in the number of founders starting new companies?

While there are more founders stopping to ask, “Is this the best time to start a company?” we haven’t seen any decline in strong founders attacking big problems that need technical solutions.

Our team has been investing for multiple decades. We all have personal experience with fantastic companies that were started when economic uncertainty abounded, the markets were shaky, and financing was relatively scarce. Two of Amplify’s most successful investments, Datadog and Fastly, got started when there was not a lot of appetite for risk.

In addition to a new $400 million early-stage fund, Amplify recently raised $300 million to support existing portfolio companies as they grow. (Congratulations again, it was a pleasure working with you on that fundraise!) How does your relationship with your portfolio companies evolve as they scale?

That’s a good question. Frankly, our relationship with our portfolio companies doesn’t change much as they grow. We’ve always partnered with founders from the very earliest stages and have supported them all the way up to their IPOs. However, our Select Fund strategy, which we first deployed in 2020, does allow us to be a more significant source of capital for companies that continue accelerating into bigger market opportunities as they mature.

The most notable change at Amplify over the past three years has been our continued investment in our Build Team – a dedicated team of seven individuals who help technical founders go from zero to one in areas that can make or break a company at the early stage. The Build Team is made up of experts in technical selling, sales leadership, talent management, technical recruiting, data science, developer marketing and design. This team definitely gets us more deeply involved with our companies over longer periods of time and, as a result, we are in a better position to support those companies with both solutions for business problems and capital for growth.

You work with technical founders. Which industries do you think have the most potential to be disrupted by machine learning and AI in the near term?

The real-world applications of artificial intelligence are limitless. But for the longest time, most AI impact has been focused on things that live within a computer, such as algorithms for optimizing inventory, predicting the song you’d like to hear next or suggesting an item for your shopping cart. Those are all experiences in the digital world.

We remain incredibly excited about how AI will impact the physical world. The development of autonomous vehicles is the most well-recognized physical-world application of this trend, but we think that the broader AI-robotics revolution has only just begun. We are seeing an explosion of applications across manufacturing, logistics, agriculture, aviation, office work, retail, and consumer settings where co-bots are autonomously working in place of, or alongside, humans. All of these applications would be impossible without artificial intelligence.

Covariant, a portfolio company that I work with – and also a Cooley client – is a perfect example of how powerful AI together with robotics can automate logistics and warehouse operations. Another portfolio company, Iron Ox, uses AI and robotics to deliver the first fully automated indoor farm. Iron Ox can grow indoor crops from seed to harvest without human intervention, while constantly optimizing for maximum yields and minimal pests. The net result is high-quality, high-yield produce at a low cost. Again, none of this is possible without AI and robotics.

Are there verticals you would expect to be more resilient than others in a down market? How does Amplify’s strategy pivot with the deal environment?

The term “down market” is interesting, because even if the stocks are trading at lower valuations and interest rates are rising, we are not seeing a decline in the end customer appetite for technical innovation that is increasing revenue, improving efficiency or accelerating digital transformation.

We do see three megatrends driving the growth of digital infrastructure: (1) the move to cloud computing, (2) the growth of AI and (3) the transformation of every existing business to a digital-first business. All these trends are accelerating – and the companies that deliver value in these domains over the next five to 10 years will be hugely rewarded. We plan to remain focused on finding founders in these sectors and supporting them aggressively over that time frame.

As you near Amplify’s 10th anniversary, what are you most proud of, and what are you most excited for in the years to come?

First is our portfolio. Amazing founders continue to choose Amplify as their lead investor, and it’s overwhelming and humbling to think that that’s happened over 100 times in the past decade.

Second is our team. I’m continually blown away by the caliber of people who choose to build their careers at Amplify, and I’m even more blown away that they care so deeply about each other and the firm we’ve built.

Looking ahead, I’m most excited that the best companies in our portfolio are the ones that are still being built. It’s a special feeling to see so many of our founders building jaw-dropping technology that the broader world isn’t aware of yet. I can’t wait for them to realize their full potential.

Any other observations on this quarter’s VC data worth noting?

It’s a tricky time in the market. Lower valuations and slower deal pace tend to beget even lower valuations and even slower deal pace. Capital will be more scarce than it has been in the past, and virtually all startups will need to navigate growth amid this more sober environment. While that is logical and healthy, make no mistake that it is a significant change in operating procedure that will take time to work through the venture markets.

About Sunil Dhaliwal

Sunil Dhaliwal is founder and general partner of Amplify Partners. He has more than 25 years of experience as an investor in the private technology markets. Since founding Amplify in 2012, Sunil has led investments in Fastly, Datadog, BlueData and dozens of high-growth companies, including Covariant, Hex, PicnicHealth and Replicated. He also has served on numerous private and public company boards.

Sunil previously was a general partner at Battery Ventures, where he invested in category-defining IT infrastructure companies, including Splunk, CipherTrust, Netezza and @stake. He has twice been named to the Forbes Midas List, which ranks the top 100 venture capitalists worldwide, and in 2022 he was named to the Midas Seed list, which ranks the top 25 early-stage investors in the world. Before his work as a venture capital investor, Sunil was a member of the technology banking group at Alex. Brown & Sons. He graduated from Georgetown University with a Bachelor of Science degree in finance and international business. Sunil resides in the San Francisco Bay Area with his wife and three children.

[View source.]