Where could VC funding be going into in 2024?

Crunchbase data reveals that early-stage startup funding plunged 34% year-over-year in November. Lux Capital General Partner Bilal Zuberi joined Yahoo Finance’s Seana Smith at the Barclays Global Technology Conference to discuss implications for venture capital funding

Zuberi stated the last year has been a “downer” for VCs amid scarce liquidity events like IPOs. This forced startups to take on cost-saving strategies through layoffs and operational changes to achieve profitability. However, he sees areas like defense tech, AI, and human productivity enhancement as needed areas of investment, calling them “important for society” and venture returns.

Though strategies have shifted from purely top-line growth toward “building real, profitable businesses,” Zuberi argues sectors enriching lives and pushing boundaries still command capital

"A few years ago, start-ups used to be very narrative-driven. They've become very much metrics and operations-driven," Zuberi says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: Welcome back to Yahoo Finance. Well, this year has been a tough year for startups looking to raise money. There's new data out from Crunchbase that shows that early-stage funding fell once again in November, down about 34% from a year ago. Here to discuss what the past year has been like and also the state of play for the VC industry, we want to bring in Bilal Zuberi. He's a general partner with Lux Capital. Bilal, it's great to have you here. Thanks so much for taking the time.

BILAL ZUBERI: Great to be here.

SEANA SMITH: So let's talk about how tough or challenging this past year has been. At Lux Capital, you guys have about $5 billion in assets under management. You're funding-- mostly funding science and technology types of companies. So what have you seen some of the trends over the last 12 months?

BILAL ZUBERI: I mean, look, generally speaking, the last 12 months have been a downer for the industry. There's been fewer financings if you're not-- if you take AI outside a little bit. Lack of IPOs, lack of liquidity for our LPs, and we're very cognizant of that. That has meant a lot of belt-tightening for a lot of startups. A lot of changes in operational plans that allowed them to reach profitability sooner. That has meant layoffs. That has meant a lot of change in planning on what the company accomplishes.

At the same time, you know, we invest in a few broad areas that-- that we consider to be not only important for society but also where venture dollars have been flowing in. Things like securing our borders, securing our freedoms, and securing environment. You know, a lot of money has gone into defense tech and-- and continues to go in. We've been beneficiaries of that.

We, you know, work a lot in increasing productivity of human experience, everything from mobility to the way we do work at home and in our offices. A lot of money has gone into that. AI has been a part of that. We do a lot of investments also in improving human life and condition and reducing human suffering. And there's been a lot of money that's gone into that, as well, in drug discovery companies and so on. And frankly, there's a little bit of an M&A that's been happening in the last few weeks and months. So we've been watching that very carefully. There are some very large ones.

And then last but not the least is unleashing human creativity, where we've invested in companies like Hugging Face and Runway and many others. That is really democratizing access to technology. I mean, there's literally-- I can sit online and watch television stations now where you can watch completely AI-generated movies and you know.

So there's a lot of interesting things happening at the same time. But you know, as I was telling the conference here earlier today, it's always good to be here and with public market investors to really calibrate for private markets as well and to understand all these companies that are now see these A, C, D, E, whatever stage. They're eventually going to be either a public company or get bought by a public companies. What will be expected of them? And I think that is, you know, it has been a real dose of medicine that private investors have had to take.

SEANA SMITH: And how have those expectations changed?

BILAL ZUBERI: So I think two or three years ago, it was all about top-line growth. Everybody was looking for growth and where can you find growth, and that was what the VC was known for. And now people are looking for building real businesses and building profitable businesses. You know, there's this thing called profit that startups can aspire to as well.

And I think the-- the reality of it is that if two, three, four years ago, startups used to be very narrative-driven, they've become very much metrics and operations-driven. And I think that has required VCs and founders and CEOs and executive talent that's been hired over the last two years to really hone in and understand how do you actually build real businesses.