A conversation with top LP Beezer Clarkson, Partner, Sapphire Partners, on the state of VC

This week, as top LPs and VCs gather to connect in Berlin for SuperVenture 2023, we caught up with Beezer Clarkson, Partner at Sapphire Partners, on the state of venture capital today. Enjoy this interview and Beezer's insights on key challenges that lie ahead, plus where LPs and GPs should focus their awareness.

You've been involved with venture capital for about 20 years now. How has it changed since you started?

So much of it hasn't changed - both since the beginning of my career and the origins of VC. The foundation of venture is still the same, from LPs putting money into venture funds, funds investing in entrepreneurs and entrepreneurs working their way towards meaningful exits. To generate real returns, you must have some extraordinary exits - hence the power law. Then the money comes back, and the cycle continues. This has remained constant since the beginning of venture capital. Where we have seen exciting change is at the top of the funnel for what and who can be a venture capitalist. Through our study of venture and internal data collection, we are seeing hundreds of funds get funded and even more that are trying but haven't yet closed. There's more entrants now than ever, which is very exciting. It's not wildly different, but the ability to have more venture capitalists has in some capacity changed the very nature of the industry.

On the back of that, some people have called 2022 the year of reckoning venture capital. Do you agree?

The phrase that comes to mind when thinking of 2022 is ‘wake-up call’, though that carries more of a negative connotation than I like. I think 2022 has been a radically different year for many investors that have been in the bull market for a decade - whether LPs, GPs or entrepreneurs. For many in the industry, this is the first downturn they’ve experienced, yet it’s an important and inevitably present aspect of venture: understanding market cycles, business fundamentals, margins, a company’s cashflow as well as that there is a cost to capital. During the last bull market, because the cost of capital was so low, for many venture backed companies, it was a bit like dancing on the moon - there was a very different sense of gravity - founders were able to raise every six months at increasingly higher valuations and now suddenly, we’re back on earth and that isn’t happening. We’ve also seen PitchBook reports that show the difference in dollars created by exits in 2022 versus the mid-2021 market exuberance and years prior - and it’s unsurprisingly significantly down today. That is another aspect to the ‘wake up call’ or ‘reckoning’ that you mentioned. The industry is not seeing the kinds of dollars returned in 2022 or 2023 that we saw in 2020 and 2021. It may feel like watching grass grow for a while, but this is more a return to how it used to be. It will likely feel tough before it gets good again. I think these things are incredibly healthy, albeit not fun, especially if you’ve never experienced any loss in your portfolio before. But does it build better entrepreneurs and investors? For those of us who've been through it before, I think it’s clear that yes, it does.

So in a way having experienced these cycles of toughness before, has hardened or informed your strategy and approach compared to LPs whose only experienced upturns. How do you think that comes across?

We launched Sapphire Partners a little over a decade ago, and the other Sapphire founders and I had all been through downturns before. The thinking was to pick a place where we could stay consistent, understanding that cycles would come and go, but find a through line that we wanted to invest in, which was and continues to be early-stage venture funds. (Sapphire Partners, the LP arm of Sapphire, is separate from Sapphire Ventures - the direct strategy on the platform.) We have been very consistent, whether in an upturn or downturn part of the cycle, as we continue to focus on early-stage venture because of the risk/reward profile. We’ve also wanted to be disciplined in the dollars we commit each year, which was hard in the past bull market due to the number of funds coming back faster to market. And now, when things are quieter, it is also important to retain our consistency.

Like you’ve mentioned, when dealing with capital, there’s always a risk. Do you see any regions though, that are growing into more ‘safe spaces’ or that have more of a positive outlook for returns now than others?

The trend line that we've always believed in is that the best early-stage managers can only be the best if they find the best companies. Many VCs that I talk to say it's not even them who are picking it, it's the entrepreneurs that they find. It’s tricky to say: ‘Oh yes, we're going to decide in a blind pool of capital that it must be X.’ What we have done is thought a lot about the centers where technology funding seems to be aggregating – the US, Europe, and Israel – and that’s where we’ve directed our efforts in finding the best possible managers. I would say what often differentiates managers is their perspective. Back in the day, cloud computing was considered a niche, and almost too small by some investors, and today some would argue we’re not even out of its beginning stages yet. Could AI be following the same trend line? Perhaps, but we’re still in the early innings of this. When it’s helpful, we can also look at the underlying companies in our portfolio and see where they're aggregating and consider what exposures we may want to have. Do we want to add more enterprise, consumer, deep tech? In the end though, you don’t know where a fund is headed. As an example, we had a fund that was very thoughtful about how data can drive business, and their first fund had a lot of enterprise software, and their second had a lot of software appropriate for healthcare or biotech - but it's the same people with the same thesis. It was just the opportunity set that they found interesting. This really sums up the life of an LP: For us, we solve for the best investors and believe that will pull through the best companies.

We’ve already discussed the changes, or non-changes, in recent years. What are your hopes for this asset class in the next 2-3 years? What are some of the challenges ahead or where do you think LPs and GPs should focus their awareness?

Cycles will continue. I don't know when it will go back up, but it will, and I think a the current rockier road is helpful for training investors - I know that is true for me. I started in 2000, on the back of the bubble. It was an excellent time and extremely fast-paced. A year later, pretty much everybody I knew in the tech world was out of a job and the venture fund I was at gave back the money to their LPs and shut down - and we were not the only ones by any stretch. My hope is that people will go through this year and learn to be more strategic and thoughtful about process. With early-stage venture, you should be taking a risk, but having a wider experience can be useful in thinking through which risks to take and which to not.

It’s like there is a strength in the downturn and using that to learn how to do things on the other side.

I believe you can see the difference in how people behave as investors based on having both sides of the experience.

For more insights from bright GP and LP minds, check out OpenLP – an initiative of Sapphire Partners that Beezer and her team launched to demystify the LP perspective and provide transparency across the venture ecosystem. Follow along on Twitter and LinkedIn for valuable VC resources and join us at SuperVenture.