Now is the optimal time for venture capital deployment as tough market conditions represent a breeding ground for resilient companies to dominate in the long term.
These are the thoughts of Meredith McPherron, CEO and managing partner of Drive by DraftKings, a Boston-based multi-stage venture capital firm that invests in SportsTech and entertainment.
Founded in 2019 by leaders from DraftKings, General Catalyst, Boston Seed Capital and Accomplice, Drive by DraftKings invests in a diverse portfolio spanning sports and gaming, media and fan engagement, and human performance.
The firm believes there is “massive potential” in its core sectors, with McPherron insisting that the present day is one of the most attractive times to deploy capital of the last decade.
“Tough markets are where great companies build to win the long game,” she wrote in a July blog post.
Venture capitalists scaled back their deployment pace in 2022 after reaching a record-high investment level in 2021. Investors have since become more cautious, with a primary focus on profit over growth.
While capital is still being deployed, VC firms told iGaming NEXT last summer that the wider economic outlook, combined with corrections in public company valuations, had raised the bar for VC investing.
According to Pitchbook’s Q2 2023 Venture Monitor, that situation has not significantly improved. At the end of H1 2023, the VC ecosystem was still struggling to adapt to a “market not seen in years”.
The report read: “This shift in the landscape has impacted all sectors and stages of the venture ecosystem with deals, exits and fundraising all well below the high-water marks set in the past few years.”
Despite the challenges, McPherron remains optimistic, particularly with regards to DraftKings’ domestic sector.
“In the last year alone, the market has invested over $20bn in our core sectors. With no signs of the momentum slowing down, we see a few key drivers of growth as having the greatest continuing impact,” she explained.
According to McPherron, who is a board adviser at Own Up and a board member at Toya, gaming has emerged as a formidable force, experiencing annual growth rates above 10% due to several reasons.
One is the ongoing regulation of sports betting in the US, and the fact that approximately 50% of Americans now have access to legal online gambling activities.
Moreover, she said mobile phone penetration is enabling greater access and adoption for both real-money and skill gaming, while the onset of generative AI is poised to revolutionise the “traditional gaming studio model and the way we will enjoy games in the future”.
McPherron emphasised that capital deployment during volatile times also requires resilience.
Over the past year, factors such as recessionary concerns, geopolitical uncertainties, the war in Ukraine, Fed tightening, bank failures, and the collapse of crypto have made public markets highly unstable.
“The past year has certainly demanded patience while remaining open and agile around opportunity,” she wrote.
“Our discipline paid off as private market valuations corrected and entry points became more attractive for early stage companies raising capital,” she added.
Harvard Business School master McPherron highlighted that the past year has been a build cycle for many companies.
She added that building during challenging operating environments requires focus and smart capital allocation, with founders responsible for balancing growth and burn.
“Leaning into tough times inspires a focus on efficiency, adding value every day, and managing metrics versus hype.
“Companies that build quality products and experiences will see a payoff in markets that demand the best experiences, whether in gaming, fan engagement, or human performance,” she added.
Moreover, McPherron pointed to the ongoing major technology innovation boom and the emergence of new tools, such as generative AI.
“Technology and markets continue to move forward. People move forward. And great companies built on fundamentals will move forward,” she said.
The Pitchbook report echoed this sentiment, acknowledging that despite the challenging circumstances, market downturns have historically paved the way for the rise of new industry titans.
The report added that specific sectors, including AI, hold countless opportunities within the present market landscape, and there is every reason to expect that the venture industry will continue to be the “leading edge of global innovation and the catalyst for building the economy of tomorrow”.