NFC's 2022 Annual LP Meeting Recap

Garrett Leach

On October 28th, our Limited Partners (LPs) joined us in Bozeman for a discussion of recent investments, fund performance, portfolio company progress, and outlook and positioning for the future at NFC’s Annual Meeting. 2022 has been an especially tumultuous year for venture markets and technology companies and has created significant uncertainty around the future path of the economy and financial markets over the coming years. However, we remain optimistic that outstanding founders will continue to choose the Rocky Mountains to build enduring companies of impact, utility, and value. NFC has continued to grow and mature, making a few exciting changes during 2021. Franz Kofler joined as Senior Associate based in Salt Lake City and Scott Holton joined us as CFO in our Bozeman office. Our investment team now has a physical presence in our three core markets, Montana, Colorado, and Utah. We have also made investments in data and technology to drive better decision making and outcomes. We are confident our firm is well positioned to be the early-stage capital partner of choice for founders across the Rocky Mountains in the decades to come.

We owe our LPs tremendous thanks for their continued support of NFC, which extends far beyond capital commitments to counsel, portfolio company support, deal referrals, and much more.

Regime Reset

Looking back, our 2021 Annual Meeting marked the beginning of a rapid change in macro regime. Throughout 2020 and 2021, exuberance pervaded financial markets. Broad based fiscal and monetary stimulus resulted in a repricing of market discounts rates, which drove a tsunami of demand for high growth public and private companies and soaring valuations. US VCs invested $343.6 billion dollars in 2021, more than double the dollars deployed in 2020, according to Pitchbook.

However, in the background of this fervor, inflation was lurking. To the Federal Reserve’s chagrin, inflation has proved to be more persistent than transitory. In response, the Federal Reserve embarked on a brisk hiking cycle beginning in March of 2022 which caused a repricing of market discount rates, this time to the upside. Long-duration, or high growth public equities, have been hit hardest, with the EM Cloud Index down nearly 60% over the past 12 months. All this to say, there has been pain and elevated uncertainty this past year. Rate sensitive sectors such as housing are feeling the effects of higher rates, but until recently the financial market reset hadn’t significantly impacted the real economy. Unemployment remains low and consumer spending has not yet rolled over. The exception to this has been technology. Throughout 2020 and 2021, technology companies hired and invested profusely, sometimes profligately. With capital so freely available, the incentive was to grow at all costs, with near certainty the market would continue to fund losses so long as growth persisted. Today, these same firms are facing real headwinds. For private companies there is no longer certainty VCs or non-traditional investors will fund you when you next need capital. For public firms, the market is demanding a focus on operational efficiency and earnings. In response to these market dynamics, many public and private technology companies have, among other measures, en masse executed reductions in force. Data from highlights this dynamic.

This new regime presents both challenges and opportunities for early-stage companies. The cost of capital is much higher for early-stage companies today. VCs will continue to fund great teams and ideas, but with a renewed focus on products and services driving immediate time to value propositions for customers. For early-stage founders, exceptional talent across business functions is more available as a result of layoffs and attrition. Broad-based secular trends will continue to drive innovation, and we remain particularly excited about the promise of AI/ML, climate, and fintech driving both positive outcomes in the world and value creation over the next decade. For early-stage founders who stay the course, remaining disciplined with respect to hiring, investing, and raising, they will be well positioned to scale as market conditions improve over the medium to long term.

The Evolution of Venture Markets

Three notable trends are worth highlighting from venture markets over the past year. First, crossover investors played a central role in 2021 venture markets. Hedge funds, sovereign wealth funds, mutual funds, and other ‘tourist investors’ participated in 6,400 venture financings according to Pitchbook, 50% more than in 2020. As market conditions have turned, these firms have started to withdraw from private markets in search of better risk/reward opportunities in the battered public markets. Second, even faced with the realities of the denominator effect, Limited Partners have continued to deploy vast sums of capital with venture managers. LPs committed $142B into over 1,000 funds in 2021, according to Pitchbook, and GPs are on track to raise even more in 2022! A greater share of LP dollars are going to experienced managers in 2022, relative to historical trends, making it even more challenging for emerging managers to raise capital. Dry powder remains high, with Pitchbook estimating cumulative US venture dry powder at $290B as of June 2022, although it is likely much of that capital will be deployed supporting existing portfolio companies through challenging economic conditions ahead instead of making net new investments. Third, a bifurcation continues to take place in early-stage venture. The early-stage vehicles of many prominent early-stage U.S. managers have grown to billions of dollars. A16Z is investing out of a $2.5B vehicle, Founders Fund out of a $1.9B fund, and Lightspeed from a $2B fund. These examples illustrate the broader trend. The size of these funds forces investors at these firms to write big checks, $20M+, into a specific type of company, one with an obvious shot at a $10B outcome. On the other side of the market, there are innumerable vehicles targeted at writing the first check into companies at the pre-seed and seed stages, but with limited ability to lead rounds of $3-5M. This leaves many companies, especially those in the Rocky Mountains, without an obvious capital partner between the pre-seed or seed and a growth round. We believe NFC is well positioned to fill this inefficiency, able to lead rounds between $3-10M, partnering with Rocky Mountain companies which are post pre-seed but pre-growth and not an obvious fit for a massive capital raise from a coastal firm.

What’s Next?

The Rockies continue to attract exceptionally talented people looking to build businesses of impact, utility, and value with a global reach. Our current portfolio is a testament to this fact, and twelve portfolio companies joined us at our Annual Meeting to highlight that to LPs. Jason Denner of Optera Climate joined us to share the exciting work the firm is doing to help multinational companies, especially those with complex supply chains, account for emissions and set science-based targets for reduction. Jeff Gibson of MonetizeNow covered how he is building a world class integrated quoting, billing, and usage-pricing platform for modern SaaS companies. Pete Roos of Bozeman based Bridger Photonics shared how his firm is using LiDAR to help global oil & gas operators detect and measure methane leakage across their infrastructure. Grin Lord, founder and CEO of mpathic, inspired LPs with her vision to bring empathy to the enterprise. These are just a few of the examples of Rocky Mountain companies and entrepreneurs NFC has partnered with to build businesses of global impact right here in the Rockies. To date, we have invested $100M in 49 companies across our first three funds. These firms are driving employment creation, wage growth, and business outcomes in the Mountain West, fundamentally changing the opportunities available to people in this region. We continue to be a proud partner to these businesses and entrepreneurs, and believe the Rocky Mountains are well positioned to be an engine of innovation for the world over the coming decades.

Funding Innovation Across the Intermountain West

Over the past year, NFC team has continued to grow, with Scott Holton joining as Chief Financial Officer and Franz Kofler as a Senior Associate.

The NFC team now has established offices in Boulder, CO, Salt Lake City, Utah, and Missoula, MT.

We maintain a robust confidence in the Intermountain West as a incredible place to live, work, and invest. We believe that great companies and innovations can be found anywhere and are proud to have catalyzed company formation, enterprise value creation, and job and income growth across the Rocky Mountain region.

The NFC Team

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