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How Tier 1 venture capital investors can help startups navigate market volatility

By Brad Leufkens and John-Christian Bourque

Upheaval in the U.S. banking industry underscores need for strong investment partners

Recent volatility in U.S. financial markets, and in particular the banking sector, created a domino effect for many venture-backed startups, who suddenly found themselves scrambling for liquidity. This underscores a growing need for startups to have strong investment partners to help them weather unexpected financial challenges.

Tier 1 venture capital (VC) investors, like Teachers' Venture Growth (TVG), provide support that goes far beyond an equity investment. Tier 1 VC partners are characterized by a strong track record of investing in successful startups and by providing valuable guidance and support to their portfolio companies (portcos). Since its inception in 2019, TVG has made equity investments in 26 companies and is a well-capitalized Tier 1 VC investor as part of Ontario Teachers' — a global investor with net assets of C$247.2 billion. TVG has re-invested in our portfolio, having completed follow-on investments for 25% of our companies.

The Evolution of the “top tier”

One of the many benefits of working with a Tier 1 VC investor is access to networks and relationships with debt financiers and law firms with in-depth expertise in the space. Our public equities and credit teams may be able to respond faster during a financial crisis than a traditional VC fund. Thanks to Ontario Teachers’ permanent capital base, TVG may have access to capital during periods of market crisis, while traditional VC’s may be limited by existing reserves and restrictions on callable capital.  

But Tier 1 VC investors are about more than just capital. Along with financial institutions, the TVG investment and operating teams, for instance, connect portcos with business specialists and other founders. TVG is also part of a global organization that is investing across multiple asset classes all over the world. This reach enables founders to tap into a global perspective, as well as expertise and resources when needed. Moreover, TVG actively partners with founders and management teams to provide operational advice and access to resources, ranging from strategic planning to customized counterparty risk assessments and restructuring.

Helping portcos prepare for future market volatility

The current upheaval in the banking sector may foreshadow a paradigm shift in financial markets. Significant headwinds are developing as the result of higher interest rates, geo-political tensions, decoupling of stock and bond performance, and a reset in the capital environment for innovation.

Venture-backed companies in an era of constrained capital will need to ally themselves with strong institutions that have both the balance sheet and the expertise to navigate a changing marketplace. Gone are the halcyon days of unlimited capital during the past decade. In a recessionary climate, hot startups or fast growth tech companies may find their funding options more limited.

Companies seeking venture capital in the near term will need both the financial strength and partner networks offered by active Tier 1 VC investors.

A laser focus on value creation

The ability to respond quickly to changing market conditions is always important for startups. Skill and knowledge become even more important as the economy softens. While the policy response to the banking crisis was swift, the underlying economic weakness points toward a recession on the horizon. An economic downturn in North America would slow the flow of venture capital activity and raise the bar for young companies interested in equity financing.

While reading the financial tea leaves requires subjective analysis, it appears that Tier 1 VC investors are going to play an increasingly important role in a scarce capital environment. Now, more than ever, Tier 1 VC investors will be laser-focused on value creation and nurturing their portcos. That level of commitment bodes well for both long-term investors and startups.

Brad Leufkens is a Managing Director who helps lead the direct investing efforts of Teachers' Venture Growth (TVG) across North America.

John-Christian (J.C.) Bourque leads the Portfolio Development team at Teachers' Venture Growth (TVG).