Dear Investors, Friends of Fitz and other Friends:
This year is off to a solid start for Fitz Gate even as the rest of the world appears to be in turmoil. Over the last few months we, like you, have been keen observers of some big swings in both the public and private markets. Earlier in the year, huge amounts of capital (particularly in the growth equity and later stage VC side of the market) were deployed, almost inexplicably quickly with very little focus on either valuation or diligence for that matter. Giant later stage funds were so eager to have optionality that they were investing in very early stage companies driving up valuations to levels that just didn’t make sense. At Fitz Gate, we’ve been told frequently that even when we don’t lead a round, we do more due diligence than the lead, and we take this as a compliment. The result of this is that we added no new portfolio companies in the last half year because we thought the valuations were too frothy and would make it more difficult for us to model out the 10x+ return to which we need to see a line of sight for every investment we make. The flip side of this is that all of our existing portfolio companies that went out to raise follow-on rounds did so at very healthy premiums and often as the result of receiving multiple unsolicited term sheets (details below and on Carta for our LPs). As this year has progressed, a correction began in the much later stage segment as publicly traded tech companies have seen their valuations whipsaw up and down. This scared and continues to scare many of the later stage VCs (see WSJ Article) and growth equity funds mentioned above and so paradoxically in the last two months we’ve seen a noticeable retrenchment by these same funds out of the early stage so that they can stick to their knitting in the later stage and public markets. As a result, valuations in the early stage are coming down to more reasonable levels. We have not seen this happen to follow-on rounds for our later stage companies thankfully, but it is something we are watching carefully and making sure that our existing portcos have a lot of dry powder to weather any further market turbulence.
