Despite crypto carnage, Florida’s top venture investor sees enticing Miami startup prospects

Florida Funders is immersed in the state’s technology industry more than any other venture capital investor.

Last year, Florida defied nationwide trends, posting a record amount of venture investments and Miami got a big share of that largesse — more than $5 billion, an all-time high and 15% more than in 2021. But economic difficulties abound, and the market is still grappling with the FTX-led fallout of cryptocurrency which hit Miami hard.

Tampa-based Florida Funders has $146 million in assets under management and has heavily invested in South Florida technology startups. It has backed 96 companies mostly in the Sunshine State since raising its first fund in 2017. Focused on early-stage tech startups, its average investment over the past year was between $750,000 and $1 million.

Saxon Baum, who had been vice president of investor relations, is one of three new partners at the firm, which has a Miami office.

The Miami Herald had a conversation with Baum about the company’s investment philosophy, his outlook for Miami’s growing tech sector, and the embattled crypto market, among other things. The interview has been edited for clarity and brevity.

▪ Question: Which sectors have been the focus of Florida Funders’ investments?

▪ Answer: We do a lot of software-as-a-service investing. We invest in the future of work, fintech, artificial intelligence and machine learning. We do a lot in cybersecurity and educational technology, and then digital health, sports and content, and Web3 internet infrastructure.

▪ Q: Has that been true since your original fund?

▪ A: Yes, although I will say we used to be primarily educational tech, digital health, and fintech. So, we’ve added those other categories. And we used to be strictly Series A. Now we’ll go seed through Series A. [A seed round is the first time a startup raises financing and traditionally was when it’s little more than an idea and without customers. In Series A, startups typically have a product and have started to generate revenue.]

A lot of Series As were just crazy expensive, and we like to take a minority share but a fairly big position, and that just wasn’t possible with a $60 million fund investing in Series A deals that are worth $100 million or so.

▪ Q: Do you expect this year to stick with investing in the primary industries you mentioned?

▪ A: Yes, absolutely. We’ll stay in those categories. We’ve done more in future of work. We went pretty heavy in Web3, which is crypto-related. We’ve slowed down a little bit on that. We ‘re trying to do a little bit more in healthcare, and we’re trying to do a little bit more in cybersecurity.

▪ Q: Any there any sectors you plan to focus on more closely?

▪ A: Healthcare is probably the biggest one. There was a big influx of healthcare deals early on when we started Florida Funders. And then I think the market sort of leveled out. We had some companies raising at really high valuations and you started to see that come back down. The other one is sports.

▪ Q: What makes healthcare attractive now?

▪ A: A lot of healthcare systems are adopting technology where they were sort of stuck in their ways before. And now you kind of have the early adopters out of the way, and the masses are starting to adopt technology inside of healthcare.

I also think that a lot of the fluff in terms of the last five years in healthcare has sort of sunk to the bottom, so we are in a better position now.

The healthcare companies we’re seeing are sort of past that initial hump and are now in that first valley of the business life cycle where they’ve already proven there is product fit for the market, there is decent revenue, and they’re getting the adoption they’re looking for.

Entrepreneurs are not trying to tackle the healthcare sector, unless they have a healthcare background. You’ve also seen healthcare systems come up with their own innovation funds and their own investment arms.

▪ Q: What type of founders do you invest in?

▪ A: We love founders who’ve been there, done that before, the second-time and third-time founders who’ve been successful. We love founders that have left a high-paying job to solve a problem that they were seeing every day in the industry. We love that kind of subject matter expert.

Another huge thing that we look for is passion and the ability to recruit a team on a shoestring budget.

▪ Q: What’s been your firm’s interaction with all the new venture investors in Florida?

▪ A: Some of these larger funds — the Softbank and the Founders Fund — when they moved to Florida, they reached out to us and they asked us how can we participate in the Florida ecosystem? Who should we be working with? They didn’t just push us out of the way. So we’ve done deals with Khosla, Founders Fund, and Softbank. I think that’ll continue.

▪ Q: South Florida has defied nationwide trends in venture capital investment, but are you concerned at all about economic headwinds this year affecting the tech scene here?

▪ A: Yes. I think Miami has been negatively affected in Web3. And what’s going to happen is there’s going to be several companies from Miami that are extremely successful, and it might just take a year, it might take two years, it might take three years. But at this point, it’s basically a wait-and-see type game.

From a venture capital standpoint, we’re looking at this market downturn as a massive opportunity where valuations have come down a bit, from 10 to 15%, from the prior several years. And we’re seeing great companies at great valuations.

The other thing that’s interesting is we’re starting to see a lot of companies that are doing very well struggle to raise large rounds, and they don’t want to price their company in an environment like this. So they’re coming back to existing investors, to sort of pass the hat, typically on a convertible note, to bridge them to that next larger round. Maybe that’s in six months or two years, whatever it may be. It’s putting us in a position to get more ownership in companies that we already know.

Over the last year we’ve seen that. Ultimately, I think there’s going to be more opportunity for new investment in venture capital. With that being said, I do think there’s going to be some carnage, and we’re seeing this already.

And we’ve seen this over the past six months with later-stage companies that have raised money at crazy high valuations that don’t have the fundamentals, don’t have a good balance sheet, and don’t have the right financials to sustain that valuation.

The final thing is the mergers and acquisitions market last year was very slow. This year I think it is going to pick up significantly, but the pricing will be more favorable to the buyer, not the seller. Companies are going to be in the position where they’re forced to sell because they can’t raise the money they want to.

▪ Q: Have any of your portfolio companies had layoffs in the past 12 months?

▪ A: We put out a statement at the beginning of 2022 saying you need to be thinking about cutting burn and you need to stop thinking about growth at all cost. So yes, absolutely, just like mostly every company, there have been layoffs. By no means have we seen 50 to 60% of a company laid off, but we’ve definitely seen a trimming of the fat with some companies.

▪ Q: Do you expect that to continue this year?

▪ A: Yes. I expect that to continue.

▪ Q: You don’t think the worst is behind us?

▪ A: I don’t think the worst is behind us in some things. I think the worst from an unpredictability standpoint is behind us. There was so much unpredictability, there were so many variables, and there was so much volatility last year. I think this year we have a few more questions answered.

We know what’s going on in the economy. We know that interest rates are high. I think that having answers just turns the hose back on because then you have firms that are willing to take risks.

▪ Q: What do you make of the fallout in crypto markets?

▪ A: We invest in Web3 next stage internet. We just don’t invest in coin holdings. A lot of these companies in crypto are going to fail. You’re going to get a lot of carnage. That’s probably going to happen to 90% of the companies. But you’re going to see that 10% who can make it through this are going to be some of the most successful companies that come out of this generation of startups.

▪ Q: What are the biggest challenges South Florida faces in the tech ecosystem beyond macroeconomic challenges?

▪ A: I think there’s going to be a challenge in Web3 around trust. I think it’s going to take some time for investors to feel comfortable again in Web3, specifically in Miami because of all the FTX crypto fallout and everything related to that. I think there’s an uphill battle there.

This story was originally published January 29, 2023 at 5:30 AM.