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Veteran venture capital investor Liam Donohue has been in the business for three decades and has seen the boom-and-bust cycles for tech startups come and go.
But raising a new fund for .406 Ventures, the Boston firm he cofounded in 2006, was the toughest yet. “This was by far the most challenging market I’ve seen,” Donohue said in an interview.
That’s saying something, given the downturns he has lived through. The firm announced this month it attracted $265 million for its fifth fund, less than it initially targeted, for investing in early-stage startups mostly in the fields of digital health care, artificial intelligence, and cybersecurity. That’s down from $294 million for its fourth fund, raised in the boom times of 2019, but still the firm’s second-largest yet.
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“We’ve always raised funds in this range,” Donohue, founder and managing partner at .406, said. “It’s the right amount of capital to go after this opportunity.” (The firm is named after Ted Williams’s historic batting average in 1941.)
Even as his team was raising the new fund, other VC firms were calling it quits. Boston-based OpenView Venture Partners, founded the same year as .406 Ventures, laid off half its staff in December. Overall, 38 percent of VC firms that were active in 2022 failed to complete at least two deals last year, according to data from PitchBook.
A few other Boston firms successfully raised money last year, including MassMutual’s second MM Catalyst Fund, which collected $100 million to invest in Black-led and rural startups, and climate tech VC firm Material Impact, which raised $352 million for its third fund.
Donohue’s firm typically leads investments of $4 million to $8 million in early stage startups and then invests additional amounts in the successful ones as they grow. Last year, the firm had two big paydays from its stable of Boston startups. Insurance giant Travelers paid $435 million for Corvus Insurance and IT gear maker Cisco Systems bought cybersecurity firm Oort for an undisclosed sum.
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Nationally, funding for the earliest-stage startups was down 31 percent last year to $11.5 billion, after the boom years of 2021 and 2022, according to Crunchbase. But several of the most active areas for startup seed funding, generative AI and AI-enabled health care, play to .406 Ventures’ strengths.
The firm has been investing in AI-related startups for more than a decade, well before the arrival of ChatGPT ignited a new hype cycle. It was an early investor in Indico, the data-focused AI firm that was a pioneer in generative AI. And the firm recently invested in Mythica, a generative AI startup focused on the video game industry led by Indico cofounder Slater Victoroff.
“Every business plan we see is an AI company,” Donohue said.
At .406 Ventures, the emphasis in AI has been on startups working on infrastructure and developing carefully crafted AI apps that avoid the mistakes and “hallucinations” of some, Donohue said.
So, expect to see some big new opportunities emerge from this field. Generative AI, the technology behind ChatGPT, “is not a fly-by-night technology,” Donohue said. “It’s a fundamental core shift.”
Aaron Pressman can be reached at aaron.pressman@globe.com. Follow him @ampressman.