19 Term Sheet readers and VC insiders weigh in on the state of venture capital
It’s been approximately three months since tech investors started doling out the dire warnings and cash preservation strategies.
As summer months got sleepy—compared to 2021, that is—interest rates have climbed further and supply chain issues have persisted. Meanwhile, tech valuations have begun to come down and the amount of cash being dished out to startups has been shrinking, even if it’s still high.
How is all this going to play out? How bad could a downturn get? I asked Term Sheet readers what they’re seeing out there and what they’re predicting for the rest of this year.
Here’s what you had to say:
“While a big bite has been taken out of valuations, and investors have clearly slowed investment in new companies. It’s hard to tell if the worst is over yet, because there are so many significant variables that may change the equation dramatically. We’ll need to see what happens with inflation, the war in Ukraine, China, the midterms, before we can know more definitively,” Yuval Brisker, co-founder and CEO, Alviere
“Deals have significantly slowed down… I have a bunch of pre/seed that could raise a Series A in 2021 but now are doing bridge/small uprounds in 2022. A few Series A VCs have told my seed investments they want to see unit economic profitable (opex still unprofitable) which is crazy,” Trace Cohen, angel investor
“During 2020-2021, VCs were investing in companies based on whether or not they believed another firm would invest in the same company at a higher valuation later—partly driven by public market comps. Now, VCs have returned to investing in companies they think will become more valuable due to the actual fundamentals of the business, rather than investing where they believe the market is most likely to price future rounds. In short, over the last two years, VCs were underwriting to future capital markets. Now, they are underwriting to future company performance,” Ali Hamed, general partner, Crossbeam Venture Partners
“There has been an obvious market shift from pure growth focus to the balance of growth and profitability, and for us at Invoca, the latter has been more of our focus all along… We’re seeing investors have a critical eye on verified business fundamentals and long-term market potential while returning to companies that are strong, steady, and proven,” Gregg Johnson, CEO, Invoca
“Certain B2B-focused tech sectors will manage to outperform an otherwise gloomy economic outlook that will keep spiraling downward due to collapsing equity prices and persistently high interest rates. Cybersecurity will be a bright spot for the tech sector; enterprises have no choice but to keep hardening their defenses from increasingly sophisticated–and active–bad actors. Enterprise tech, especially in the areas of data, fintech, developer tools, and infrastructure, will also defy the economic headwinds as companies prioritize tools and resources that increase efficiencies amid tightening budgets and still tighter IT talent pools. Meanwhile, the crypto markets, after a year of roller coaster activity, will stabilize and resume growth by early 2023,” Gene Frantz, general partner, CapitalG
“This downturn is a unique one, and I don’t think we’ve hit bottom yet. The structural factors (inflation, energy crisis, supply chain crisis, war in Europe, China’s slowdown, etc.) seem too great, and some will last for a while. Multiples have compressed; now revenues and earnings will as well. Venture funding will continue to slow and likely won’t pick up meaningfully until we’re past the bottom. I expect that private valuations will generally track public ones with a 3-6 month delay. But crisis brings opportunity, and major downturns break the status quo and give rise to many industry-changing companies. So for founders considering starting new companies, it is a fertile moment for big ideas,” Nick Beim, partner, Venrock
“Though many LPs think the current environment is throwing up interesting investment opportunities, they are having difficulty making room for them. A significant number of LPs we have been talking to are maxed out on making new commitments for the rest of the year except for high-conviction re-ups or high-conviction new commitments to GPs they have been following for a long time,” Kelly DePonte, managing director, Probitas Partners
“We think there is a strong chance of an extended slowdown in the housing market, with up to 50% reduction in transaction volume across certain geographies. This slowdown will have a ripple effect both on technology businesses that are tethered to real estate transaction volume, which will have to evolve their business models to survive, and on home price appreciation, which will take a big hit,” Gregor Watson, co-founder, 1Sharpe Capital
“These lofty valuations were always going to come back to earth. It was inevitable. And for companies at the extreme end of the spectrum, this reversion to the mean is very painful indeed. There is no possible way for some of them to ever justify the valuations they commanded in the private markets, and in some cases carried into the public markets. This is also true for earlier-stage companies. When you raise money at a historically high valuation relative to revenue, you run the very real risk of running out of money before you can even ‘grow into’ your last-round valuation… The big splashy fundraises are going to become increasingly rare, which means founders spend less time competing on hype and more time competing on what they are actually delivering. A tightening of the fundraising climate is a ‘great equalizer’ in startup land and the best builders thrive when business fundamentals become more of a focus. In fact, it is much harder to rightsize a large company, and this creates even more opportunities for nimble startups with reasonable expectations to sprint ahead. Finally, valuations will hold much less ‘signaling’ power over the next couple of years. The previous two years created an environment where the company that raised money at the highest valuation was often anointed the ‘winner.’ Many of them are now facing significant backlash and scrutiny. This means those good companies that simply ‘need more time’ don’t need to navigate the valuation hamster wheel or face death,” Chris Gardner, general partner, Underscore VC
“The pandemic was both a great and terrible thing for fintech entrepreneurs. What was great was the massive shift towards digital solutions and fintech innovation overall. The acceleration of change was incredible, creating many new opportunities. The downside was it made things almost too easy, which caused so many companies in fintech to see incredible growth that was just not sustainable. We see that correction occur, but don’t forget the long-term shifts that occurred, many of which will not go away. Valuations may be shifting for startups, but wise entrepreneurs are staying focused on solving customer problems and creating lasting value for the people they are trying to serve,” Devin Miller, co-founder, Securesave
“My belief is that the market is going to quickly go back to being overheated in certain pockets. Capital is going to flow aggressively into fewer opportunities that seem more de-risked because the founders are ‘proven’ or because of significant traction. Valuations may not look like 2021 but maybe like 2018. In that year, the median valuation wasn’t so crazy, but that was also when SoftBank poured billions into WeWork. Anecdotally, I’m surprised that many investors have not marked down their portfolios to reflect market realities. This will drive some perverse incentives in the market as VCs look to protect inflated valuations by being willing to accept more structure in mid/late-stage deals for preserving a high headline valuation. Founders should beware of this new misalignment,” Rob Go, co-founder and partner, NextView Ventures
“You have the same chance today to raise this round as you did six months ago if you’ve got an exciting idea with some compelling founders. If you have a differentiated value proposition, you should still be able to raise. It may take longer or be harder, but it’s still doable. If you don’t, it will be very very difficult. The current macro environment is causing the most pain at the Series B and beyond. But the exit environment that matters to a fund like ours, which is investing very early, is more than seven years in the future. Price compression in the short term, which is just trickling down to the early stages of the venture market, is, if anything, a tailwind,” Rex Salisbury, solo GP and founding partner, Cambrian
“The fact that deal velocity is slowing and fundraising amounts are coming back to Earth after a frothy few years is a net positive for founders. VCs are now spending more time doing due diligence—talking to founders and studying markets. So we can expect that future funding won’t primarily go to strong fundraisers with flashy stories. Now, overlooked founders in less sexy markets who have substantive data on why they’re winning and how their businesses can scale will be better off than they were over the past couple years of abundant capital,” Jonathan Lehr, co-founder and general partner, Work-Bench
“I don’t see the asset class permanently shocked. We need to work through 2 to 4 quarter more of adjusting operating models and valuation expectations, but I think most of the hard work and pain will be complete by next summer—possibly much sooner. The biggest unknown, which could threaten that prediction is if inflation remains stubbornly high and the consumer-driven economy shrinks meaningfully in the near-term. Strong jobs numbers suggest this isn’t super likely, but we just don’t know how things will look come holiday season and if there are a series of additional layoffs to protect corporate profitability,” Dan Rosen, general partner, Commerce Ventures
“Global venture funding slowed by more than 25% for the second quarter of 2022 compared to the same period last year, based on an analysis of Crunchbase data. And since then it has trended down even further. I think this leads to a more rational market, where startups cannot assume high valuations and therefore need to assess where to focus their efforts to grow,” Gené Teare, senior data editor, Crunchbase News
“As investors, we’ve shifted our focus to companies with better unit economics and lower burn rates, even if that comes at the expense of higher growth. Investors now value the quality of revenue growth in a way that they didn’t just a few quarters ago. The focus on efficiency of growth also typically extends runway and thus buys more time for the market to settle into a new equilibrium around valuations. Downturns offer the opportunity—even if painful—to become much stronger in the long run… Our internal analysis suggests that it could be several more quarters until we reach the bottom of this downturn, and that it could take several more years until we return to the highs of 2021. We also found that venture valuations closely track public market valuations, and that they typically adjust within one to two quarters. To predict when venture valuations will have bottomed out, one need look no further than the Nasdaq Composite index as a leading indicator,” Don Butler, managing director, Thomvest Ventures
“We’re going to keep seeing fintech companies cutting marketing spend to reduce their burn rate. Instead, they’ll pivot to focus on customer conversion—so instead of attracting new customers, convincing the ones they’ve already attracted to sign up for their product. Fraud is going to be a big factor in fintechs’ ability to convert ‘good’ customers, and fintechs have to make sure their identity verification solutions are safe and seamless so that customers aren’t turned off by the process of getting verified,” Laura Spiekerman, co-founder and Chief Revenue Officer, Alloy
“I work for an equipment leasing company that specializes in leasing equipment to venture backed startups… With that said, this economic downturn has actually played out in our favor. With groups like Y Combinator telling their portfolio companies to preserve cash as best they can, the door has opened for lots of conversations that we normally weren’t having because of startups being flush with cash. There will definitely be winners and losers of this downturn and I think it will flush out the real winners. Who can brace for the storm, survive the storm, and come out better because of it? I think it will be those that have strong management teams, great products, addressable markets where the company can actually solve a true problem, and those that are willing to think outside the box to survive. That part seems fairly obvious but, at least for the time being, startups without these things are going to sputter out and fail. I was at Venture Summit West a few weeks ago and that seemed to be the sentiment from the VC panelists and VC judges,” Jess Hawthorne, sales representative, CSC Leasing Company
“What we’re seeing in the new environment is very favorable for investors, founders and the field. Bad ideas aren’t getting funded as readily. Good ideas that got funded are coming back for ‘A extension’ rounds, or mild up rounds. And the ugly ideas will be shutting down over the next 12 months as there’s a flight to quality. The valuation compression in the public markets is an over-reaction in our view—[especially] in digital health—and we think it will return to normal levels by 2024,” Shahram Seyedin-Noor, founder and general partner, Civilization Ventures
Thanks for reading. See you tomorrow,
Jackson Fordyce curated the deals section of today’s newsletter.
- Vilya, a Seattle-based disease biotechnology developer, raised $50 million in Series A funding led by ARCH Venture Partners and other angels.
- StarTree, a Mountain View, Calif.-based analytics platform, raised $47 million in Series B funding. GGV Capital led the round and was joined by investors including Sapphire Ventures, Bain Capital Ventures, and CRV.
- Theranica, a Montclair, N.J.-based migraine-focused digital therapeutics company, raised $45 million in Series C funding. New Rhein Healthcare Investors led the round and was joined by investors including aMoon, Lightspeed Venture Partners, LionBird, Takoa Invest, and Corundum Open Innovation.
- Astro, formerly Austin Software, an Austin-based management platform for development teams in Latin America, raised $13 million in Series A funding. Greycroft led the round and was joined by investors including Obvious Ventures and others.
- Atomic, a Wellington, New Zealand-based customer experience messaging platform, raised $4.5 million in Series A funding. Movac led the round and was joined by investors including Rod Drury, K1W1, Hoku, and other angels.
- Bain Capital agreed to acquire the scientific instruments business of Olympus Corp, a Tokyo-based medical devices company for $3.1 billion.
- Ed’s Supply, backed by Gryphon Investors, acquired Controlled Temp Supply, an Oxford, Miss.-based HVAC/R equipment, parts, supplies, and customer service provider. Financial terms were not disclosed.
- Environmental Systems Group, backed by Bernhard, acquired BEM Systems, a Chatham, N.J.-based environmental engineering firm. Financial terms were not disclosed.
- Revelstoke Capital Partners acquired Monte Nido, a Miami-based eating disorder treatment provider, from Levine Leichtman Capital Partners. Financial terms were not disclosed.
- Kinside acquired LegUp, a Seattle-based universal child care enrollment system. Financial terms were not disclosed.
- Sony agreed to acquire Savage Game Studios, a Berlin and Helsinki-based mobile game developer. Financial terms were not disclosed.
FUNDS + FUNDS OF FUNDS
- Medical Excellence Capital, a Nissequogue, N.Y.-based venture capital firm, raised $145 million for a fund focused on investments in cell therapy, gene therapy, AI/ML applied to drug discovery, synthetic biology, and regenerative medicine.
- Bessemer Venture Partners, a San Francisco-based venture capital firm, promoted Janelle Teng to vice president.
- Y Combinator, a Mountain View, Calif.-based accelerator program and venture fund, named Garry Tan as its next president and CEO. Tan is the founder of Initialized Capital and a former YC partner.