Growth 🚀 Can Wait; Survival ☠️ Cannot!
We’re in a significant market adjustment with massive implications on startup funding. It feels a little like the Dot.com crash in 2000/01. I was still in investment banking, and we were working on mergers & acquisitions and tech startup IPOs, when the world around me changed dramatically within just a few weeks. But what exactly is happening right now?
What is happening? Venture Capital Hits the Brakes on Startup Funding!
While the number of Venture Capital (VC) deals remained high in Q1 2022, the deal value is down $20bn or 26% from Q4. This data is for the US, but the European market should follow in Q2. At the same time, IPOs of VC-backed companies came to a complete halt after we enjoyed a phenomenal stretch of mega exits. With the path to short-term exits closed, especially late-stage investors will be very careful, and we can assume that this is going to continue for a while.
Source: Q1/2022 PitchBook Venture Monitor
Why is it Happening? Inflation, Interest Rates, Recession.
The inflation rate is rising, causing interest rates to increase, which will slow down growth or even lead to a recession. It is essential to realize that we have experienced an unusually long period of very low interest rates (price for money) which made huge funds available, incl. venture capital. Think of it as an open bar: Free drinks lead to more drinking.
Well, the bar just raised the prices.
David Sacks has posted a nice summary video that puts it all in context. Here is the accompanying deck he shares in the video.
Source: Craft Ventures | Operating in a Downturn
What does that mean for founders? Focus on Cash!
The funding environment will be more demanding. Great companies will always get funding, but good companies might struggle. While there's plenty of cash in the market, investors are careful.
What can you do as a founder expect?
Valuations will drop: Be realistic and optimize for cash, not valuation.
Deals will close slower: Build relationships early and allow for more time.
Risk appetite will slow: Show why your idea matters in times like these.
Time is not your friend: Stretch the runway to survive.
As the economy slows, your customers are likely to review their spending. The sales cycle will get longer, and you need to demonstrate why your product is a must-have. Costs are examined more closely, and renewals or repeat purchases are not a given.
Go back to the fundamentals: Who is buying, what do they buy, and why are they buying.
Dan Rose sums it up quite well.
Startup Funding in Decline: End of the World? Opportunities ahead.
A downturn is also an opportunity for change. For example, Mailchimp started in 2001 in the middle of the dot.com crash. The AirBnB founders got accepted to YCombinators in 2009, and Uber launched the same year.
Following the COVID disruption, many are looking for permanent change, and nothing fosters change better than a good crisis.
Aim your message at a problem relevant in a recession.
Focus your value prop on costs, efficiency, and profitability.
Adjust your tone to the changed situation of your target audience.
Focus on being a business, not being a startup.
If you’re not sure how to address the current climate, ping me or reach out (see below). The Moinland community includes many founders that experienced a crisis or two. They'd love to share their experiences with you!