Last year, venture capitalists went on a spending spree, funneling a dizzying amount of capital into startups with ambitious growth plans and large total addressable markets.
But just a year later, investors are expressing a new tone: hesitancy.
A sharp decline in public tech stock valuations and rising interest rates brought on by inflation are changing the dynamic between founders and investors.
No longer does the growth curve graph on the third slide of a pitch deck result in funding, said Annie Kadavy, managing director at Redpoint.
“It’s like, ‘Show us what’s your payback period? What’s your unit level profitability? What’s your sales cycle?’ ” she said, speaking at the GeekWire Summit Thursday. “There’s just a different level of focus on the operating efficiency or metrics of a business.”
The result is a steep decline in total VC spending. During the period ended Sept. 30, there were an estimated 4,074 deals, accounting for a total of $43 billion in startup investments, according to a preview of the PitchBook-NVCA Venture Monitor report, released Thursday. That’s a nine-quarter low, down from nearly $83 billion deployed across 3,518 deals the same period last year.
To understand the effects that come with these shifts, a trio of VCs gathered to share their analyses at the GeekWire Summit in Seattle. The panel included Tina Hoang-To, founding partner at Seattle-based Kin Ventures; Chris DeVore, founding managing partner at Seattle firm Founders’ Co-op, and Kadavy. The discussion was moderated by Amy Bohutinsky, venture partner at TCV and former Zillow Group chief operating officer.
Read on for more highlights of the discussion.
- For early-stage startups, the slowdown in VC activity can provide more time to focus on fundamentals, DeVore said. When money is not being invested at such a fast pace, theres less competitive pressures for founders, meaning they have more time to identify a potential problem to solve and customer base to serve. “When everybody’s getting funded in parallel,” he explained, “you don’t have that luxury.”
- Hoang-To said that entrepreneurs are experiencing less pressure. Reflecting on a recent conversation, she said a founder told her that they ended up being grateful for having a valuation lower than expected because it meant they were less likely to have a dreaded down round in the future. “It’s been interesting to see how founders have been reacting to this environment,” she said. “Folks are more like, ‘Okay, now, we’re operating in a normal pace, normal expectations for what I can do with my business.’” She added: “Maybe that’s a good thing for the ecosystem.”
- However, early-stage capital has not changed very much. The slowdown in VC activity is mostly occurring with growth stage companies, such as Series B and Series C investors, which might have valuations that are disjointed from their actual progress, according to Kadavy. She added the current environment is ripe for starting a company because there will be less competition and more of an ability to attract employees.
- Hoang-To said that companies built during periods of shaky economic conditions tend to fare better in the long haul. She said some of her best performing investments occurred in 2008 to 2011, which was in the aftermath of the financial crisis.
- Asked about the types of startups they are looking to fund, DeVore said that 80-to-90% of the economy is still run on pen, paper and Excel, creating a large opportunity for disruption in enterprise software. The other panelists agreed, highlighting the fact that they all invested in Logixboard, a Seattle startup that builds software for freight-forwarding companies. “It sounds boring,” DeVore said. “But so much of the economy’s hasn’t yet embraced software as the operating system of their business. And COVID poked everyone in the eye and said, ‘Hey, pay attention, you have to do this.’ So that created tons of opportunity for the stuff that we love as investors.”
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