“It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.”
Harry S. Truman
Building on my post on ‘Advice for startups in a downturn (May 2022 edition)‘, this week I continued to follow with interest the impact of the current correction on startups and venture capital, particularly in early stage.
1. Sequoia’s “Adapting to Endure”
Sequoia presented this deck to a group of portfolio founders and it quickly spread online to founders worldwide. The key messages:
- “This is not a time to panic. It is a time to pause and reassess”.
- The recovery will be long and gradual
- It might not translate into your valuation overnight, but over the medium and long-term, disciplined, durable growth is always rewarded and translates into meaningful value appreciation
- Survival of the quickest – make cuts now to extend runway
- Don’t waste a good crisis:
- Recruiting is about to get easier
2. Layoffs and hiring freezes have started
Over 60 tech companies have been reported to conduct over 16,000 layoffs in May, and the list is growing as you can see in https://layoffs.fyi
Big tech (Google, Meta, Microsoft, Amazon, Apple) have implemented a temporary hiring freeze. Snap’s stock plunged 40% last week after Evan Spigel announced the company will miss revenue targets, which raises questions about other ‘advertising powered’ social networks.
We’re just in the beginning and I expect to hear about many more layoffs.
3. How much of the slowdown in venture capital is real vs. ‘doom and gloom’ headlines
According to the State of Private Markets report by Carta it’s clear to see that the biggest impact of the current downturn is on the growth stages (post series A) and that seed remains stable (for now).
There’s a lagging effect in venture capital as rounds get announced several quarters after they’ve been completed and reporting is typically done on a quarterly basis, but as the chart below indicates, the slowdown is already being felt in Q2 2022:
I’ll take the opportunity to share a nugget by Konvoy Ventures on the current impact they’re observing across stages in the next 12 months:
Pre-Seed / Seed: These rounds will be impacted the least and will generally continue to be filled and oversubscribed. Investing at this stage is primarily focused on founders, market tailwinds, and underlying product/strategy (in that order). Additionally, given the valuation entry points, the return upside remains quite substantial regardless of macro conditions. As a result, they are less susceptible to immediate changes in the market environment.
Series A: This is the first stage where demonstrating results will be absolutely critical to capturing investors’ attention over the next 12 months. While “pitching the vision” was often sufficient in 2021, there will be heightened scrutiny on early execution in a less frothy market. A critical consequence of this will be the need for faster feedback loops at the company level that require more bridge rounds to keep companies alive until they can show sufficient results to raise. We may see many VC funds increase their reserves strategies to triage their portfolio through this high-bar Series A environment.
Series B: Since this is generally the round where growth investors will start to enter the picture, the underwriting will be more meticulous in a tightening market. Beyond growth momentum and compelling KPIs, this is where investors will search for true strategic differentiation and a path to profitability.
Gaming’s Investment Climate, Konvoy Ventures
4. Who is actually pulling back from investing?
We’re early into this downturn and the pullback from early stage investors is starting to be felt too. Take look at the data by Crunchbase.
Interestingly, the investors you’d expect to be holding back (SoftBank. Tiger, etc) have been more active in the first five months of 2022 than the equivalent period in 2021.
However General Catalyst, Coatue, Qiming Venture Partners and D1 Capital Partners have siginficatedly slowed down their investments based on disclosed data.
On the same topic, Matt Truck’s ”The great VC pullback of 2022” (published April 28th 2022)
Only two parts of the market have been spared so far:
seed: plenty of financings still happening at the seed level. No real compression on valuations yet. YC is as frothy as ever. Arguably, the seed stage should be the most recession-proof area of venture, because seed companies are 6-10 years away from a meaningful exit, and no one can predict where the market will be then. Also, checks are smaller, especially seen from the perspective of the very large multi-stage firms that have earmarked hundreds of millions of dollars to seed the seed stage.
crypto: the web3 market largely follows its own logic. Many investments are token based, rather than equity based, so to some extent web3 companies a less immediately caught in the propagation logic mentioned above. Also, market traction can be somewhat circular and self-reinforcing in the web3 world, as companies and projects tend to be closely intertwined. Finally, after an explosion of crypto VC funds, there’s arguably a lot more money chasing deals, than truly exciting companies and projects just yet.
It also seems that the pullback is mostly a US phenomenon right now. From all my conversations with European friends, for example, things continue to be frothy over there. My sense is that the current US situation will propagate internationally sooner rather than later.
Matt Truck, Firstmark Capital
5. The bull market is over. What are the implications for venture capital?
Samir Kaji shares more evidence of the slowdown in venture capital investment.
Despite record amounts of dry powder, we anticipate the Q2 numbers to show an even more significant drop as fund managers 1) face more headwinds with existing portfolios to which they must dedicate more time to 2) continue to evaluate quickly changing market conditions to inform investment strategy 3) pull back on the velocity of the $100MM+ rounds we saw in record numbers in 2021 (Tiger has publicly pulled back) and 4) adapt to the reality that raising capital from institutions may become more challenging.
- Pace of VC deals overall has slowed in 2022
- Valuations are lowering and down-rounds are starting to occur
- Innovation will continue to happen and venture capital will find alpha (Amen!)
Bonus: 2022 Axios Harris 100 poll
The 2022 Axios Harris Poll 100 gauges the reputation of the top 100 of the most visible brands in America. It is based on a survey of 33,096 Americans in a nationally representative sample conducted March 11-April 3, 2022.
Check out the 5 least trusted brands in America:
I’m a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google’s first physical hub for startups.
I’m also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we’ve built 11 schools and 50 libraries in the developing world.