Death begets new life
Layoffs, VC climate and recessions -> new companies being formed
I’m not talking about Easter - I’m talking about what I’m seeing economically in the startup ecosystem.
I was at a venture event this past week, and the collision of market forces is like nothing I’ve seen before.
The contraction in dealflow - in even the pitches VCs will hear right now - is draconian.
Here’s what I think is going on:
VCs are lemmings, and they’re also very afraid of being wrong. Right now, they feel super out of depth with the major shifts taking place related to AI, so whereas before they’d talk to most interesting startups, but especially those in their theses, now they are often only taking calls with startups related to extremely narrow theses.
They’re also getting cagey - or dare I say, almost Midwestern - about revenue metrics. VCs are asking for revenue so early that asking for it automatically rules out an investment. They’re essentially setting unrealistic pre-seed metrics that cross normal startups off their list for them.
Bigger funds want sure bets (see one and two), and the smaller funds want to make somewhat riskier bets, but they’re running out of dry powder. Their LPs are skittish because they’re seeing recession signs.
This means that I’m having to get really, really creative to help my startups get funded. We’re looking at:
Family office networks (if you know any, please send them to me)
Angels and angel syndicates (if you have ones you like, please send them to me)
Venture debt (if you have had good/bad experiences with this, please let me know)
Bootstrapping revenue farther
Foreign investors
PE
Donor advisers
UHNWI investment banks
It’s hard, genuinely hard. So if you’re a founder right now, please don’t feel bad.
However, this issue is on a crash course with two other trends I just wrote about - a recession, and layoffs.
At the same time that venture funding is drying up, and many startups will either find alternative funding or fail, we have two major, precipitous forces that are going to create an explosion in new startups being created. When people get laid off during a recession, guess what they do? If they can’t find work, they start their own business.
So if you’re a large venture fund - get ready, be more confident, and start building broader theses. If you’re a small venture fund, tell your LPs that this is a market moment they won’t want to miss. And if you’re a startup - or about to be - be prepared to search in unexpected places for financing. You may end up retaining more equity than you think.