- After the first summer slowdown in two years, venture capitalists are ramping up again.
- Investors are returning from Labor Day ready to fund startups at bargain prices.
- Still, many investors doubt that the fundraising market will return to pandemic highs any time soon.
It was a chillier summer than most — for startups, that is.
After two years of pandemic lockdowns and a bustling stock market that made it easy to write checks freely, the venture capitalists who invest in fledgling businesses took a breather this summer. They pulled back on spending, and the once-nosebleed valuations that startups enjoyed disappeared almost overnight.
Now, even as the economy teeters on the brink of a global recession, there’s a growing sense among VCs that the funding slowdown is coming to a close and investors are itching to get back to dealmaking with the hottest startups on the block. They expect the pace to pick up this fall, though a return to the pandemic’s funding heyday will likely take much longer.
“The market was largely frozen this summer, but in the last few weeks we’ve seen it thaw,” Mark Goldberg, a partner at Index Ventures who invests in startups across stages, said.
Brad Svrluga, a prominent seed-stage investor at Primary, which has stakes in Alloy and K Health, said he worried when a couple of portfolio companies went out to raise new funds in the past 30 days. To his surprise, those deals are now closing with “very favorable” terms.
“Good companies are still getting the attention of good investors,” Svrluga said.
One startup from Y Combinator’s latest batch is said to be raising $2 million at a valuation of $75 million, a sign of increasing investor appetite, Semil Shah, who invests in early-stage startups as a partner at Lightspeed Venture Partners and through his own fund, Haystack, said.
‘Open for business’
Traditionally, the venture industry enters a state of hibernation in the summer, with investors jet-setting and turning on out-of-office messages. But investors told Insider that as the tech industry exploded during pandemic lockdowns, many venture firms continued to chase startups.
“Travel was curtailed by COVID and most people just kept plowing through,” Svrluga said.
But the frenzy finally fizzled out this summer, Svrluga and a half dozen other investors said. Funding for startups fell sharply in the quarter ending in June — the most recent quarter with available data — with PitchBook data showing investments down by as much as 23% year over year.
Outside of the pandemic, the pace of dealmaking typically increases as kids go back to school and the dust clears at Burning Man, a desert festival where artists and tech bros mingle. After an especially slow summer, some investors are eager to get back to writing checks.
“We’re open for business,” Mike Ghaffary, a general partner at Canvas Ventures who invests in early-stage startups, said. He said his firm continued to invest through the downturn, but it spies an even bigger opportunity in the aftermath.
He’s seeing startups raise Series A and Series B rounds at valuations that are 30% to 40% lower than what similar companies sought last year. That means his firm can make more investments, because companies are pricing their shares for less.
Even with investors at the ready, fewer founders are bringing deals to market, several venture capitalists Insider interviewed said.
Many startups cut costs during downturns and now have money in the bank that allows them to hold off on fundraising until market conditions improve, Ghaffary said. He sits on the boards of six startups, and he said four of them have 24 months of runway.
“They might not like the valuation they’d get if they did it right now,” Ghaffary said, speaking generally about startups raising money and not about his portfolio companies.
Spending more cautiously
Many investors are sitting on piles of cash.
In the first half of this year, venture firms raised a staggering $83 billion in new funds — the highest amount over a six-month period for the industry — Sunita Patel, the chief business-development officer at Silicon Valley Bank, said. She noted that some of these firms spent the majority of their time fundraising in 2021.
Even with all that dry powder, “there’s no rush to deploy just because the capital is there,” Patel said. Plenty of investors are waiting to see how the public-market volatility shakes out before dumping funds. They also recognize that their own investors, whom they call limited partners, may not be ready to fund capital calls given that their public-market portfolios are down, Patel said.
Zachary Bratun-Glennon, a partner at Gradient Ventures who focuses on early-stage investments, said the macroeconomic slowdown will continue to be “top of mind for investors throughout the next couple of quarters.”
More than anything, investors want to set “rational expectations” for founders going into the end of this year, even as dealmaking picks up, Svrluga said. Fundraising will take weeks rather than days to close, “so that we can all really get to know each other before we get married,” he said. And the stratospheric valuations that startups earned in 2020 and 2021 have come back to earth, Bratun-Glennon said.
Investors also clarified that while fundraising has largely bounced back for early-stage startups, the recovery will take much longer for the growth-stage market. In the second quarter of this year, growth-stage fundraising fell 31% from the previous quarter, while, according to Crunchbase data, seed-stage fundraising grew 9% over the previous quarter.
Jake Gibson, a partner at Better Tomorrow Ventures who mostly invests in pre-seed and seed-stage startups, said he expects his firm to participate in more follow-on rounds for portfolio companies while access to growth-stage capital is limited. “We have plenty of capital for follow-on rounds to continue to support teams where we think it makes sense,” Gibson said.
For those founders expecting the fundraising market to spring back to its pandemic-era peak this fall — don’t count on it, Goldberg said.
“Founders shouldn’t bank on increasing activity after Labor Day,” he said. “That said, there’s a lot of pent up interest for dealmaking on both sides of the table and I think more companies are looking at fundraising again. The real question will be: At what price will deals come together?”
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