Amid plummeting stocks and political uncertainty, VCs urge their portfolios to prepare for winter | TechCrunch (2024)

The warning signs are flashing faster and more furiously now, and investors are increasingly urging their startups to take notice.

With the Dow Jones Industrial Average enduring a Christmas Eve rout of historic proportions, and other indices entering bear market territory, the long-predicted end of the latest bull market is upon the technology industry.

Stock markets suffer their worst Christmas Eve trading day

While tech companies managed to escape the worst parts of the great recession in 2008, increasing regulatory scrutiny coupled with a broader set of economic risk factors (including a trade war with China, flagging domestic industrial spending and — perhaps most worrying — the $9 trillion in debt sitting on corporate balance sheets) may offset projected growth in information technology outlays from companies to create a scenario where the roaring teens of the tech industry’s millennial years head into the terrible twenties of the new century.

That means venture capital investors are once again breaking out the RIP Good Timesslide deck from Sequoia Capital and cautioning their portfolio companies about what comes next.

“In the course of preparing plans for 2019, most of our mature companies have internalized the risk for a downturn, but I think it’s hard to really model what the impact will be,” wrote Founder Collective managing partner David Frankel in an email. “You could imagine a slowdown in capital markets due to a rise in interest rates, that might hurt some companies that are overly dependent on VC, but leave the strong companies largely unscathed. It’s also easy to imagine a more systemic correction that decimates the verticals that were (& this will be easy with hindsight of course) ‘vitamins’ not painkillers.”

For some startups that means making hay while the sun shines and raising more capital now. As Joshua Hoffman, the chief executive of synthetic biology startup Zymergen, explained toBloomberg when discussing his recent $400 million round led by SoftBank Vision Fund, “We wanted to have some fat on our bones for sure… The time to raise money is when people are giving it to you.” (Even if that money is tied to the dismemberment-and-beheading-happy Saudi Arabian government.)

Amid plummeting stocks and political uncertainty, VCs urge their portfolios to prepare for winter | TechCrunch (1)

For some, the times look very similar to the early 2000s, when the dot-com bubble burst. In 2000, venture investors put around $99 billion into venture-backed startups. Eighteen years later that number is roughly $96 billion.

In the first year of the new millennium, a Japanese firm called SoftBank had established a worldwide network of funds to invest hundreds of millions of dollars into startup companies that were going to revolutionize the technology industry. Now, SoftBank is once again the firm throwing millions (hundreds of millions) against the proverbial wall in hopes that billions will come bouncing back.

Recapping a year of highs and lows for SoftBank

Venture firms are expected to raise around $45 billion this year, while back in 2000 funds were sitting on about $80 billion in capital, according to a 2005 study from University of Western Ontario professor Milford Green.

There are important differences between the early part of the millennium and today’s technology and venture capital markets. Business models for technology companies are far more mature (Apple, Amazon, Alphabet, Facebook and Microsoft are among the world’s most valuable companies) and the replacement of “eyeballs” with ad dollars can’t be overstated as an engine for economic growth and value.

At the same time, the fact that an entire generation of entrepreneurs have not experienced an economic down cycle is a sign of concern for some investors.

“There’s a large cohort of founders who haven’t seen a down economy and that’s a risk to the ecosystem,” Frankel writes. “Many founders believe that in a weak economy, that they might have to accept a down round, but few have grappled with the reality that capital markets don’t soften, they seize and capital just can’t be had, at almost any price, for months or more.”

So investors like Lux Capital’s Bilal Zuberi has begun advising portfolio companies to start preparing for times they’ve never seen. Winter… is indeed coming.

In a direct message Zuberi wrote:

Yes, for all obvious reasons we do believe startups should be thinking hard about their capital needs going into 2019 and beyond, and how to not get caught in a firestorm. (a) the amount of money flowing in SV startups has meant startup teams and investors are not used to being frugal. Consider this, many junior partners at VC firms have never seen an economic downturn — and they are sitting on Boards of startups spending tons of money, (b) raising money sooner than later, but not increasing burn is a prudent thing to do for companies that have access to more capital, (c) when downturn hits there will be special situations opportunities to invest in good companies but at lower valuations. All VC firms know…But I wouldn’t want any of my companies to become a ‘special situation’. So fighting hard now to reach escape velocity is also prudent. And (d) you are seeing VC firms bulk up their own funds, raise debt funds, and so on…this should be a signal to startups that where capital flows from upstream is starting to worry. Smart founders should take that as a signal, and prepare accordingly.

For Zuberi, preparation means a few things. Founders need to think about their financing plans beyond the next 12 to 18 months, and raise capital only if that cost of capital is low. Preparation also means keeping tabs on burn rates and financials in general, and begin planning on how to move aggressively should competitors start becoming “special situations” that investors may look to offload.

Of course, there’s still the possibility that all of this worrying will be for nothing. Bill Gurley warned about a culling of the unicorn herdin 2015, and there have been rumblings about a startup crash since the Brexit vote went through.

The Dot Com bust and suprime crises felt like big, surprising (at the time) shocks. Now I feel like everyone's standing around with their emergency preparedness bags, pointing at the oncoming recession and it's just not happening. Very strange feeling.

— Micah Rosenbloom (@micahjay1) December 7, 2018

At this point though, the parallels are beginning to look more than eerie, and it may behoove founders to take the warnings as more than just another instance of investors crying wolf — if only because it seems that the wolf is indeed at the door.

Amid plummeting stocks and political uncertainty, VCs urge their portfolios to prepare for winter | TechCrunch (2024)

FAQs

Who owns venture capital? ›

VC firms typically control a pool of funds collected from wealthy individuals, insurance companies, pension funds, and other institutional investors. Although all of the partners have partial ownership of the fund, the VC firm decides how the monies will be invested.

How is venture capital doing? ›

Dropping to its lowest level in four years, the 2023 VC market saw a 35% year-over-year decrease from the declining VC investment levels of 2022. Overhang of more than 50,000 existing VC-backed startups continues to impact the investing landscape, which needs to sort out high valuations and low liquidity.

Will all companies have venture capital? ›

No, it is not necessary for all startups to receive funding from venture capitalists (VCs). While venture capital can be a significant source of funding for many startups, there are alternative ways for startups to obtain seed funding.

Where does VC money come from? ›

The capital in VC comes from affluent individuals, pension funds, endowments, insurance companies, and other entities that are willing to take higher risks for potentially higher rewards. This form of financing is distinct from traditional bank loans or public markets, focusing instead on long-term growth potential.

How risky are venture capital funds? ›

Venture capital is a high-risk, high-reward type of investment, and there is no guarantee of success. While VC firms aim to identify the best opportunities and minimize risk, investing in startups and early-stage companies is inherently risky, and there is always the potential for loss of capital.

Is venture capital drying up? ›

Late-Stage Deal Activity Continues to Decline

For all 2023, $80.4 billion was invested in 4,305 deals, which was down from the $94 billion invested in 4,687 deals in 2022. The lack of progress, exit activity and high interest rates created problems both for investors and founders of late-stage VC-backed companies.

Is VC funding slowing down? ›

The slow final quarter put 2023 on record as the lowest total for venture funding since 2018, Crunchbase said. Specifically, global startup investment in 2023 reached just $285 billion, marking a 38% decline year over year, down from the $462 billion invested in 2022.

Does JP Morgan do venture capital? ›

Invest side-by-side with experienced global institutional investors though direct investment in next generation companies and coinvestment opportunities in real estate, venture capital and other private investments from top fund sponsors.

Who founded venture capital? ›

Georges Doriot, the "father of venture capitalism", along with Ralph Flanders and Karl Compton (former president of MIT) founded ARDC in 1946 to encourage private-sector investment in businesses run by soldiers returning from World War II.

Does JP Morgan have venture capital? ›

With decades of global experience, a robust professional and venture capital network, and scalable money-management solutions, we're the only bank you'll ever need.

Are Shark Tank venture capitalists? ›

The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.

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