Remember, R.I.P Good Times, the Sequoia slide deck in 2008 warning its portfolio companies to batten down the hatches and “spend every dollar as if it were your last”? Things aren’t yet quite as dire as the last time the economy tailspinned into recession, but a number of factors are making some startup investors wary. “I think 2012 will look more like 2008 than 2011,” warns First Round Capital’s Josh Kopelman. His pace of investing has not slowed down. He’s just being realistic.
Speaking to other early-stage investors recently, I get the same sense that the froth (dare I say “bubble“?) of the past 18 months is coming to an end. Many VCs (and founders) have been feasting, and now it might be time to take a breather. The number of seed-stage fundings is outpacing series A fundings. And whether you consider this a Series A Crunch or not, many more seed stage companies got funded over the past 18 months than previously and many more will subsequently not continue to get funded when it comes time for a series A.
Many of the top-tier VC firms who have been scrambling to get into as many seed deals as possible, are now being extra cautious and selective. When a big-name VC declines to invest again a second time around that sends a negative signal to the other potential investors and can often kill a deal. I am starting to hear stories of exactly that happening. At the same time, VCs are fighting each other more fiercely than ever to get into the top deals and will pay whatever the price.
Yet, on the larger economic front, things don’t look so rosy. Overall economic growth remains sluggish at (a recently downward-revised) 2 percent last quarter, unemployment remains at a very high 9 percent, and governments around the world (including the U.S.) are in the throes of major debt and deficit crises. Both consumer and enterprise spending on technology is directly tied to the economy.
Kopelman is right. It’s not R.I.P Good Times quite yet, but be prepared to see some bloodletting. The easy money might not be so easy anymore and the economy is still limping along. A shakeout isn’t necessarily a bad thing. It means less competition for those who survive and it forces them to find their business model faster. If you look back at companies that were founded in 2008, they include Airbnb, Groupon, and ngmoco.
Josh Kopelman is a venture capitalist and Managing Partner at First Round Capital. Previously, Kopelman founded Half.com, which was acquired by eBay in 2000. He remained with eBay for three years, running the Half.com business unit and growing eBay’s Media marketplace to almost half a billion dollars in annual sales. In late 2003 Kopelman helped to found TurnTide, an anti-spam company that created the world’s first anti-spam router. TurnTide was acquired by Symantec just six months later. In 2001 Kopelman co-founded the...
First Round Capital is a venture capital firm that primarily makes early round investments. They look to play an active role in the operations of most the companies they invest in.
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