R.I.P. Frothy Times, A Return To Normalcy

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Whatever it is, it is palpable. A sort of buzz in the Valley that all is not well, and a slight nervousness among entrepreneurs, investors and startup employees as they flit about their day-to-day. We may not be in the middle of an outright private market collapse, but there will definitely be fewer tigers and monkeys at this year’s holiday parties.

The fingernail biting is not just caused by the Series A crunch, which has been happening for a year, although that is definitely a part of it (“20 percent of companies that have gotten a seed round in the last year will be able to raise a Series A,” Sarah Lacy wrote on Wednesday, aptly comparing the current jostle for venture money to a game of musical chairs).

What’s happening is more like a Series A, B, C and D Crunch. As Dow Jones reported last week, VC consumer investment spend is down 42 percent in the first three quarters of this year versus last year. And while much of that 2011 capital was put into outlying behemoths like Groupon, Twitter and Facebook, we’re hearing whispers that some top VC firms are indeed slowing down on their number of investments in the past 3-4 months. This is happening across all tiers, with emphasis on A and late-stage, and even sectors, with consumer web obviously taking the biggest hit.

More notably, valuations are also down among deals that can get the meeting, and in those meetings investors are increasingly asking “What’s the business model?”

The slowness is caused by confluence of factors; namely the macroeconomic climate, poorly performing tech IPOs, uncertainty about mobile, a relative freeze on major social acquisitions from Google and yes, a shitload of seed funded companies going nowhere.

The chill is so pervasive and vague that investor Fred Wilson felt compelled to title his post this past weekend, vaguely enough, “What Has Changed,” because it’s sort of hard to pinpoint what exactly has changed other than to say winter is literally coming.

“We are seeing fundraising challenges everywhere, even in our very best portfolio companies,” wrote Wilson, most likely referring to his portfolio company Foursquare, which would like to raise at a $700 million valuation despite VC pressure to raise at a more rational $200 million to $300 million.

Another recent indicator of market contraction is SVAngel’s exit from Y Combinator’s Start Fund, which has adjusted to these more modest times by renaming itself YC VC and contracting itself, doling out smaller amounts of actual capital and providing more human capital. The fund will now plunk down $80K per startup (versus $150K) and require its VC participants to provide mentorship through office hours.

Foursquare has become sort of the canary in the coal mine of whether or not 2013 will be “RIP Good Times” or just a return to normalcy for the Valley. People have got the popcorn out watching not that Silicon Valley reality TV show but whether or not the company will complete funding above its last valuation and whether this upcoming YC batch will be smaller — both in terms of valuations and actual size. The impending fate of a couple of mobile companies with meteoric rises are also serving as a litmus; Path, Viddy and Highlight are a few that come to mind.

The smarter investors I spoke to viewed the thinning of the herd as something positive and held that the slump was just the ecosystem’s homeostatic way of separating the startup wheat from the chaff. And many viewed the return to normalcy as healthy; a way to manage expectations for future tech IPOs and seed companies that are more feature than actual business. As a collective, VCs enjoy being bearish — at least when it’s not about their own portfolios.

An end to all the froth might be just what the doctor ordered. Perhaps a less receptive Q1 2013 means we’ll get back to angel investors who actually add legitimate, objectively measurable value — not just people who want to put “angel investor” in their Twitter bio. Or, in what will inevitably be an investors’ market, founders who are gritty, determined, weird, exceptional visionaries and not just MBAs waiting out a job crisis?

Because the consensus still is that in boom or bust times, good companies are good companies: It takes 5 to 8 years to build a great one regardless of cycle (Airbnb had no problems raising its most recent round). As entrepreneur Ryan Block put it, “Breaking: it’s tough to start a company, and startups have to fight for traction. The industry has really changed!”

Perspective is the cheapest, most painfully earned, value.

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