Early last week, during a panel about the state of early-stage investing, a handful of VCs I interviewed largely agreed that, as a class, they’re less keen right now to write checks as quickly as earlier this year.
The next day, First Round Capital published a survey of more than 500 founders of venture-backed companies who plainly agree. In fact, 80 percent of respondents said they were able to raise their target amounts during their last round, but almost all said they anticipated harder times ahead.
The slowdown seems due, given the feverish pace of investing in recent years, and the accompanying rise in valuations. The big question is whether things will stay sluggish for long. Peter Pham — an investor and advisor to many seed-stage companies, as well as the cofounder of the L.A.-based company-building outfit Science – says we’ll know the answer in March. We talked about it yesterday. Here’s more from that chat, edited for length.
TC: You just helped serial entrepreneur Gil Elbaz raise $35 million for his company, Factual. You say it was a long road, though, which is surprising.
PP: It wasn’t an easy round, and this is the guy who created AdSense [which Google created out of Elbaz’s earlier company, Applied Semantics, after acquiring it in 2003]. Gil is super intellectual, and more than ever, the process of raising money requires a lot of salesmanship. You have to convince people who don’t know your business or have the same clarity or information that you have to invest in it, and that’s tough.
TC: When do you know it’s going to be a “no”?
PP: I’ve become an expert. I’ve probably pitched a few thousand times over the last four years, across 40 rounds at Science and on behalf of many friends I’ve helped to raise money. I’ve pitched some firms up to 20 times, and every time, I can tell you when the no is happening, even if the venture firm isn’t saying no because it wants to keep the option [of changing its mind].
TC: What’s the tell?
PP: If it’s in person, 100 percent you can tell what’s happening through body language, the VCs’ responsiveness, the questions you’re asked.
After a meeting, I gauge everything by the what happens over the next 24 hours. After that, a VC [who hasn’t been in touch in some way] is typically on to the next shiny object.
TC: You think things are getting worse for entrepreneurs suddenly. What happened?
PP: If you’ve been following Bill Gurley, a very smart guy, what he’s been tweeting has probably depressed you. The China market has scared some. We’re seeing companies like Homejoy in the online-to-offline market dying. Collectively, these things have everyone looking at valuations and saying, “This is overpriced. Let’s wait.”
We’re also facing a natural post-Thanksgiving slowdown, where most deals have already been pitched and pricing agreed on and that have closed or are closing. In fact, I’d say if you don’t close by Tuesday of next week, you’re in no man’s land.
Broadly speaking, the negotiating power has definitely swung back from the entrepreneurs to the VCs.
TC: These things are cyclical. Do you think the pendulum has swung back all the way? How long do you expect VCs to have the upper hand?
PP: We’ll have to wait and see, but we’ll know more when YC graduates its next class. [President] Sam Altman has publicly told YC companies not to optimize on price, but because of [fear of missing out], prices end up getting driven up anyway; we’ll see if that happens.
We also have to see what happens if the Fed raises interest rates.
After that, people will begin pitching again the week after CES [the giant consumer electronics show held in Las Vegas every January], which will take us into February, when some terms sheets will get signed again.
[The invite-only] TED [conference, attended by many in the tech community] is another dead week. Then announcements will happen in March. If you see a ton of things getting funded at high prices, you’ll know things didn’t change. If not, you’ll know the market has shifted. It’ll be very clear.