After the last few weeks of geopolitical volatility spilling over to the financial and crypto markets, it seems like all anyone can talk about is what startups and VCs can, should or will do in the anticipated downturn.
As an investor who prides himself on being able to identify the best early-stage startups, I’m confident that VCs with high-quality seed investments don’t need to fear a potential slowdown. Obviously, a slowdown would result in lower valuations and less capital flowing to startups, but that might not be the worst thing for investors looking to double down on their investments at attractive prices.
The capital markets are still very much on the side of founders, and there’s plenty of room for the scales to rebalance. VCs should be excited about the coming buying opportunities.
Startups slowed spending during the pandemic and extended their runways. At the same time, they’ve been able to raise big rounds at increasing frequencies. Startups that managed their finances wisely now can boast a strong balance sheet, lower expenses and plenty of cash.
Seed-stage investing is the best place for venture capital to deploy when global uncertainty sprouts up.
What this means for VCs is that if the financial markets slow down, valuations on these strong companies with long runways come down, allowing investors to increase their share of the cap tables of their favorite portfolio companies at a discount.
If you look at the 2008 financial crisis, early- and late-stage startup funding crashed, but seed funding exploded, giving rise to some of the biggest companies we see listed on stock exchanges today. This growth in seed funding was led by emerging technologies like mobile and cloud.
Today, similar opportunities exist in SaaS and web3. It took many years for early- and late-stage funding to rebound to 2007 levels, but during that window, the amount of capital pouring into seed rounds simply continued to rise.
Investors became leery of writing huge checks to companies that required massive growth and scale to continue growing into their valuations. The risk/reward simply didn’t balance out. On the other hand, seed-stage companies faced much more reasonable scaling challenges to reach growth milestones.