There’s a clash happening in the early-stage market.
In one world, late-stage investors are reacting to tech stonk corrections by clamoring toward the early-stage investment world, forcing seed investors to go even earlier to defend ownership and potential returns. This trend was underscored by firms like Andreessen Horowitz launching a pre-seed program months after launching a $400 million seed fund. Even more, Techstars, an accelerator literally launched to help startups get off the ground, debuted a fund to back companies that are too early for its traditional programming.
While all that is going on, early-stage investors are enduring a valuation correction and portfolio markdowns. Some are admitting that they’re telling portfolio companies to refocus on cash conservation, profitability and discipline, not just growth.
Let’s pretend these two vastly different worlds are in the same universe: Early-stage investors are getting more disciplined and cash rich, but at the same time, the earliest investors are going earlier. Investors are pushing founders to be lean but also green, but at the same time, offering them $10,000 to take PTO for a week and try their hand at entrepreneurship. Growth, gross margin and burn are the new top priorities for CEOs, but at the same time, venture capitalists are clamoring to offer more funds, earlier, in newly invented subcategories of early-stage investment.
The tension between these two worlds looks different depending on if you’re a Stanford founder starting a SaaS company, or if you’re a bootstrapped, first-time entrepreneur trying to disrupt agtech. Regardless, the growing spotlight, and discipline, on the early stage just makes me wonder one broad thing: What’s left for early-stage investors to focus on?
The optimistic view is that we’re finally going to see an actual disruption of investment criteria, maybe more similar to AngelList’s Quant Fund that writes checks for startups that show high hiring demand. Things may get more quantitative, but they also could get interestingly qualitative: What if a VC firm went to Twitter’s product team and offered each disgruntled manager $100,000 to start a company? I’d write about that and any efforts to get more first-time founders into the world of startups.
The negative view is twofold (sorry).
One worry is that we’ll see emerging fund managers struggle to win deals with growing early-stage competition, and ultimately those folks will be unable to raise follow-on funds. Scaling a venture firm from $9 million to $90 million has always been a big challenge for solo GPs, and these times are the litmus test for those who will be around 10 years from now. If not many great companies are left for the microfunds, they will disappear.
The second worry assumes the first happens: Building will get more boring and more predictable. As venture firms push to get earlier but simultaneously deliver the same multibillion dollar return profiles, they may have to go for startups with more proven business models. Yawn. January Ventures’ Maren Bannon recently told me that “there’s a lot of building that needs to get done before a company takes a Tiger Global seed check.” I took that quote as meaning microfunds and more experienced seed funds play a key role in helping companies tweak their way to that first big check. Without that stage, I imagine that more money doesn’t lead to more growth, it leads to more predictable disruption.
When I was digging into the story of Duolingo, CEO Luis von Ahn told me that the company first monetized by selling user-generated translations — which happened naturally on its free app — to a group of paying clients. When other services caught on, it became a race to the bottom: New translation companies were constantly undercutting them with lower prices and it forced them to pivot the business model altogether. I sense the same thing happening in early stage: If the earliest keep being forced to go earlier, at some point investors will have to pivot, find a new way to back the brightest minds of the next few generations and offer a noise-canceling deal.
This was a therapeutic piece to write mostly because I knew, from the start, that there would be no final conclusion. So, here we are, how do you feel?