Investors prepare for a founder downturn. Or influx. Wait, what?

Gumroad’s Sahil Lavingia broke into the venture world as one of the early testers of the rolling fund, an AngelList product that allows investors to raise capital on a subscription-like basis. That was in 2020. Fast-forward to 2022 and a lot has changed.

One of those changes? The number of pitches from founders looking to raise. “Since March, it’s gone down about 90%,” Lavingia told TechCrunch. “I was probably seeing more than most — about 20 to 40 well-vetted decks a week – and that number is down to about two to four a week now.” He’s also seen the quality of talent rise for people wanting to work for Gumroad — which he partially attributes to the steady stampede of layoffs — and a decline of founders starting companies.

A downturn in the number of founders raising capital suggests that early-stage startups aren’t as immune to macroeconomic shifts as some investors claim; in contrast, a boom of fresh startups would support the idea that recessions — and the accompanying spate of layoffs — are the time when startups are born.

“I think that the total number of founders we’re going to see will be fewer, but the quality bar is going up.” Redpoint managing director Annie Kadavy

Lavingia breaks down the state of founders into three buckets: “tourist founders, immigrant founders and ‘born and raised’ founders.” Tourist founders, he said, are the ones who only start companies in bull markets, a cohort he said has dropped by about 100%.

“They’re rarely fundable in bear markets,” Lavingia said. “They need to hire others to build stuff.” Immigrant founders, meanwhile, care less about the reputation and status of starting a company but do weigh its risk and return. This founder cohort has been cut in half, per Lavingia. Finally, “born and raised” founders are founders regardless of the market: “They all existed and therefore raised money in 2020-2021, so they too are not starting companies and raising money at the same rate.”

The investor recently landed $2.8 million in his quarterly rolling fund fundraise and is hopeful that the decline in founder volume changes by Q4 of this year. And while he’s a part-time investor, spending other time building Gumroad, he questions how patient institutional LPs may be for other emerging fund managers.

“Basically all funds are at -90% volume of new rounds but won’t comment since they don’t want LPs to know who has just given them lots of money that’s mostly sitting idle,” Lavingia said. “A good thing but [people] are impatient.”

Two sides and no one agrees

There are two sides forming in early-stage venture capital: the investors who admit that talent has shifted and those who stand by deal flow that is as loud as ever.

Vijay Chattha’s work has been defined by over 500 buzzy startup launches that turn into success stories and unicorns, such as Clearco and Poshmark, enough so that his public relations firm, VSC, started a venture arm with Jay Kapoor last year to back climate tech startups and then help them tell their stories.

In Chattha’s view, the slowdown in startups is already over. He noticed that while most founders followed “doom and gloom guidance” in April through June, July and August will be the firm’s strongest months of new engagements in 2022, especially on the public relations side. Deal flow is consistent, not volatile, on the investment side, with more reasonable valuations, he said.

“It tracks to a nearly identical bounce back of August 2020 after COVID lockdowns,” he added, saying that a lot of Series A through D startups are raising their profiles, with their businesses doing well despite the macro fears.

“The volume of startups, the diversity of growth verticals ranging from SaaS to climate tech, and the globalization of startups means that there are just more opportunities and companies looking to grow than past downturns of 2009 and 2001.”

Leslie Feinzaig, the investor behind venture operation Graham & Walker, struck a similar tone to Chattha, saying that the firm already had a dip in cold inbounds and referrals in May and June but that the number went back up in July.

While she said that “last quarter was an adjustment period for founders,” she is now seeing a lot of brand new startups. “Many of which we’re excited about, but by definition they are just too early to pull a VC round together, especially in this market. But I’m very excited about the next few quarters for this reason,” Feinzaig added.

Graham & Walker’s pipeline is 99% women-founded startups, which “have historically had a much harder time fundraising, and for the most part never experienced the frothiness in the market. … That’s why I tell our founders and LPs that these companies are built to meet this moment.”

It’s important for investors, especially ones on their debut fund, to show that they have a geyser of deal flow and access because it helps cement LP trust. Older funds have been striking a different tone. Redpoint Ventures recently closed its ninth early-stage focused fund, a $650 million investment vehicle to back startups from seed through Series B.

Redpoint managing director Annie Kadavy said that there will be fewer total companies started in the next year than there were in the last two. And that it’s a “great thing.”

“In an environment where it’s really easy to raise a seed round, it’s really easy to get your first product up as long as you can throw more money at the problem you’re trying to solve … that is a different profile of risk,” she said, “versus it’s really hard to raise money, and I have to build those products because I care so deeply about the problem.

“I think that the total number of founders we’re going to see will be fewer, but the quality bar is going up.”

And the definition of “volume” differs from firm to firm. Startup accelerator Y Combinator narrowed its current cohort size by nearly 40%, citing the downturn and difficult fundraising environment for startups.

“The S22 batch is significantly smaller than our most recent batches. This was intentional,” head of communications Lindsay Amos said in a statement provided to TechCrunch.

So what do these conflicting statements add up to? If there are fewer founders starting companies due to market turbulence, the founders who do get to launch will have an affable asterisk next to their pitch deck — despite all odds, downturn-born founders can say that they believe in their idea so much that they’re launching during a time when fundraising is tough, customers are being more careful with their dollars and describing the economy as “unstable” is an understatement. And that sort of belief could lead to some pretty stellar startups — if only investors can believe, too.