If you had to sum up the 2022 venture capital market in one word, that word could be contradictions.
Venture funds have record dry powder — deployable capital on hand — and yet funding continues to steadily decline. There is seemingly more talk of backing women and people of color in the industry than ever, and yet the numbers are headed in the opposite direction. VCs said publicly that they were focusing on companies on the path to profitability, but that wasn’t true for even a minute.
So while many venture firms said they are largely sitting out investing this year as they wait for valuations to fall, it is, again, largely untrue.
What does seem to be true, though, is that some VCs are using this year’s uncertainty as an excuse to avoid doing the work it takes to discuss valuations and assess TAM on potential investments into companies with real customer bases. Because they aren’t backing no one — they’re just backing everyone but you.
On Monday, Peloton CEO and co-founder — and now certified rug guy — John Foley announced a $25 million Series A round for his DTC custom rug company. That’s quite a lot of money for a company that is pre-launch, hasn’t proven it’s a solution to a real problem, and was started by someone who has been working on it full time for less than two months. And, wait, I thought VCs didn’t like DTC anymore?
On Tuesday, amid a wave of recent layoffs from the likes of Stripe and Twitter, DayOne Ventures launched a new program called “Funded not Fired,” that will write $100,000 checks by the end of the year into 20 companies launched by the recently laid off. Some of the startups will then get a follow-on investment of $1 million.
Yes, the notion that members of this largely talented pool of engineers and product managers will likely go on to start venture-backable and potentially successful businesses is not a bad one by any means. It’s likely that we will see a new crop of companies from these recent cuts and, statistically speaking, some of them are bound to be good. These are really smart people, after all.
If this was announced after a company had to gut staff in an otherwise strong market — like, say, after the collapse of WeWork or similar — this would be smart. But that isn’t the environment we are in, and the timing of this couldn’t be more tone-deaf.
Just imagine seeing this news if you’re a founder of a company that’s several years old, with a product that’s used by real customers, and still failing to bring in fresh cash. And we all know startups that are struggling to raise. They tell me over the phone, and you can find numerous examples of both founders and VCs discussing what a frustrating environment it is to raise right now. Deal counts have dropped drastically this year and we are starting to see consolidation.
A venture fund is looking to dump at minimum $2 million into not only not your company, but companies that currently don’t exist. Yes, this is good and normal.
In September, disgraced former WeWork CEO Adam Neumann raised $350 million for yet another pre-launch startup. That’s more than startups helmed by a founder of color raised in the entire third quarter.
Once again, this shows all founders doing the hard work day in and day out — especially women and people of color — that to most VCs, name matters over numbers. Pedigree triumphs over product-market fit.
And, wait, there’s somehow more. The cherry on top of all of this comes from crypto exchange FTX’s spectacular collapse this week. Amid the chaos, it was revealed that Sequoia, which is frequently propped up as one of the smartest firms in the game, invested in FTX founder Sam Bankman-Fried after he was caught playing a video game during the pitch meeting.
He showed he didn’t care, and yet he raised billions at eye-watering valuations.
This venture dynamic isn’t new. But amid a market that continues to get more challenging and will likely be the catalyst for good companies to have to close their doors, it seems like venture’s house is on fire.
The sad thing to focus on now is not when this dynamic will end, but rather, as my colleague Dominic-Madori Davis painfully points out, when will Sam Bankman-Fried’s next startup raise more money in one round than Black founders do in an entire year?