Jason Lemkin kicked off the second day of SaaStr with the topic that’s on most founders’ thoughts: the widely anticipated belt-tightening among venture capitalists. He interviewed Mark Suster, partner at Upfront Ventures, to get the word on the street. Are we really headed for a funding crisis?
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In a nutshell:
- Those guys who keep predicting a funding crunch? They’re probably right.
- We’re headed for a period of creative destruction, where a wide number of weak startups will fail and a new cohort will take their place.
- Always be raising – start courting potential investors now.
Okay, okay, it’s an overused phrase. But this is a pretty appropriate place for a grizzled Ned Stark to look to the north and speak dire warnings to the well-fed children of summer. Suster noted that there were no IPOs this January – zero. He followed with more worrying statistics for early-stage founders:
- The number of angel and seed rounds saw a 22% CAGR (compound annual growth rate), but if you look at the dollar amounts, most of the money is going to late-round investments.
- Mergers and acquisitions are down as well.
- Median valuations increased 3x in the last two years, but fell horribly in 4Q2015.
- In a survey of venture capitalist sentiment, 82% used words like “caution” and “concern” to describe the future funding climate.
But there’s good news too
It’s not all doom and gloom. Certain verticals are hot: Suster named transportation, virtual reality, computational biology, food and agriculture, and aerospace as a few areas that continue to get funding. He sees a period of creative destruction coming, where businesses with weak fundamentals will fall by the wayside and a new cohort will take their place. The predicted (and highly likely) drop in venture funding will be the forest fire that clears the underbrush, provides fertile ground for new growth, and leaves well-protected trees relatively unscathed.
How to court a venture capitalist
Suster finished up with tips on how to court a VC. His strongest recommendation? Always be raising.
“I’m not raising my next fund until 2018, but guess when I’m starting the process? Now.”He makes investments based not just on the business or product, but on the founders and executive team. He compared an investment to a marriage without a divorce clause – he’s not going to jump into a long-term contract with someone he doesn’t know. He suggests that founders work their contacts now, so that they’ll be set up for success down the line.