24 May 2022 |

Maximum Fear: Unpacking the Downturn



Maximum Fear: Unpacking the Downturn

  • Layoffs are accelerating and now include Robinhood, On Deck, Thrasio, Carvana, Gorillas, Cameo, and Netflix
  • Meta, Twitter and dozens of early stage startups have initiated hiring freezes
  • Klarna and Mainstreet have slashed valuations to seeking new funding, the first high profile down rounds of the cycle
  • VCs are forecasting doom and recommending portfolio companies cut burn and get default alive as fast as possible

Political Cartoons from 1929, Weeks Before Black Tuesday (The Fed Armed with a Bazooka Felt Relevant)


As you may have heard the market is down. Software stocks are down ~80% from all time highs, the Fed is on a rate-raising warpath, and inflation appears unrelenting. The focus for this newsletter is how that macro picture intersects with private markets, venture, and startups.

Multiple Compression

No one is arguing that software companies like Cloudflare aren’t great businesses, the question is whether they should be valued at 5x revenue, 20x revenue, or 100x revenue?

In private markets over the last 3 years, a 100x multiple on ARR was all but routine for the most competitive startups. That’s changing. Fast.

Take this quote from Andreessen Horowitz’s most recent guidance for founders:

For instance, a year ago, it was common to see funding valuations for late stage private companies that were 100x of ARR. If you did your last round at $20M ARR, growing 3x, you may have raised at a $2B valuation.

– A Framework for Navigating Down Markets, A16Z

The piece goes on to say that companies who raised at 100x ARR can now expect valuations closer to 15x ARR. This means to maintain that sky-high valuation they pulled in their last round, companies will need to grow revenue by 600%.

That’s not impossible, but very, very few will succeed. So we’re about to see a spate of down rounds.

Note: There are also questions about how fast founders adjust to price changes. If VCs and founders can’t come to terms there is no deal. Startups are not profitable businesses, so at some point, they will need to raise no matter what the terms, but you could see a freeze on both sides as prices correct. I don’t have the data yet but deals appear to be slowing.

For VCs: The Good, the Bad, and the Ugly

  • Leverage: When it comes to negotiating VC deals, founders have had all the cards for nearly a decade. Tiger Global was handing out term sheets at higher valuations than founders asked for. Hundreds of new VC firms launched and started competing for deal flow. Terms were extremely ‘founder friendly’. But a downturn means lower valuations (aka cheaper prices for VCs) and better terms. You wouldn’t believe how many seasoned investors sound down right excited right now.
  • The Rising Cost of Capital: On the other hand, LPs have already started pulling back and it’s going to get harder for VCs to raise new funds. The knock on effects of that are not to be underestimated. Fewer VCs means less money flowing into the startup ecosystem, which would make it harder to raise, and drive a general contraction in tech markets.In his quarterly letter, Josh Wolfe, GP at Lux Capital, lays out what would happen if we saw a 2001-scale pull back in VC dollars:

From Josh Wolfe on Twitter.

Note: Today is not 2001. The internet is not new and no one is claiming tech companies are a fad. Tech is the most dominant sector of the US economy and while we’ll see a pull back, it won’t be an ‘01 nuclear-winter pull back.

  • End of the Solo-Capitalist (?): Last year, 350 funds with less than $50M AUM got started. Solo GPs, rolling funds, and operator investors have been celebrated lately, and have multiplied as the cost of capital hit all time lows. The strategy for most has been similar to Tiger’s, albeit with much smaller check sizes: Build an index fund of hot tech startups and ride valuations up. But if valuations continue to plunge, those paper markups on VC portfolios are going to disintegrate. How will the solo-capitalists fair as LPs start to reel in capital?


A16Z Games Fund I

  • Andreessen Horowitz announces a dedicated gaming fund, the $600 million Games Fund I
  • A16Z has already backed dozens of gaming companies including Roblox, Axie Infinity, Sandbox VR, Faraway, and Zed Run
  • The fund is A16Z’s third sector specific fund after Bio and Crypto

Why It Matters

Gaming is breaking out and getting recognized as a massive sector. As I wrote two weeks back, gaming is now bigger than music, film, and streaming combined. In their announcement A16Z went further, doubling previous estimates of the gaming industry’s size, pegging it at a whopping $300 billion all in.

It’s also a signal that the technology and operating models underpinning gaming are differentiated enough to warrant a unique fund. Features like live ops teams, social netowrks, and in-game economies built on crypto currency.

The defining quote from the announcement memo:

Over the past decade, games have undergone a radical transformation, from simply being packaged entertainment, to becoming online services that more closely resemble social networks and scale like consumer technology companies.

– Andrew ChenJonathan Lai, and James Gwertzman

3 Avenues for Gaming Growth

  • Social Networks → Complete with social graphs, interest graphs, chat, and features for communities
  • Web3 and Digital goods → Combining NFT price insanity with Fortnite’s 100% margins on digital items… What a business you’d have on your hands.
  • Ads → As games become the dominant sink for people’s attention, in game advertising will accelerate. Don’t be shocked to see ads for real world products on digital billboards.

Games Fund I will invest in consumer products for gaming, game studios, and infrastructure – from AI to run in game crypto economies to live ops tools.


Every week I interview up and coming founders to break down their business, how it fits into the market, and get a glimpse of what’s coming next in tech. Here’s a quick take from the Just Raised pod.


The US is facing a critical shortage of baby formula. A deep dive into formula’s history, food science, and how modern biotech can create a better product, with Laura Katz, Founder and CEO of Helaina.

Product: Infant formula with human proteins to mirror breast milk and build immunity in babies

Raised: $20M Series A from Spark Capital and including Siam, Primary Ventures, and Plum Alley

The world of food science is on fire. Impossible burgers, lab grown meat, animal-free leather — the market is booming. At the frontier, researchers are harnessing genetics to build biological factories that create human proteins at scale. Helaina is the first company to add human proteins to a food product. Infant formula.

At the core of our technology, we program yeast to become little cell factories and then when we feed them the nutrients they need, they can spit out the same proteins found in breast milk. And it’s these proteins that help to pass immunity from Mom to baby. 

– Laura Katz, Founder and CEO of Helaina

Listen Here →



Raise: $1.7B at a $127B valuation

One Liner: The world’s premier rocket company

SpaceX is a bellwether for the entire private space industry. The company’s reusable rockets have driven down launch costs from millions of dollars per kilogram to about $1,500 a kilo, virtually creating the market for new space startups play in.

The $127B valuation is up from a $100B last year and a $46B valuation the year before that. As the world’s second most valuable startup – after TikTok maker Bytedance – there’s a huge demand for shares. A down round for SpaceX would be a negative signal to investors that could impact the entire private space industry.

Azra Games

Raise: $15M from A16Z from Games Fund I

Including: NFX, Coinbase, Play Ventures, Franklin Templeton

One Liner: AAA game studio focused on developing crypto economy games

Azra falls squarely in the studio category for Games Fund I. Founder and CEO Mark Otero joins the list of gaming veterans who’ve jumped ship to start crypto economy games. He led divisions at EA and Bioware and his last Star Wars mobile game generated a billion in revenue.

Crypto gaming is magnet for top gaming talent — which tells you everything you need to know about the sector’s future.


Raise: $2.5M from Sequoia Capital

One Liner: AI to read and improve your writing

This is the beginning for AI writing. Today companies like Twain and Copy AI and Sudowrite are building AI assistants to help improve your writing. In the near future, AI will be able to generate entire novels in the style of your favorite author about any topic you choose.

For a business perspective, we haven’t seen many companies turn major advancements in natural language processing into sustainable businesses yet. We’ll see what comes out of Twain. Today it’s 100% free to try.


Raised: $300M Series D from Coatue and Insight Partners

Including: Accel, Tiger Global, and Kleiner Perkins

One Liner: Payments for South East Asia

Payments are big business. Stripe has become one of most valuable private companies in the world building seamless online payments. Mainly via credit card. But in Southeast Asia credit card penetration is extremely low so payments happen via slow banking infrastructure. Xendit has built it’s business around simplifying that infrastructure. In the past 12 months they’ve more than doubled total payment volume from $6.5B to $15B, according to Techcrunch.


More cartoons from 1929