WORKWEEK

Everyone seems to think venture investing is dead. All the mainstream media articles you read are about how VC’s are pulling term sheets and no one’s investing. 

And yes things have pulled back from a very frothy market, as I wrote last week. But investors are still investing, especially in early stage venture. And there’s new data from a great CBInsights Q2 2022 report that backs that up. 

In Q2, VC investing overall fell 23% from the previous quarter, which CBInsights says is the largest quarterly drop in almost a decade. BUT even with such a precipitous drop, this was still the 6th largest funding quarter on record!

CBInsights expects global VC funding this year to be around $500 billion—which is lower than last year’s $625 billion but significantly that other years, as you can see from the chart below.

Taking a look at the quarterly chart, you can see that this quarter is still big AF compared to every other quarter, minus the anomaly that was 2021. 

There’s definitely a pullback—but the data indicates that “mega-rounds” are what’s falling, which fell 31% quarter over quarter. Annually, you can see that this year probably won’t be that massive in terms of large $100 million plus rounds.

So what are VC’s investing in? In a bear market, it makes sense to move away from huge rounds and focus on your strengths, which for most investors in the early or mid stage investing game. Investors are still eagerly writing checks, but for companies that they already know or are in their ecosystem. I’ve heard a ton of companies looking at inside rounds (raising money from preexisting investors) or working with VC’s that they’re really familiar with. 

The other big difference, in my opinion, is that the bar is back to being pretty high. When raising VC, you need to be able to show certain milestones and metrics, and prove that these numbers are sustainable. Now that capital isn’t moving as freely or loosely as it was over the past 6-8 quarters, the metrics and numbers companies need to successfully raise capital is getting higher. Sorry to all the folks that wanted to raise 2 on 20 pre-product. 

There’s still a ton of dry powder in the venture ecosystem; you can see that with all the massive billion dollar fund announcements like Lightspeed Ventures. Established funds are still alive and kicking and raising bigger and bigger funds. LP’s are also eagerly investing in microfunds that have a unique competitive advantage in the market, or domain expertise with strong track records (or both.) 

For what it’s worth, I think this market reset is actually good. In super frothy markets there tends to be lower quality startups and ideas to fund. Over the past 1.5 years, almost all of my VC friends have complained a ton about the speed at which deals were getting done; because of that, a lot of funds didn’t have time to do as much diligence as they’d like. Other, more disciplined, funds just pulled back on deals they thought didn’t fit the way they do business. 

As the ecosystem resets, it’s important for founders to reset expectations too. Don’t think it’s going to be super easy to raise a new round of capital, especially from new investors. My advice would be to focus on metrics and building a strong underlying business—if you do that, then raising in any market, bull or bear, is extremely doable.