Why this Recession is Actually a Gold Mine for Venture Capital
In the best of times and the worst of times, performant entrepreneurs will thrive, survive, and prevail.
VC Focus During Lean Times
Tech has been arguably overdue for a correction of sorts, not unlike high finance during the 2008 Great Recession. And VCs have tightened their belts in anticipation of the impending downturn mixed with high inflation. This has culminated in investors focusing on quality versus quantity in terms of startup deals. Cheap capital won’t be as plentiful as they were nearly a year ago. According to PitchBook, the squeeze on venture capital has quickly translated to a more investor-friendly environment as entrepreneurs compete for a smaller aggregate pool of funds. Commensurately, the median valuation step ups have dramatically begun to revert to the mean of the past five years as well.
Goodbye (for now), Wanna-be-preneurs
During times of boom, hot capital balloons quickly. And the average quality of ventures also steeply drops as the number of optimistic (both capable and misguided) founders who presume they can build the next big unicorn increases.
VCs have pressure to quickly deploy the rounds of capital they raised from their own investors (limited partners). So they are less discriminant about what and who they invest in. A lot of FOMO (fear of missing out) investing practices happen, as VCs pour money into deals that are poorly vetted, often relying on shallow investment heuristics. Raising a few million even for a pre-seed round doesn’t seem that difficult if you just have a story (not even a prototype).
But in lean times, only the most hardcore of entrepreneurs (especially those of early stage startups) are going to be booting up new ventures in this economic climate. In other words, the macroeconomic shift has created a natural screen that filters out less confident founders and shaky…
