After a few weeks of geopolitical volatility spilling over into financial and crypto markets, it seems like everyone can talk about what startups and venture capitalists can, should or will do in the face of the anticipated downturn.
In light of the investments taking place, venture capitalists with high-quality early-stage investments can be trusted not to fear a potential slowdown. Obviously, a slowdown would result in lower valuations and less capital flow to startups, but that might not be the worst thing for investors looking to double their investments at attractive prices.
The capital markets are still very much on the side of the founders, and there is plenty of room for the scales to rebalance. The venture capitalists they should be excited about upcoming buying opportunities.
Startups cut spending during the pandemic and expanded their catwalks. At the same time, they have been able to generate large rounds at increasing frequencies. Startups that managed their finances wisely can now boast a strong balance sheet, lower expenses, and plenty of cash.
What this means for venture capitalists is that if the financial markets slow down, the valuations of these strong companies with long track records go down, allowing investors to increase their share of the cap tables of their favorite portfolio companies with a discount.
If you look at the 2008 financial crisis, funding for early and late-stage startups crashed, but seed funding exploded, giving rise to some of the largest companies we see trading on stock exchanges today. This growth in seed funding was led by emerging technologies such as mobile and cloud.
Similar opportunities exist today in SaaS and web3. It took many years for early-stage and late-stage funding to recover to 2007 levels, but during that window, the amount of capital pouring into seed rounds just kept rising.
Investors became wary of dousing huge checks to companies that required massive growth and scale to keep growing in their valuations. The risk/reward just didn't balance. On the other hand, seed-stage companies faced much more reasonable scalability challenges to reach growth milestones.
The risk/reward just made sense. Investors cannot sit on capital; they have to invest somewhere, and when recessions hit, the economy shifts to heavily favor younger companies.
So what can we learn from history? As investors grow wary, we've seen increased attention (and capital inflows) on seed or early start-ups, even from those who traditionally invest in early- and late-stage companies.
The change has already begun and history begins to repeat itself. SaaS and web3 are now on a path not too different from the one that mobile and cloud technologies took to come to the forefront in the 2000s.
NFTs are turning users into members, and SaaS startups are turning legacy industries into digitally integrated behemoths capable of huge margin expansion. We are still in the early days of this transformation, so even as global markets shake from macroeconomic and geopolitical factors, companies building in the SaaS and web3 space have plenty of growth potential on the horizon, as well as the capital needed to get there. thereto.
With soaring valuations, startups have been raising cash not only to continue their growth, but also to insure against the investment pullbacks seen in recent periods. The truth is, founders, investors, and everyone else have been making the best partnerships in the market for over a decade. In fact, the startups were preparing for a possible recession even before the pandemic hit.
The last two years, with the pandemic, rising inflation, supply chain constraints, and then the invasion of Ukraine, have shown the founders, and the world, just how quickly global scenarios are changing. Smart founders have adjusted their strategies accordingly and positioned their young companies with the necessary infrastructure and capital to sustain growth during this period of global uncertainty.
Take seed-level enterprise SaaS startups as an example. The pandemic has made strong digital offerings and tools essential parts of every business. This contributed to the rise in valuations for these startups as companies of all kinds flocked to digital products to manage everything from remote payroll to human resources, analytics, conference calls and more.
As inflation started to rise, the invasion of Ukraine, sanctions, supply chain issues and market volatility caused valuations to fall very attractively.
All this happened while the ARR (Annual Recurring Revenue, or Annual Recurring Income) and the LTV (Lifetime Value, or Customer Lifetime Value) remain strong and the market demand for these tools shows few signs of weakening. In short, investors can get exposure to big companies at a discount.
However, this is not all positive for investors. Companies will fail due to these global factors, especially if the slowdown continues. That said, there are still plenty of strong startups with impeccable balance sheets that are extremely well-suited to managing (and even thriving) during these volatile times.
Investors are concerned about deploying more capital in this scenario, but it's a biased perspective that history has proven wrong. Venture investing, in particular, is a long-term game, and the current dynamics present an exceptionally rare time for investors to increase their exposure to young companies that will succeed in the long term.
You can now see this dynamic repeating itself as investors begin to move away from late-stage companies in favor of investing in early-stage startups.
If you have been following recent history, it is clear that early stage investing is the best place for venture capital to be deployed when a period of global uncertainty arises.
