A tech correction was inevitable — let's look back on the last year

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  1. Data show 2021 was a bonkers, record-setting year for venture capital

We all joked that the VC market was getting weird…

This isn’t an “I called the tech bubble blah blah” — it’s a “we got crazy and forgot about fundamentals,” which inevitably led to something. After a 10yr stonk market bull run, we had one of the most “bonkers” VC years ever, which kind of makes sense. Covid pulled years of growth ahead and crammed it into a few industries, masking the inherent risk and fundamental flaws with unsustainable growth. As long as startups kept raising and IPOing at eye-watering numbers, who cared? It’s always a game of musical chairs.

As we have recently found out the private markets are directly correlated to the public markets. Why? That’s the only comp we have when comparing private market valuations at the later stages to their hopeful IPO rev multiple that the markets will accept. So when the multiples kept going up, so did valuations and capital pouring into the industry because it seemed like everyone but you were getting rich…

https://news.crunchbase.com/news/global-vc-funding-unicorns-2021-monthly-recap/

It’s obvious now in hindsight (though we knew it while it was happening) that the late-stage was just trying to pour capital into anything it could. The interesting part is the “early stage” basically doubling which we rarely see as it generally means lots of liquidity post-IPO/exit (generally delayed 6month lockup) that occurred end of 2020/early 2021 hence a huge run-up towards the end of the year 2021 Q3/Q4 as seen below.

https://assets.kpmg/content/dam/kpmg/xx/pdf/2022/01/venture-pulse-q4-2021.pdf

Basically, new money flooded the market that had never really invested before — so they put checks into anything they could and lots of emerging managers as well. The double whammy was that as more competition at the later growth stage heated up, the big multi-stage firms went earlier with their $3–5M “seed” checks that basically doubled valuations within a year. People were investing in pre-product/rev seed startups at $30-$40M valuations led by tier 1 firms. For the firms it was an option/lotto ticket to lead the next rounds of those that showed some traction. And for the new investors, no one can really fault you for investing with the best.

https://www.angellist.com/blog/the-state-of-us-early-stage-venture-startups-1q22

And then Tiger couldn’t write checks fast enough, basically marking up everything they could like a private ETF. They invested in a few of my startups too, so I can't be that angry, yet.

https://pitchbook.com/news/articles/charts-tiger-global-dealmaking-vc

So what happens next? Lots of doom and gloom easily for the next few months as whatever you want to call this time period plays out… All the startup funding news you see is 3–12months delayed so that will change as well.

Lots of early startups will raise bridge/extensions/pre Series A rounds hopefully at reasonable terms to try and outlive the slowdown long enough to show traction and raise more. Unfortunately as we’ve already started to see, there will be a lot of layoffs as startups focus on cash, profitability and cash flow https://layoffs.fyi/ Also a lot of top executives at later stage startups and public companies will start to leave and join early-stage startups because of the potential upside. Their stock options/RSUs are underwater and they can take their experience/expertise to teams that never would have been able to afford them.

https://news.crunchbase.com/news/global-vc-funding-decline-monthly-recap-april-2022/

The latest data came out as I was writing this and it’s exactly what we would expect. A few months of a slow down, that might take 3–6months or a year to find the bottom. But remember spring 2020 when Covid first hit and we thought the world was going to end for a few months, then we had one of the greatest VC/stock runs? It could come roaring right back…

This is the time to be a value add investor — hit up your founders/teams because they need you. We’ve been saying for the last 10yrs that the greatest companies are built now.