In late 2008, I was about to turn in my 2 week resignation at Google to start a company when Sequoia sent out a presentation to their portfolio companies. In their 56 slide presentation of doom and gloom, they told their companies to batten down the hatches and expect to survive a year without external funding. I ended up leaving Google during one of the worst economic downturns in the last decade, a seemingly stupid move at the time but actually one of the best moves I could have made in my career.
Since then I’ve moved to the other side of the fence as an investor. From my purview at 500 Startups in talking with many seed investors – both angels and VCs – this is what I predict will happen in 2016. (Note: these are my opinions and not my employer’s):
1. Raising seed capital from VCs who invest in all stages will become challenging.
Investors who invest at all stages are increasingly reserving more capital for follow-on to keep their existing portfolio companies afloat longer. The IPO markets have been tough, and late stage investors are realizing their unicorns actually are just My Little Ponies in a Halloween costume. It’s just really hard to get liquidity these days in the late stage game.
2. Angel investors will reduce their seed investments.
When polling several angel investors, the general feeling is that angels will also be parring back on their startup investments. For angels, they are not tied to investing in startups per se – they simply want to invest money in channels that will yield good returns.
Some say that if/when the Fed increases interest rates, people will pour their money back into interest-bearing accounts. Although the interest rates will still be significantly lower gains than, say, holding an index of good startups, if angels cannot get liquidity for their earlier startup investments, they’ll prefer accounts that allow them to take out their cash immediately.
3. VCs who invest solely in seed companies will continue investing at the same cadence if not increase their investment speed.
Micro VCs such as 500 Startups will continue to invest business-as-usual in 2016 and may potentially even increase our investment cadence opportunistically. The best times to invest are when others are fearful. I’ve heard from other VCs who invest solely in seed startups that they plan to do the same.
That said, because I know that it may be challenging for our portfolio companies to raise from downstream investors, it will be extra important for me to believe that companies I invest in will 1) survive even without downstream capital and 2) have the traction to potentially bootstrap for a while if need be. What this really translates to is that I’ll be extra careful to make sure that a company has really solid unit metrics; growth matters, but unit economics matter more, especially in times like these.
4. All points above don’t apply to international investors.
The general assumption of the above points were for American investors. That said, international investors are investing very differently. I see interesting market changes in other places, where many investors are divesting their money into American markets or away from older industries.
Never before has it been more advantageous in the startup world to speak a second language.
What is different between now and 2008?
It seems that every 8 years, money seems tight. In 2008, raising money as a startup was brutal. In 2000, we had the dot com bust. In 1992, we were in a recession. In 1984, we were pulling out of a really long recession (or so I’m told).
This time, it’s not going to be doom and gloom. There are plenty of VC firms that have recently raised capital; there is a lot of available cash for startups. The economy is generally doing well, but investors are cautious. They are waiting to see what happens to existing unicorns before ploughing more money into new startups. They are waiting for liquidity. And yet, there is still plenty of money to go around that needs to be invested. So, if you are a seed stage startup with a lot of traction and solid unit metrics, you will get funded. It will be business as usual for you.
However, if you are a seed stage startup with an idea and zero traction or if your unit metrics don’t quite look good or if your growth is say, 5% MoM, it will be a lot more challenging for you to raise in 2016 than it was in May 2015.
What do you suggest?
If you have decent traction numbers for a seed stage company, you should raise money at the beginning of 2016. Make sure you have enough cash for 18 months, if possible (or can survive off revenues). Keep your burn low.
If you don’t have the numbers at all, I would go heads down right now and bootstrap to get them. Times like these are actually good – they force companies to focus on their business because they have no other choice.
Although it was scary leaving my job at Google in 2008 to do a startup (we could not get any funding), ultimately, it helped me focus on the business and not get distracted. And, times like these also weed out people who are serious about their business and those who are wantrepreneurs.
No need to batten the hatches this time around. But take an umbrella.
Special thanks to Dave McClure and Brian Wang for their input on this post.