Jon: All right, Peter. So it's probably been about a month or two since we recorded. I think in the meantime, you and I have been traveling a lot. You've been traveling international for play and you've traveled to your office in Atlanta for work, correct? Yep. I've been to India and back first time in a while since COVID.
Peter: Yeah. How was that?
Jon: it was super fast. I missed the times being able to go and really just go stay in India. But, you know, we're busy and you got to do what you got to do.
Peter: Was India a lot different due to COVID?
Jon: No, I don't think I felt I don't think I noticed very many changes.
Peter: Interesting. Cool.
Jon: All right. So today, my big question is, is venture capital slowing down?
Jon: So that's the question. I know right now we've seen rising interest rates. There's a lot of speculation on the horizon. I think we could look at this question from an angel perspective, from a seed to, you know, VC series A, B, C, and D, But I think the first thing is comparing to Q1, there were 404,822 VC deals that were closed, totaling a total of 70.7 billion, which was far below the 90 billion VC investment for Q4.
Jon: And so based on those numbers, does that surprise you? Does is this indicative of something bigger that's to come.
Peter: And doesn't surprise me? No, I think that's there's definitely a slowdown. But, you know, there's a slowdown for a couple of reasons. One, Q4 was like a record year, right, and a record quarter. Lots of deals, lots of funding, more so than, you know, prior quarters and prior years. So, you know, inevitably, like even a slight slowdown is going to be pretty significant.
Peter: And then, you know, the other thing is, yeah, interest rates started rising. There became a lot less certainty around what's what's going to happen around inflation and other things. And so I think you've seen a lot of people pull back in that first really hit in the public markets. And that has basically spooked everybody else, especially anybody that's in the short term seeing their investments start to go public.
Peter: And, you know, part of part of what's really hurt is you've had a bunch of companies that got funded at very high valuations when they were private. They've gone since gone public and haven't frankly performed very well in the public markets. And so now there's a lot of investors kind of looking at that and saying, hey, I'm not certain anymore where valuations should be in the private market because I'm not seeing the kinds of returns that I would have anticipated once these companies go public.
Peter: And that's only gotten worse as as tech stocks have kind of led the charge off of this decline in the stock market.
Jon: So in summary, you think this is happening because the exits aren't what people are anticipating.
Peter: I mean, ultimately, right. Like, that's that's what's going to slow down any any type of investment cycle is if you're not getting the returns that you anticipated. Right. You're going to shift that capital to other investments that can generate, you know, higher yield.
Jon: Because some of the other funds that I've talked to recently, Grant is private a month or two, and a lot could change in a month or two because right now it is March.
Jon: May 9th, sorry. So today it is May 9th. And so a lot could have changed. But I know some of the earlier funders are saying they're not seeing any changes in in deal flow and funding. Would you agree with that or disagree with that?
Peter: I think I disagree. So, I mean, it depends on stage. So the later stage stuff I think is struggling a little bit to get done. I think earlier stage, you know, is more likely to get done. But even they're like, I'm seeing a slowdown across the board. I just met with a company today, really great series, a stage company, really good growth, really good metrics.
Peter: And they were like, hey, you know, given this current funding environment, you know, we've cut back our fundraising goals by 20% and we've also like reset our valuation expectation. And we anticipate that this could get longer, take longer to get done. And we're also not as certain when people raise their hand and say, hey, I want to invest if we can really count on that or not.
Peter: Right. And I don't think that they're unique in that. I'm kind of seeing that across the board, that that rounds are just taking longer and longer to get done.
Jon: So the amount that they're raising is 20% less. Is the is their valuation also taking a 20% hit?
Peter: Probably at least 20%, maybe more?
Peter: Yeah, but you know, 20%, you know, compared to when. Right. Compared to Q4 of last year. Yeah. Compared to a year ago, maybe not as big of a as a hit as you might expect compared to two years ago. You know, it's actually probably a slight gain. So, you know, it's all it's all relative.
Jon: Do you think Q2 numbers will be alarming for those following these trends?
Peter: Well, I don't think that they'll be all that surprising. I wouldn't be surprised if Q2 looks worse than Q1, frankly, because you had a lot of like overhang from Q4 bleeding into Q1. Right. So like we for example, we we funded a deal and one of their biggest competitors raise gold at a very high valuation and kind of shocked us.
Peter: And then what we realized kind of back channeling is that what happened is that those terms had been set in Q4 and really everybody had like signed up and made commitments and everything else. And so essentially they had closed it in Q4, but they didn't do the announcement until January. And frankly, like the money may not have come in until Q1.
Peter: But, you know, realistically, like the deal was done in Q4. So like deals like that are going to show up in the Q1 numbers. Right. And so that's an overhang. And then you also had like this misalignment of valuation expectations where like maybe a company set the valuation in Q4, but they are still fundraising into Q1. And, you know, maybe they closed some of the capital, but maybe not as much of it as they had anticipated.
Peter: Right. Or it just took a lot longer to get it closed. So, like all of those things lead me to believe that, like the Q1 numbers are probably going to be better than the Q2 numbers. I don't know where Q3 comes out, but it'll really depend on whether or not I think the U.S. economy starts heading into more of a recession and starts impacting the performance of these these technology companies that raised a ton of money.
Peter: And you're seeing a lot of technology companies that already start to pull back a little bit and start doing big layoffs. Right. So like Robinhood and a bunch of others have laid off a bunch of.
Jon: Staff matter has as well.
Jon: Matter to say Mater Mater. I apologize. Mark Zuckerberg. So it looks like funding for seed deals hasn't dropped. Those numbers are up 14% compared to the prior quarter. But for later series companies, that's down 19%. Do you think that seed will continue to be unaffected? Does it is it more resilient? Is it more like inelastic to the market or.
Peter: Yeah, I think seed generally is is more inelastic to the market. Seed is going to be impacted more by kind of the creation of new companies at any given time than it is necessarily by, you know, valuation ins or how the public markets are performing. Because if you make a seed investment, you're signing up for like a ten year commitment right before you're going to get any sort of liquidity in most cases.
Peter: And so, you know, you just kind of make investments and, you know, cross cycles because there's no other way to do it. That said, like seed investing is one of those areas where you're really I think what you're seeing is people that still have a lot of cash, right? So most deals are done by angels, seed funds, etc..
Peter: Those people are still sitting on a lot of cash and they're able to invest it and they're saying, look, I don't care what the market's doing today because I'm making this like ten year investment. And so they're paying the money in. I think the problem with later stage deals is it's like, okay, if I put this money in, this company is telling me that they're going to go public in a year or two years, and I have no idea where the stock market's going to be in in a year or two.
Peter: And so I don't want to take that risk. Right. I'd rather put it into something that's safer. And part of it's not not even like like we have this discussion today at our firm. We're looking at the deal. And I was like, I love the company. Super bullish on the company. You know, it was a very growth stage deal.
Peter: I'm terrified that in six months the three trades at a lower valuation and we take a hit on our books, even though ultimately longer term, I think it'll be a really successful company and we'll make money on it. That's still pretty damaging as a firm to have like a write down. And so I think you're seeing some of that too, where like firms are like, I love the company, not sure where the valuation is going to be in 6 to 12 months.
Peter: Maybe we sit and wait and see.
Jon: Okay. So do you think a lot of the deals will happen that way? You're like, you want to do a deal, but you're afraid of the write down, a write down. It's going to get hard for anyone to raise later on for you. What do you do for you to raise another round?
Peter: I think it's going to make things more difficult, but I think what you're going to see and we're already seeing this is like safes and convertible notes across the board where people are like, I'm going to kick the can down the road on valuation. Let's kick in some money right now to keep the company going because, you know, we're still big believers in the company, especially over the longer term.
Peter: but we're not going to try and go out and get some big halo valuation and try to defend it and blah blah, blah.
Jon: Are the caps on the safes and convertible notes or the interest rates that are in changing?
Peter: I mean, yeah, they're probably coming in a lot lower than they, than they would have.
Jon: Been like what does get specific, Can't get how specific can you get? Like, let's say a company is doing in a million revenue, Are they still, are they doing a price round or are they just saying, hey, here's a safer convertible note? I assume that'll be a price round.
Peter: Yeah, I mean, so that's probably like, you know, series A territory and you know, they can probably do a price round but, but they're going to be like that company mentioned earlier that's going to take a hit on valuation relative to where it was, you know, 3 to 6 months ago.
Jon: Like a pre-revenue start up. Would you have that kind of data to know what the cap is on those type of deals?
Peter: That can be? Yeah, but I just don't know that seed stage stuff is the valuations are changing a whole lot. Okay. I think what is changing from the seed stages, you had these outliers, so like company seed stage companies, pre-revenue that raised, you know, $100 million seed round, you know, at a $300 million valuation. And you're like, how does that like make any valuation sense at all?
Peter: I think those are probably not going to happen as frequently. And you're already seeing that like I haven't seen any of those happen over the last few months. But I think just your standard, you know, here's half a million, here's a million, here's, you know, couple million whatever seeds seed round. I think those continue to happen.
Jon: Okay. I know some of the numbers.
Peter: And I don't think the valuations change very much for those.
Jon: Okay. I know some of the numbers I've seen in in my space as we're looking are concerned about raising is one company now. So you know announcing and when you raised could be what, four months off 7 million and then three months later they announced an additional 25 million.
Jon: And so in some aspects, those numbers you probably never would have seen before.
Peter: Yeah. Yeah. But some of it too is like how long did it take for them to announce the first round?
Peter: Yeah, I mean they probably closed on that many quite a while ago, right.
Jon: More than four months, 12 months.
Peter: Could it be okay. I've seen that sometimes. You know, the other thing too is like, look, the reality is, as much as everyone's pulling back, there's still an insane amount of capital dry powder ready to invest. And so, you know, what we saw kind of happening was there's a little bit of a bifurcation. And I think we talked about this where like high quality deals were still getting done at high valuations and mediocre companies were struggling to raise at all.
Peter: Right. Where is that? You know, six, nine months ago, like everybody was raising at high valuations. Right. So I think there's a little bit of that occurring as well where you have companies that are doing something really interesting, they're growing really fast. You've got investors that are sitting on a lot of money and they're saying, hey, this is winner.
Peter: I want to preempt the next round or and get in and invest sooner so I can lock up that that that spot in the company.
Jon: Okay. Do you think 2022 will be a good year for pieces or will there just be a lot of right. Right. You know, like.
Peter: I think I think 2022 is going to be a tough year for VCs. I think you're going to see kind of write downs across the board. I think you're going to see a lot of VCs ponying up more money to maintain their positions and keep their companies alive through convertible notes and bridge rounds. I don't think there's there's going to be a ton of liquidity events occurring, right, because everybody's nervous and, you know, they're not making big bets this year.
Peter: Right now. Certainly there are exceptions, right? You look at Shopify and deliver, but there's also.
Jon: Fiasco in which that one distinct.
Peter: Yeah. I mean yeah right. So I think there's going to be some more painful stories like that, especially as some of these high fliers like a fast goes back to markets as hey like we need to raise more money in the VCs, look at the metrics and they're like absolutely not in the company just you know folds.
Jon: I think they've completely folded. There was an announcement on their website.
Jon: They're dun dun dun dun.
Peter: Or they re trade at a lower valuation, right? You look at like companies like Instacart that have traded down. Okay, have a substantially okay.
Jon: I think to, to wrap up besides changing how how deals are done so you're seeing a lot more convertible notes you're seeing lower numbers as far as what's the market cap or how much they're able to raise. You're seeing average companies no longer being able to raise, whether they were able to raise before. Well, we see any other trends.
Peter: Like I think, yeah, I'm hopeful that some of these companies that are still great, companies that are struggling a little bit right now to raise will like over the next few months by the end of the year by you know Q3 Q4 investor like I'm hopeful that investors have more confidence in the overall market and where things are going and start making investments in those types of companies because I still think there's a lot of great investments to be had in that space that that maybe those companies aren't getting the love that they deserve.
Peter: But that said, like, like there's a lot of capital that's been flushed into the market. Right. And it's going to take a little bit of time for that to play out. And so it'll be interesting to see how 2022 continues to play out this year.
Jon: Do you think that VCs love for tech will shift with everything that's happening now?
Peter: I don't think it's going anywhere, right. I think on the one hand, VCs really benefited from this, you know, the bull market of last year where there were just, you know, crazy high valuations for public tech stocks and a lot of VCs were able to liquidate and realize a ton of their investments and make a ton of money.
Peter: So it's a great year for VC. Last year. But, you know, the reality is tech is just such a great tech, such a great venture investment that, you know, I don't think it's going anywhere anytime soon.
Jon: All right. So thank you guys for watching. Please go to venture capital. Lot more to subscribe. Do you like that? You are a venture capital firm.
Peter: Wow. Like it's you.
Peter: Anyways, thanks for joining us today. If you're out fundraising, you know, I would. I would. If I were you, I would plan a little extra time in your fundraising path. It's probably going to take you a little bit longer to close a deal. and you know, being able to build kind of momentum and coalitions among your investors can be super important.
Peter: So just keep that in mind for, for this year. If you are venture backed already, you know you should be having detailed conversations with your your board about how do you think about fundraising this year and and hopefully they're there around the table to step up and give you the capital you need throughout the rest of the year.
Peter: Thanks for joining us. Hopefully this was interesting.
Jon: Make sure you like it. Subscribe comment below if you've got any questions and we'll include it in any future episodes.
Jon: All right. Thanks, guys. See you soon.
