As CEO and co-founder of Entrepreneur First, Matt Clifford has a pretty good vantage point from which to assess the global startup landscape.

In Berlin, London, Paris, Bangalore and Singapore, the Reid Hoffman-backed company runs a program to help ambitious people find co-founders and start companies. Having amassed a $2 billion portfolio since 2011, EF is now entering a new era of incubating startups — just as the coronavirus pandemic upends the entire global economy.

Protocol caught up with Clifford to ask what changes he's seeing in the market, whether he really thinks VCs are "behaving badly," and what startups should be doing right now to come out strong on the other side.

This interview has been lightly edited and condensed for clarity.

How have you seen the fundraising environment change in the past month or so?

Almost everyone is changing investment behavior because of this. My rough estimate would be that most seed funds intend to cut their pace by about 50%, so half the number of investments in 2020 that they would normally do. And because of that, supply and demand just means that capital valuations will fall. I expect valuations to fall 30% to 40%, even in seed, and at least that farther up the chain.

Almost everyone says they're still open for business, and I guess that's technically true; I think there are people who are writing checks. But at the moment, people are largely clearing out the pipeline that they already had from in-person meetings in the first half of Q1. So I think new investments are just harder: I mean, the rapport that you can build on Zoom, at least for now, feels less strong than the rapport you can build in person. So I think it's going to be a much harder environment for founders in general.

But in some senses I think that is probably not a terrible thing. I think we definitely had got to the point where valuations were getting pretty frothy. And I think free money is always nice, but I think it's useful for founders to learn the discipline of hard times, in some ways. So while I wouldn't want to pretend for a minute that we wouldn't click our fingers and make this go away if we could, I do think that great companies will continue to be built in this environment.

You held your European demo day on March 27. Have you seen any difference in the deal terms investors are demanding compared to normal?

I haven't yet at seed seen any unusual terms other than probably slightly lower prices. I think we've had the first three term sheets [from demo day] now. So far, prices seem maybe a little lower, but not crazy low; it's not halved or anything. And I'm yet to see any founder-unfriendly terms, like participating preferences or anything like that. But I am hearing farther up the chain that's bound to come in at series B, certainly. Participating preferences in most of the boom were just a total no-no, and stuff like that is definitely coming back.

You recently wrote an article for Sifted about VCs behaving badly during this crisis: People changing the terms on signed term sheets, for instance. Can you elaborate on what you've seen?

Maybe I didn't emphasize this enough [in the article]: I think it is, fortunately, a minority of firms and individuals. And actually I think you could turn the whole argument on its head, and say it's quite remarkable how many investors have honored commitments they made in what now does seem a totally different world.

But you know, we're in six territories; at least one deal per territory, I've seen some pretty egregious behavior. And as I said in the article, I have no problem with prices changing. I don't think there's any way around that. I think what is less acceptable is the fact that the power dynamic as a round comes to a close, when terms have already been signed, is just so tilted in favor of the investor, because of the structure of the industry. You really do run down the clock, not just in terms of time, but in terms of runway. Typically, you're starting to raise money when you've got six months left.

Let's say it takes three months to find the right lead, you sign terms … It can often take two months to close a series A or B, given the amount of due diligence that goes on. So by the time you're getting toward signing, you could really be down to a month of runway. So I think for, then, a VC to change the terms, when you really have no other options left, it's a kind of raw power play that maybe is common in certain other sectors or asset classes, but it's pretty rare in VC, because VC is built on 10-year-long relationships. So it's pretty disappointing.

And I do think it is counterproductive and short-sighted. There's no doubt that reputations spread quickly in small ecosystems, and that's what we are. It seems crazy to me to be willing to throw away a reputation on the basis of one deal in one fund. You're not going to make or break your fund that way, but you do make or break your reputation.

Did you get any pushback on the article?

I didn't really get a lot of pushback. Privately, some VCs did make the point that in some cases, it becomes almost like a fiduciary duty to not go ahead with the deal if the world's changed so much. For example, if you'd signed terms on a company that was doing some sort of concert-booking software, something that's clearly just gonna burn all the money in the next six to nine months while revenue is zero, I can see that there is a reasonable point there. Where it feels to me less justifiable is when there's really no immediate impact on the company. It's just more of an excuse, I would say, to exercise leverage.

You've spoken a lot about how entrepreneurship has grown as a way for ambitious people to demonstrate their ambition. But Entrepreneur First has only ever operated in an economic expansion. Now that we're in a downturn, might fewer people be attracted to entrepreneurship?

I think it's fair to say after 12 years of boom, you probably are attracting into the system people who you might call startup tourists, venture tourists: people for whom it just looks sexy, it looks like the shiny thing. It's certainly true that there'll be fewer of those, and there'll be some supply constraints as the risk averse step back from the ecosystem. [But] now is a great time for problem solvers. God knows, you look at the world today and see a lot of problems.

I think it's never been more attractive to say, how do we solve those problems, how do we solve them at scale, how do we solve them at scale in a way that creates something genuinely valuable. We shouldn't underestimate entrepreneurs. I think the actual environment risk is a relatively small part of the enormous risk that faces entrepreneurs anyway.

There's been talk in both the U.S. and U.K. about how governments should help startups get through the downturn. What are your thoughts on that?

I do think that there are ways that governments need to intervene and help in the current environment, [but] I'm pretty skeptical about some of the solutions that are being put forward, because I think they don't take into account the natural mortality of startups. If you look at the best data I've seen, the Dealroom study of European series A, what it suggests is something like 77% of companies that raise a seed round do not raise a series A — they die, basically. So I think we should be very careful about using taxpayer money to save companies whose natural death rate is three quarters. And I think it's really important to design any mechanism to be compatible with getting a great deal for the taxpayer.

I do see that there's a market failure that will happen as a result of coronavirus, and I do see a lot of value in resolving that. If you think about people slowing down their pace, I think right now at series A and at series B, most investors are putting their money and their time on their existing portfolio rather than making new investments. So you are going to see even the 23% that would successfully raise an A round normally struggle to do that in this environment. I think it's important to fill that gap — I think it's bad for the U.K. for those companies to fail. So the task for the taxpayer is how do you, without expertise, successfully back as many as possible of the 23% and as few as possible of the 77%. Fortunately, I think there's a pretty easy answer: Require co-investment, require that the existing investors of these companies have skin in the game.

If you did that, you would take away a lot of the risk of taxpayers' propping up bad companies. You might expect me to say the opposite, that it would be better for us to prop up as many as possible. The reason I'm not saying that is I think it's important to remember the ecosystem. The reality is that the failure rate of startups is part of what makes the ecosystem work: the recycling of capital and talent, the communication of important information around what markets are viable, and what are not. If you don't have that recycling, and that signal effect, you actually can really damage the ecosystem.

So if the failure rate within, say, a two-year period of seed-funded startups went from 75% to 30%, because there's tons of government money flowing in, it's going to massively distort the market. It's going to keep good people working on bad things for longer, and it's going to make it much, much harder for people with good ideas to succeed.

Have you thought about bringing Entrepreneur First to the U.S?

The core team-building product isn't the bit of the funnel that we think is best suited for the U.S. Ultimately, we think that EF is best suited to ecosystems that lack network density. The big risk in any investment model is adverse selection, that you're specifically selecting the people that aren't going to succeed. And I think that's something that people criticized EF for early on: "These are the losers, they couldn't do it anyway." I think we've pretty decisively proved them wrong about that, when you just look at the portfolio's success.

I understand where the critique came from: There's a danger that if being able to find a co-founder is positively correlated with success, then the people that couldn't find co-founders are not going to succeed. That's not true, it turns out, in Europe and Asia, as I think we've demonstrated. But we believe that it might be true in the U.S., or particularly in Silicon Valley. Our mission is to go to places where starting a company is not yet normal, where it's not yet the standard way to express ambition, and to help people in that place discover entrepreneurship. In Silicon Valley, it's pretty obvious that starting a company is almost the default way to express ambition. And so I think in that environment, not having a good co-founder in your network might actually be correlated with failure.

Also I think the pricing and economics of it are much more challenging. The valuations there are so high that for our offer to be competitive would require a big change in the model. So we just see a lot of lower-hanging fruit elsewhere in the world, which is why we've chosen the sites that we have.

What do you think startups should be doing right now?

I think the first thing is, make the tough decisions. Most of us, in boom times, sort of allow waste to creep into the system one way or another. That can be waste most obviously, in terms of spending too much. But it can also be things like a lack of focus; it can be trying to do too many things at once; it can be, you know, adding adjacent product lines that you're not quite ready for. So the first thing is, look at all the waste that you're potentially accumulating in the current version of what you're doing, and cut everything that isn't absolutely core. I think people that do that now — that make those tough decisions — are just going to be way, way, way better positioned for the economic downturn.

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The second thing is to focus on what it takes to succeed on the other side of the crisis. I think it's tempting to sort of live in the crisis. And I understand that, and it's a natural instinct, but I think the people that make it through this will be the people that have a narrative about what they're doing and the value they're creating beyond that. What people shouldn't do is make cuts to the functions of their company that are going to be what creates value after the crisis.

So now is not the time, if you're a tech company, to be gutting your product function. It's tempting if you think you're not going to be making many sales in this period. But actually, the most important thing is to come out the other side of the crisis with the best possible tech and products to succeed. Just focus on what is the actual value that you create, and who are the people and resources in the company that you need to do that.

The third one is just to relentlessly stay close to your customers in this period. Ultimately, at risk of stating the obvious, the startups that succeed are the ones that deliver something genuinely valuable to their customers. One of the hardest things about this period is that it's harder to spend time with customers than it normally is. But actually, I think what we hear from big enterprises is that, right now, they're ruthlessly focusing on reducing spend on anything that isn't a hair-on-fire problem for them. They're not spending money on nice-to-haves right now.

And so I think startups need to just make sure they are super close to their customers and really understand what is urgent and important right now. I think startups that focus on the new urgency — what has just become urgent because of the crisis — they're the ones most likely to succeed.