The 'new normal' in startups was never normal

The 'new normal' never was

Let me let you in on a dirty secret: A lot of investors are secretly relieved this correction is happening.

Despite the doomsday tweets and the blaring red of the stock market, investors I’ve spoken with this week have also breathed a sigh of relief at the correction and a hopeful return to lower prices and a slower investing pace. “I’m even going to plan a summer vacation,” one person giddily told me, anticipating the return of the VC Summer™ .

That’s not to say that there isn’t a lot of pain right now in all parts of the ecosystem. VCs are not flippantly dismissing the human toll of laid-off workers and stressed-out founders, and they are spending a lot of time right now counseling companies and talking them through how to cut costs or do layoffs.

But even as the times are hard, there’s also a healthy recognition among many in the venture community that the “new normal” that emerged in the “Loom, Zoom, room” era wasn't actually normal at all. A correction wasn’t just inevitable. It’s welcome.

Things really are slowing down, and some VCs are relishing the chance to run a longer deal process compared to the breakneck pace of 2020 and 2021.

• After a rigorous deal-a-day year, I’ve heard multiple times about how investors are excited to take more time and run a “real” process instead of having to do 24-hour turnarounds because Tiger Global has slapped down a ticking-time-bomb term sheet. And even though it was meant to be sarcastic, there’s a sliver of truth in Logan Bartlett’s tweet that he’s “hearing rumors that things are getting so bleak out there that VCs are getting time to do due diligence on investments.”
• Cap-table tracker Carta has also seen a dip in average daily rounds recorded on its software from nearly 26 a day in 2021 to closer to 20 so far in 2022 (although those numbers could change as the second quarter shakes out). Clearly though, there’s still a lot of funds, including some of the loudest sounding the alarms, that are making investments.

Reading the pitch-deck tea leaves, investors are showing they’re both reading less and caring more about different things — yes, even at the early stage.

• “In 2021, investor interactions with pitch decks really outpaced the rate at which founders were sending out decks,” DocSend’s research lead Justin Izzo told me. Those lines have crossed in the last few months: VC interactions have dropped by 20% to below 2021 levels and founder activity has risen by 25%. Even within DocSend’s fundraising network, Izzo has seen early stage pitch deck submissions drop from an average of 80 a week in Q1 into the 50s in Q2.
• What they’re spending time reading has also changed: In 2021, investors reviewing pre-seed and seed-stage pitch decks spent the most time on the product and business model sections (in that order), DocSend’s Izzo found. These days, investors are spending the most time on the business model, followed by the traction section, meaning they’re scrutinizing proof that there’s some market adoption.

There’s also widespread relief about prices coming down. Many investors had been balking at prices but paying anyway.

• 2021 was the year price discipline went out the window. “Biggest change in the venture landscape now: There are no VC funds with pricing discipline. All of us have caved,” Founders Fund’s Keith Rabois tweeted in July 2021.
• But investors are already starting to see some prices come down. This is bad for many firms who are seeing their IPO stakes underwater and more private-market damage to come, but the flip side is lower entry points to invest in new companies.

Investors may be glad to hop off the treadmill of the last few years, but there’s been little introspection so far on who kept punching up the speed button. Y Combinator, for example, took some heat publicly after it published its take on the downturn. “YC’s batten down the hatches email has 10 bullet points on handling the downturn. But no word apologizing for advising founders to overvalue their companies in what was an insane previous market,” Danielle Strachman said. While the a16z folks were maligning how startups came up with absurd ways to spend money, its founder was drinking an $842 bottle of whiskey (spotted by eagle-eyed reporter Eric Newcomer). Then the firm released a hype video to announce its new gaming fund.

Perhaps some correction introspection on what was not normal about the “new normal” could be a good thing for the next set of VC advice essays.

Overheard

The “dirty term sheet” is back, according to Benchmark’s Bill Gurley. In a tweet thread, he warned operators from taking bad terms just to keep up valuation appearances. “Taking a terms-laden deal is like starting the clock on a time bomb.”

That’s if you even get one. “I’ve seen more term sheets pulled in the last month than in the last decade,” tweeted First Round’s Josh Kopelman. Take it as a warning that it could happen to you.

2021 VC language vs. 2022 VC language. FirstMark’s Matt Turck wins tweet of the week for his hilarious translation of last year’s “Blitzscale! Burn!” VC chants to this year’s “We believe in financial discipline” language.

The worst tattoo ever? Crypto investor Mike Novogratz embodied the phrase “Lunatic” when he got a wolf-themed tattoo in support of the luna cryptocurrency. Now after luna’s collapse, he says that it “will be a constant reminder that venture investing requires humility.” At least he didn’t name a child after the project, which luna’s controversial creator Do Kwon did.

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Inside track

It was boom times again — at least when it came to VC advice. Here’s a compilation of how venture capital firms are (publicly) advising founders, LPs and other VCs:

• Several Andreessen Horowitz partners, including Marc Andreessen, went on “The Good Time Show” to discuss the markets and scenario planning. “Now is a good time to buy time,” he said. A16z growth partners David George and Justin Kahl published their own framework for how startups need to reevaluate their numbers.
• Sequoia met with 250 founders on Monday, but has yet to issue a follow-up to its “RIP, Good Times” or “Black Swan” memos. Partner Ravi Gupta tweeted his own thread of advice for founders, reminding them that their valuation is not what they thought: “This market change may not be your fault, but it is your problem. If you raised in 2021, your company might be worth something like 1/3 of your last valuation.”
• If you need one graph to drive home the correction, look at Lightspeed’s comparison of Amazon in the dot-com bubble to Shopify now in its take on the upside of a downturn.
• Craft Venturesreleased its video of David Sacks and Jeff Fluhr talking about operating during a downturn, which is one of the best I’ve found for explaining what’s happening in the public and venture markets and what to do now.
• Y Combinator’s warning: “If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn," it said in an email titled "Economic Downturn." "Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan."
• NFX’s Pete Flint had a list of 39 moves to survive and thrive in a downturn, including importantly how to manage the psychology of yourself and your team.
• “If you manage to survive, this downturn is like a gift,” Altos Ventures' Ho Nam told other venture capitalists. It’s not about going to find the hot new deals, but putting in the work to help the struggling companies because you’ll learn more valuable skills.
• Lux Capital called the times an “Entropic Apex — a moment of maximum instability and imbalance where things are easily torn apart or fall to pieces,” and listed three opportunities in its letter to LPs: de novo company creation, special situations (like spinouts, divestitures and recaps) and consolidations.
• Neo’s Ali Partovi remains bullish for the early stage and didn’t agree with hoard-your-cash advice, given inflation: “If you're early-stage, don't stop hiring. Don't listen to ‘accelerators’ who are telling you to slow down. Don't kill your startup with self-inflicted wounds. You can't save your way to becoming a unicorn.”

Need to know

Tiger Global slashed its tech-stock stakes. The firm has entirely unloaded its positions in Bumble, Airbnb, Affirm, PayPal and DiDi, and cut back on companies like Intuit, Zoom, Robinhood and Peloton.

Klarna could see its valuation cut by a third. The WSJ reported that the “buy now, pay later” fintech startup could see its $46 billion valuation sliced to the “low $30 billion range” as it allegedly tries to raise more capital.

Cerebral fired its CEO, a move Kyle Robertson claimed was illegal. The mental health startup is facing regulatory scrutiny, too.

The FTC plans to crack down on ed tech companies. The FTC is eyeing education companies that “force parents and schools to surrender their children’s privacy.”

From Protocol: SaaS valuations cratered in early 2022. But these startups thrived.

Also on Protocol: Bobbie, a venture-backed baby formula startup, is caught in the center of a supply chain crisis.

Five questions with … Ballistic Ventures' Ted Schlein

Kleiner Perkins veteran Ted Schlein is fully focused on cybersecurity with his new firm, Ballistic Ventures. As general partner, he’ll be working with other industry legends like Barmak Meftah, Jake Seid, Derek Smith, Roger Thornton and Mandiant founder Kevin Mandia to invest the $300 million they raised for its cybersecurity-focused debut fund.

What’s been the biggest shift from working at a large firm like Kleiner to starting a specialized fund?

My time at Kleiner Perkins has been fantastic and the team there is doing great. At Ballistic, since we are all cybersecurity geeks, we can start every conversation halfway through. There is a deep understanding of the subject matter by everyone on the team. Plus all resources are focused in one market segment.

What product or service are you totally, even irrationally, loyal to?

I guess on a consistent basis, it would be the Spelling Bee app in the New York Times. It drives me crazy if I can’t find the “pangram” and become a genius on a daily basis.

What is the biggest issue that your partners are talking about at your partner meetings?

Mostly we argued over the names of the conference rooms in the new office. After that, we spend a lot of time talking about what will matter. What I mean is there is very little interest within this group to do incremental projects; it is a team that wants to make a difference, so we spend quite a bit of time discussing what types of ventures will make the world a safer place.

You work closely with the intelligence community. What do you think is the biggest misconception startups have about working with the government?

A startup needs to understand that selling to a commercial customer is completely different than selling to a government customer. Sales cycles are longer, acquisition process is completely different and complicated. This is a place to hire a specialist with this expertise.

What was your first job, and what’s a skill you still use from it?

I arrested shoplifters at Macy’s. So I guess I’d say I have spent my entire career trying to stop bad guys, whether in the physical world or digital world.

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