Startup founders say venture capitalists are offering tougher terms as companies try to raise funds amid economic uncertainty and a sell-off in tech stocks.
Valuations are significantly lower than they would have been a year ago, according to entrepreneurs who gathered at the Collision technology conference which drew 35,000 attendees in Toronto last week.
“We’re raising a Series A right now,” said Dejan Mirkovic, chief executive and co-founder of Goose Insurance Services Inc., a Vancouver-based startup with an app people use to find, get quotes and buy insurance. In venture capital, Series “A” funding follows initial angel or seed investments and may be followed by additional rounds of venture capital funding.
“The problem is that the market has a lot of capital to deploy, but everyone is a little shy,” Mirkovic said last week in Toronto. “A 30% discount right now, that’s what we’re seeing,” he said, referring to the drop in startup valuations from their peak.
Mirkovic said he was asked by a potential investor for so-called equity preferred shares, a transaction structure that became difficult for investors to sustain during the height of the founder-friendly venture capital boom. “We said no,” Mr. Mirkovic said.
In the event of a sale of a company, an investor holding participating preferred shares would be guaranteed to get back the original investment, plus a percentage of the remaining proceeds, according to PitchBook senior analyst Kyle Stanford. “It is considered a combination. This can be quite common, especially in bear markets,” Stanford told Collision.
David Cancel, co-founder and executive chairman of AI-based sales, services and marketing company Drift, said he launched his company in 2015 in part with a $10 million investment. He met one of Collision’s investment partners, who joked that if Mr. Cancel started a new business today, the check would be for $7 million, not $10 million. “Things are considerably lower,” Cancel said.
According to him, it’s not the end of the world.
“This is the fifth company that I have created. It seems my timing is to start a business every recession. This is my normality,” he said. “I’m more comfortable in a less noisy atmosphere. I think that’s how I feel right now.
During a downturn, there is less competition for talent and companies are held to more realistic targets, according to Cancel.
The economy is likely facing a long period of inflation and economic weakness reminiscent of the 1970s, said Wesley Chan, an investor and former Google technology chief who developed early Google projects including Google Analytics, Google Voice and Google Ventures. He is a co-founder of startup investor FPV Ventures, which in June announced the final closing of its first venture capital fund, with $450 million under management.
Venture capitalists will likely slow the pace of investment in the coming months as they identify companies that can outperform in times of stagflation, said Chan, who also attended the Collision conference.
Write to Steven Rosenbush at [email protected]
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