(Context: I'm a VC, but while I graduated just after the dotcom bubble and worked as an engineer through the '08 recession, I was not a VC until ~10 years ago.)
Directionally I agree with the post. Relative to a few months ago, there's more fear, and a much bigger emphasis now on cash efficiency, lower burn rates, etc. That said, I'm less pessimistic than the author and have different takes on a few of their points:
Point 2: "VC funds have new investment periods of 5-6 years" -- it's more like 1.5-3 years these days. Which means that LPs can back an existing VC's new fund in 9 or 18 months, and that new fund will have lower entry prices and higher ownership. A lot of established LPs I've talked to appreciate that downturns can be the best time to deploy a new VC fund. I do agree with the author's conclusion that funds might shrink in size, and many funds -- especially less established ones -- will shut down. But I believe there will continue to be lots of capital available, especially at earlier stages.
Point 3: "The compensation for software and business people will drop commensurately" -- this is the point I'm least certain about. Startup salaries have risen quickly in response to FAANG salaries. Once Google and FB started offering $400k and $600k total comp to sr engineers, startups raised their offers significantly as well. This is part of what's contributed to much bigger seed rounds in recent years: you now have to raise $4m to pay for your team of 6 in SF, instead of $2m. And if Google stops paying $400k and starts paying $250k then I do think startup salaries will drop as well. But if Google et al keep paying high comp, then I don't think startups will have much of a choice, and I think overall software comp will remain high.
Point 4: "VCs will invest more in convertible debt" -- maybe. There are benefits to debt, which the author outlined, but also drawbacks. I think most investors who write big checks will still prefer equity rounds. I do think employee equity and options will start being rebased, which we're already seeing: https://pitchbook.com/news/articles/instacart-valuation-groc...
Point 5: "Some sectors will really suffer" -- I agree with this. Here's a good take: https://twitter.com/lessin/status/1531713953293668352. Basically if a business model depended on the availability of cheap, abundant capital, then that business model will be hard to raise for in the near future. I think pure software companies will continue to attract capital at healthy (but lower) valuations.
One big difference between today and 20 years ago is that you can build a real internet business with a small team. While valuations exploded in the last 2-3 years, it was not uncommon before then to see a startup raise $2m-$3m and get to $60k or $100k MRR. And that's a great run rate for a company with half a dozen people. Your burn with 6 people and $100k MRR is probably minimal, and your dependency on future funding is low.
Directionally I agree with the post. Relative to a few months ago, there's more fear, and a much bigger emphasis now on cash efficiency, lower burn rates, etc. That said, I'm less pessimistic than the author and have different takes on a few of their points:
Point 2: "VC funds have new investment periods of 5-6 years" -- it's more like 1.5-3 years these days. Which means that LPs can back an existing VC's new fund in 9 or 18 months, and that new fund will have lower entry prices and higher ownership. A lot of established LPs I've talked to appreciate that downturns can be the best time to deploy a new VC fund. I do agree with the author's conclusion that funds might shrink in size, and many funds -- especially less established ones -- will shut down. But I believe there will continue to be lots of capital available, especially at earlier stages.
Point 3: "The compensation for software and business people will drop commensurately" -- this is the point I'm least certain about. Startup salaries have risen quickly in response to FAANG salaries. Once Google and FB started offering $400k and $600k total comp to sr engineers, startups raised their offers significantly as well. This is part of what's contributed to much bigger seed rounds in recent years: you now have to raise $4m to pay for your team of 6 in SF, instead of $2m. And if Google stops paying $400k and starts paying $250k then I do think startup salaries will drop as well. But if Google et al keep paying high comp, then I don't think startups will have much of a choice, and I think overall software comp will remain high.
Point 4: "VCs will invest more in convertible debt" -- maybe. There are benefits to debt, which the author outlined, but also drawbacks. I think most investors who write big checks will still prefer equity rounds. I do think employee equity and options will start being rebased, which we're already seeing: https://pitchbook.com/news/articles/instacart-valuation-groc...
Point 5: "Some sectors will really suffer" -- I agree with this. Here's a good take: https://twitter.com/lessin/status/1531713953293668352. Basically if a business model depended on the availability of cheap, abundant capital, then that business model will be hard to raise for in the near future. I think pure software companies will continue to attract capital at healthy (but lower) valuations.
One big difference between today and 20 years ago is that you can build a real internet business with a small team. While valuations exploded in the last 2-3 years, it was not uncommon before then to see a startup raise $2m-$3m and get to $60k or $100k MRR. And that's a great run rate for a company with half a dozen people. Your burn with 6 people and $100k MRR is probably minimal, and your dependency on future funding is low.