Hitting The Bottom?

Hitting The Bottom?

I woke up this morning to CNBC's Squawk on the Street. The headline was from my wife Gené's review of Q1 venture funding from Crunchbase News. Venture down 53%.

Ben Lerer from Lerer Hippeau, a New York early-stage venture fund, was in the chair fielding questions. He did a good job of confirming the gloomy outlook. Most investors this week are echoing the trend. It's really bad out there.

I gave the Crinchbase article to ChatGPT4 and asked for a Blues song summing up its main points. Its really quite good:

(Verse 1) I woke up this morning, with the venture blues on my mind Yeah, I woke up this morning, with the venture blues on my mind Investors pullin' back, leavin' startups far behind

(Verse 2) Global funding's down, yeah, it's been a rough year Oh, the global funding's down, Lord, it's been a rough year With Silicon Valley Bank collapsin', oh, the end feels near

(Chorus) I woke up this morning, with the venture blues in my soul Oh, I woke up this morning, with the venture blues in my soul But we'll keep on pushin', till we reach our goals

(Verse 3) Seed funding's droppin', investors holdin' tight Yeah, the seed funding's droppin', investors holdin' tight But we'll remember Square and Airbnb, who found the light

(Verse 4) Early-stage funding's down, it's a 54% decline Oh, early-stage funding's down, a 54% decline But we keep on hopin', Lord, that we'll be just fine

(Chorus) I woke up this morning, with the venture blues in my soul Oh, I woke up this morning, with the venture blues in my soul But we'll keep on pushin', till we reach our goals

(Verse 5) Late-stage funding's fallin', but AI's still standing tall Oh, late-stage funding's fallin', but AI's still standing tall With OpenAI and Stripe, we'll rise above it all

(Verse 6) The slowdown's hit us hard, but we'll keep on movin' through Yeah, the slowdown's hit us hard, but we'll keep on movin' through With the venture blues in our hearts, there's nothing we can't do

(Chorus) I woke up this morning, with the venture blues in my soul Oh, I woke up this morning, with the venture blues in my soul But we'll keep on pushin', till we reach our goals

So what is going on?

Well, I may not be the best person to say. I'm pleased to say that SignalRank ( ) closed its second round of funding last Friday. At least one well-known reader of this newsletter invested. The company is now ready to support seed and Series A investors in doing their pro-rata share of recommended Series B rounds.

The trend in Series B rounds is certainly down, as Tomasz Tunguz wrote a couple of weeks ago. Tomasz has a new $230m fund announced this week - Theory (see below). But great Series Bs are still happening.

That said, the decline is real, and the bottom is not in sight. The cause of the decline is not unlike a train derailment. A coach leaves the tracks - in this case, the decline in public market values driven by high inflation and interest rates. Then the IPO market disappears. After that, late-stage venture-backed companies struggle to raise capital at any price. Then Series B rounds decline in number and value. And now seed and Series A rounds are also derailed.

Only when public markets recover will the entire train be able to get back on the rails. Until then, venture-backed companies must preserve capital and align spending to revenue growth. The only exception is in the AI space, where large bets are being placed on huge outcomes.

Investors with capital are in a very good position. Great founders are still building startups that can grow into industry-defining pioneers. The investments are being done at lower valuations and raising less capital. Capital efficiency is now well understood. It is likely that Series A and B rounds completed in the next two to three years will produce the best outcomes for many years.

So we are not at the bottom, but we will likely get there over the next few months. And in the meantime, the next top is already being constructed. Smart investors know that to be true.