10 charts from VC-land

The correction continues, as VC mostly doesn't ponder what's next

• all things come in waves

• Zombiecorns and why it’s hard to be different

• startup closures keep climbing

• still no exits

• M&A is busy, but most deals are too small to report

• VCs calling capital, but LPs aren’t calling back

• wandering the J-curve with Persephone (reprise)

• just get ‘back to normal,’ but also more exciting reasons to be optimistic

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10 Charts from VC-land

Random Walk hasn’t written much about VC-land lately because it’s (a) mostly grim; and (b) more of the same.

VC continues to be in full correction mode, and there’s not a whole lot new or different to say about it.

The core idea of venture is amazing. Big ideas and singular talents that need a substantial amount of upfront capital to “turn over the cards” on a transformational opportunity. The strategy is high risk and high variance, but when it works, very high reward.

What it became was far too much money started chasing far too little risk, and the industry evolved into a momentum trade. Put money in today, because there’d be even more money to invest tomorrow. Whether the idea every really became a transformational business was kind of besides the point.¹

But the strategy worked!

Venture capitalists would invest money into startups that they could convert into revenue, so as to attract more investment, to generate even more revenue. A rounds led to bigger B rounds which led to even bigger C rounds, etc. and eventually the revenue-generating machine would get big enough to go public or get acquired for a very big number.

Some of these high fliers are actually transformational companies, but a whole lot of them obviously aren’t (even after the cards had been revealed).

But at at the end of the day, the biggest piles of money were very happy to invest in (or buy) rapidly growing companies (regardless of profitability), and venture capitalists made a lot of money giving the people what they wanted.

SVB

It’s been an incredible run!

Everything changed, however, when rates went higher and the free money train ended. The capital-conveyor belt snaggled.

It was no longer true that an even bigger pile of money would be waiting to invest in the next round. The public markets (and the deepest pockets of private markets), lost interest in unprofitable companies.

When Uncle Sam gives 5% cash back “risk free,” unicorn-hunting suddenly seems rather provincial.

So, the pot-of-gold at the end of the rainbow got substantially smaller, and the hurdle for a “successful exit” is considerably higher. Instead of just offering the promise of a transformational company—all we need is just one more round, just one more, to take the edge off, c’mon man, just one more E extension—you actually have to be one.

Which is to say that the higher bar for exiting has got nothing to do with how big a company you happen to be—there is no “too early” for going public—and it has everything to do with whether you’re growing and profitable.

It just turns out that being high-growth and profitable at the same time is really, really hard to do. It’s so rare, you might even call them “unicorns.”

That’s left a lot of venture-backed companies, VCs, and their LPs in something of a lurch. They placed sizable bets on the value of revenue growth alone—historically large for the asset class—and now that the goalposts have moved (back to something more sensible), they’re stuck holding the bag.

So what are they going to do? Well, outside of a select few, they’re in trouble.²

In the bigger scheme of things, the correction is healthy. That doesn’t make it fun, but it does create a big opportunity for a return to first principles, plus clever adaptation to the new-normal. It’s not clear how much of the industry are aware of what those principles are or what adaptation might look like, but that’s partly where the opportunity lies.

Zombiecorns on the rise