5 Ways Venture Funding Will Radically Change In This New World
Startups need to brace for fewer seed rounds, harsher terms and more earthly valuations
“My mom used to tell me, ‘I think you were born with a horseshoe up your ass,’” says Eric Rea.
He has reason to feel lucky. He’s CEO of Podium, a messaging platform for small businesses that’s based in Lehi, Utah, which at the end of March closed on a $125 million Series C round. It was one of the largest venture deals of a first quarter unlike any in memory — and not in a good way. Like most financing events consummated during the Covid-19 shutdown, Podium’s deal, which valued the fast-growing SaaS business at about $1.5 billion, had been negotiated well before any shelter-in-place orders were issued. But despite a significant change in macroeconomic conditions, Rea says, “we got the round done at the exact terms signed at the end of February.”
Thanks to getting a jump on the pandemic — and an existing relationship with returning investors, led by Y Combinator’s Continuity Fund — “we got lucky,” he says. “They would have had a legitimate rationale to say they changed their mind based on new evidence.” Other founders, he knows, are having a tougher time, facing not only Covid-discounted valuations, but the reemergence of some dicey deal terms that could haunt them for years to come.
Then again, what choice do they have? It’s brutal out there. Thanks to vanishing revenues, an April survey by research and policy advisory organization Startup Genome found that 65% of all companies, including 34% of startups that have raised at least a Series A round, have less than six months’ worth of runway. To slow their burn, nearly three-quarters of startups have had to let go of full-time employees, with 26% of them letting go of 60% or more of full-time staff. Companies desperate for cash now find themselves in a new world, where the power dynamics for negotiating venture deals are less in their favor. Here’s what they can expect.
Deals will be made, but there will be fewer of them
VCs are quarantining with $120 billion in cash reserves. But it won’t last forever.