Ramifications of Tech Downturn for VC/Startups (Excerpts from Our Latest LP Letter)
We wanted to open up our current thoughts on the market, so without further delay here are some excerpts taken from the latest Promus Ventures letter to our Limited Partners:
As we write this, the Nasdaq is off 14.5% YTD, with the S&P down 9.3% YTD. And it’s just the beginning of February. Only the ostriches with their heads in the sand fail to recognize that the investing winds have indeed shifted.
During the last six months of 2015, we anecdotally observed companies within and outside our community were having a more difficult time raising their Series A and B rounds. As 2016 turned, the markets have opined that the Fed’s dovish stance is over and the repricing of risk assets has begun. Our world of early-stage private market investing is not immune to these shocks.
The equity market has recently taken apart growth and tech stocks, and last week the public SaaS stocks violently corrected. Most public SaaS stocks are now 40–60% off their highs just months earlier.
This is not a time to be cocky (when is it ever?). Prudence is warranted in these cycles, and the best later-stage companies are already trimming, showing signs of wisdom by acknowledging they got ahead of themselves. High cash burn that continues up and to the right is not a badge of honor worn proudly after a large raise.
Just as the companies in which we invest can get disrupted at any time, so we view ourselves in this same light. We will continue to build and upgrade the Promus Ventures team, platform and product.
The equity market’s ongoing correction has ramifications for our seed/Series A market, as early-stumbling companies without deep-pocketed institutional investors around the table will have a difficult time surviving. Even in our stronger companies, we expect to invest in more extension rounds than before. We are fortunate that most of our top performing companies have recently raised follow-on rounds and have plenty of cash and runway ahead.
Venture capital investing is a contact sport and not for the weak at heart. Anyone can invest in a startup these days, but few understand the difficulty, patience and work required to give each team the best chance to grow and thrive.
We will continue to commit capital to top startup teams but will not bury our heads in past returns. We have enough grey hairs (unfortunately) to know that cycles matter. We will proceed with caution that the trend has shifted but also excitement that great companies are still built when the winds change.
Onward!
Based in Chicago, Promus Ventures has invested in 51 startup teams, with 80% of first investments going directly into seed rounds. The firm invests meaningfully more in subsequent rounds where appropriate, and had the privilege in 2015 to lead Spire’s $40M Series B round and Gauss Surgical’s $12M Series A round. Promus Ventures has invested alongside 100+ other venture capital firms and is affiliated with Promus Holdings, a large direct-investing firm with over 50 people and teams investing in private equity, hedge funds, managed futures and real estate.
