Entrepreneurs raising capital will see a tougher few quarters as venture capitalists and angels make sure companies already in their portfolios are well-funded. But most investors predicted the pullback will be relatiely short-lived, as investors seek new opportunities by the fall.
“With public market downturns, investment opportunities become more competitive in the favor of the VC, and the pressure on the entrepreneur to negotiate gets tougher because with the public market downturn almost all other sources of capital dry up,” said Howard Lubert, co-founder of Keiretsu Forum Mid-Atlantic and South-East, a private group for accredited angel investors.
Both entrepreneurs and VCs should always be raising money regardless of the circumstances. Reach out to investors, focus on building relationships and be tenacious, said Judy Robinett, board member of several venture capital firms and an advisor in angel groups who also speaks and writes about the venture capital industry.
Stewart Thornhill, executive director of the Zell Lurie Institute for Entrepreneurial Studies at the University of Michigan said a pullback in funding should be expected.
“It is harder to get a business up and running in a slower economy and venture capitalists know that and take into account the added challenge of launching in a down cycle,” said Thornhill.
Venture capital firms will be more careful when they are investing in startups so they can reserve the capital for their portfolio companies, said Mike Erwin, founder and chief investment officer at Ecliptic Capital, an Austin-based venture capital firm founded in 2018 that focuses on early stage companies.
“We have portfolio companies who may need to survive through a prolonged market downturn,” he said.
But there will be opportunities soon, he said. The costs to launch a startup in 2020 compared to 1999 or 2008 have greatly diminished. Current innovations in technology have helped companies scale and grow faster because advances have slashed startup costs enormously.
“When the market thaws and rewarms, entrepreneurship will pick up and rapidly grow, which is very attractive to VCs because there are higher quality and more attractive startups to choose from,” he said. “In downturns, founders are more efficient with money.”