The Tech Crash
Impetus: H2 2022 Issue
This is the inaugural issue of Momentum's newsletter. And this one is hitting you when economic uncertainty is quite high, so we can keep updated & gaze at the crystal ball together.
A lot. In the last few months, the economy & tech sector has had a rug pulled under their feet a little bit. Valuations are down, multiples squeezed, new investments have slowed a lot, layoffs are happening and there’s general uncertainty on the global economy. Crypto is down bad.
Tiger has gone from eating VC to being labeled a poster-child of this tech meltdown. Most of the big VC firms are back to advocating frugality and sustainability, and black swan memos to portfolio are back. Good times are over (again).
And our special friends at <Redacted> VC report that their large portfolio has seen zero follow-on term sheets in Q1, compared to an average of 5 per quarter earlier. Most of our investor friends report heightened levels of circumspection, while continuing to actively evaluate deals nonetheless.
When will it be over?
As you know, no one knows. But the advantage of having spent nearly a decade in the investing ecosystem is that we’ve internalized these as natural cycles and not doomsday events, and get spooked less(er). Your friendly neighbour Elon Musk advocates this downturn.
Remember 2008 RIP Good Times and 2020 Black Swan? And while it took 2 years for path reversal after 2008, the 2021 recovery was swift within the year. Crunchbase hashes it out well. Sequoia has put this crash somewhere in between 2008 & 2020 - “This is not a time to panic. It is a time to pause and reassess. We do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery like we saw at the outset of the pandemic.” Seems like a 2016 vibe of the Indian startup ecosystem's winter.
In VC, few firms control a lot (especially in relatively younger markets like India). So we expect the pull back & pause from larger/growth VC firms to result in lower entry valuations and freeze in sentiments in the short to medium term. But funds raised by venture and private equity firms in 2022 have not yet slowed down, so capital will eventually be back to be deployed.
Our early view is that the uncertainty will stay for another 12-18 months or so, and then things would start looking up.
And should fundings and valuations fall further in 2022, companies should buckle up for some bumps, but the seismic changes wrought by the last decade in venture capital are here to stay.
What does it mean for young seed funds like us?
It’s a blessing in disguise. The fact that this has happened just before Momentum's launch (and not a year later) is great for us. The big advantage of a debut fund starting up right now is that there’s no portfolio overhang of having entered any deals at inflated valuations or portfolio founders having burnt cash post funding like paper. Everyone is now advocating good habits that we've always liked. General Atlantic seems to concur.
Many of the worst investments happen at peaks before a crash and the best ones right after. So the timing is great for us! We plan to invest in rounds that make the startups sufficiently capitalized to ride the downturn with plans to remain frugal, resilient & rational. This is the time to build a solid foundation to be the frontrunners in their sectors when the tide turns & capital chases them again.
However, a somewhat balancing force is that there's dry powder in the ecosystem. So there will remain high competition for deals given all newly raised funds will eventually deploy. But we expect turnaround times on deals to be longer & as a result, our deal flow net should cast wider.
What does it mean for early-stage entrepreneurs?
As Fred Wilson wrote earlier, “The great thing about working in tech is that there are always new problems to solve, new markets to create, new products to ship. The macro events don’t change that. So focus yourself and your team on building and shipping those things, get some wins, and move forward with optimism and positive energy. It will be infectious.”
The mantra is hunker down and survive. Cut all the flab, needless spend and bad habits. Continue to find that problem-solution mix that customers want. Focus efforts and stop excessive experimentation. Tech layoffs are happening, so go after talent if you need. If fundraising, close today. Starting new fundraising rounds will be tough and closing process lengthy. Those who survive today with clean fundamentals, capital will chase them again soon.
Live long & prosper,
Ankur @ Momentum Capital