Business

‘Forget the past three years’


Eugene Zhang, founding partner of Silicon Valley VC firm TSVC Spencer Greene, general partner of TSVC

Courtesy: TSVC

Eugene ZhangA veteran investor in Silicon Valley, recalls exactly when the market for young startups peaked this year.

The flow of money from venture capital firms, hedge funds and wealthy families into seed-stage companies has reached irrational levels, he said. A company that helps startups raise funds had an oversubscribed round with an absurd $80 million valuation. In another case, a small software company with only $50,000 in revenue was valued at $35 million.

But that was before the chaos that hit the publicly traded tech giants in late 2021 began to arrive at the tiniest and most speculative startups. The hot market has suddenly cooled down, with investors dropping out between rounds of funding, leaving founders exhausted, Zhang said.

According to Zhang and others, as the balance of power in the start-up world shifts toward wallet holders, the industry has solved a new puzzle that founders need to accept.

“The first thing you need to do is forget about your classmates at Stanford who raised money at [2021] Zhang told the founders, he told CNBC in a recent interview with Zoom.

“We tell them to forget three years in the past, go back to 2019 or 2018 before the pandemic hit,” he said.

This valuation is down about 40% to 50% from recent peaks, according to Zhang.

‘Lose control’

The painful adjustment happening in Silicon Valley is a lesson in how luck and timing can affect the life of a startup — and the wealth of its founders. For more than a decade, increasingly large sums of money have been thrown at companies within the start-up range, increasing the value of everything from small-volume apparel to Still a huge asset like SpaceX.

The era of low interest rates following the 2008 financial crisis sparked a global search for profits, blurring the lines between all types of investors. increasingly sought after profits in private companies. Growth has been rewarded, even when it is unsustainable or accompanied by poor economics, in the hope that Amazon or Tesla will emerge.

The situation peaked during the pandemic, when “traveling” investors from hedge funds and other newcomers flocked to funding rounds backed by branded VCs, leaves very little time for due diligence before signing the check. Companies double and triple prices for the month, and unicorns became so popular that the phrase became meaningless. More US private companies hit a valuation of at least $1 billion last year than half a decade ago combine.

“It’s kind of out of control over the past three years,” Zhang said.

The start of the party ends in September, when stocks of pandemic winners include PayPal and Unit began to plunge as investors predicted when the Federal Reserve would start raising interest rates. Next is the valuation of companies before the IPO, including Instagram and Klarnafell 38% and 85%, respectively, before the final doom came to early-stage startups.

Deep cut

Tough for founders, pricing haircuts have become the norm across the industry, according to Nichole Wischoffa startup executive turned VC investor.

“Everybody is saying the same thing: ` `What’s normal now isn’t what you’ve seen in the last two or three years,’” Wischoff said. “The market is marching together saying: Expect the norm now. prices will drop between 35% and 50% compared to a few years ago. It’s the new normal, embrace it or let it go.”

In addition to notable valuation cuts, founders are also being forced to accept more tough terms in funding roundsgive new investors more protections or dilute existing shareholders more aggressively.

Not everyone accepts the new reality, according to Zhang, a former engineer who founded a joint venture TSVC in 2010. The outfit made an early investment in eight unicorns, including Launch and Carta. It typically keeps its shares until a company IPO, although it sold some positions in December before the expected downturn.

“Some people don’t listen; some people do,” Zhang said. “We work with people who listen, because it doesn’t matter if you raise $200 million and then when your company dies; no one will remember you.”

With my partner Spencer GreeneZhang has seen boom and bust cycles since before 2000, a perspective that today’s entrepreneurs lack, he said.

Founders who must raise money in the coming months need to test the appetites of existing investors, stay close to customers and in some cases make deep job cuts, he said.

“You have to take painful measures and be proactive instead of just passively assuming the money will come along someday,” says Zhang.

A good classic?



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