I’ve heard numerous stories in the past week about investment rounds that simply “broke down.” Investors who were “fully committed” to investing just weeks ago are dropping out when it comes time to send the money.
This is a sign that we’re still in the fear stage of this cycle: People are nervous about the prices (valuations) they’ve been investing at. And they think that they’ll be able to get better (cheaper) deals soon. Or they’re simply freezing up and refusing to invest because of the uncertainty.
But the best firms continue to invest during hard times. Great companies are often launched during economic hardship. So I will continue investing in promising startups. And over the next few months, I suspect we will all get the chance to invest in (on average) higher-quality startups. A lot of institutional (venture capital) money will likely sit on the sidelines for a while. So we angels may see some pretty sweet deals come our way.
Prices (valuations) will probably come down a bit if the stock markets continue to struggle. At the early stages, I expect to see a 20% drop in valuations over the coming months. (The average valuation of a very young startup doesn’t move very much over short periods.)
Late-stage private companies, however, could see drops more in line with the stock markets. Many of these companies are already worth $10 billion and should be public by now.
If you’re into late-stage investing, I continue to recommend favoring deals that are on the much lower end of the “late-stage” spectrum. In short, I like $1 billion deals a lot more than $10 billion ones.