Just after the COVID-19 lockdown began, startup deals slowed to a crawl. And they stayed at that pace for a few weeks.
Now, things are roaring back. Many new early-stage investment funds have formed over the last few months. Competition for “hot” deals is crazier than I’ve ever seen it. And somehow, valuations seem even higher than they were pre-crisis.
We’ve clearly reached a speculative phase in the markets at large. And that’s leaking over from stocks into startups.
My plan for startup investing during this crazy market is simple. I’m mostly avoiding deals from the San Francisco Bay Area (SFBA). Investors in the SFBA are bidding up seed-stage rounds to crazy price levels ($30 million is not uncommon today!). There are just so many VCs and angels in one small area, all competing for the same hot deals.
The valuations are much more reasonable once you leave Silicon Valley. For a similar deal, you’re looking at least a 100% price decrease outside the SFBA. That’s why I’m looking for investments from the rest of America — and Canada — where valuations are still sane.
For what it’s worth, I don’t think these bubbly valuations in the SFBA will last too long — maybe a year or so. It’s even possible they already peaked.
But until valuations calm down, I’m being very selective about the deals I invest in. When you invest at a $30 million valuation versus a (more typical) seed valuation of $5 million, it makes it VERY hard to make money in the long term. So my advice is simple: be picky, avoid the hot deal frenzy and look for great traction!