Startup founders say venture-capital investors are offering tougher terms as companies attempt to raise money amid economic uncertainty and a broad selloff in tech stocks.
Valuations are sharply lower than they would have been last year, according to entrepreneurs who gathered at the Collision tech conference that drew 35,000 attendees in Toronto last week.
“We’re raising a Series A right now,” said Dejan Mirkovic, chief executive and co-founder of Goose Insurance Services Inc., a Vancouver-based startup with an app that people use to find, get quotes for and buy insurance. In venture capital, “A” series funding follows initial angel or seed investments and can be followed by additional rounds of venture funding.
“The issue is that the market has a lot of capital to deploy, but everyone’s a little gun-shy,” Mr. Mirkovic said last week in Toronto. “A 30% haircut right now is what we’re seeing,” he said, referring to the decline in startup valuations from their peak.
Mr. Mirkovic said one potential investor asked him for so-called participating preferred shares, a deal structure that became difficult for investors to sustain during the founder-friendly heyday of the venture boom. “We said no,” Mr. Mirkovic said.
In the event that a company is sold, an investor with participating preferred shares would be guaranteed to recoup the original investment, plus a percentage of the remaining proceeds, according to PitchBook senior analyst Kyle Stanford. “It is seen as double-dipping. It can be pretty common, especially in down markets,” Mr. Stanford said at Collision.
David Cancel, co-founder and executive chairman of AI-based sales, service and marketing company Drift, said he launched his company in 2015 in part with a $10 million investment. He ran into one of the investment partners at Collision, who joked that if Mr. Cancel was starting a new business today, the check would be for $7 million, not $10 million. “Things are dramatically lower,” said Mr. Cancel.
In his view, that’s not the end of the world.
“This is my fifth company I have started. It seems like my timing is to start a company in every recession. That’s my normal,” he said. “I am more comfortable in the less-noise kind of atmosphere. I think that is what it feels like right now.”
In a downturn, there is less competition for talent and companies are held to more realistic objectives, according to Mr. Cancel.
The economy is likely facing an extended period of inflation and economic weakness that recalls the 1970s, said Wesley Chan, an investor and former tech leader at Google who developed early Google projects including Google Analytics, Google Voice and Google Ventures. He is a co-founder of early stage investor FPV Ventures, which announced in June the final closing of its first venture-capital fund, with $450 million under management.
Venture-capital investors are likely to slow the pace of investment in coming months as they identify companies that can outperform in a period of stagflation, said Mr. Chan, who also attended the Collision conference.
Write to Steven Rosenbush at [email protected]
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