Everyone is talking about the economic downturn, and exuberant valuations in private markets. Bill Gurley predicted this back in early 2015, and I’ve written about it last August.
So, okay, it is finally here – everyone said it, and everyone knows where we are.
We are here now, and I want argue that right now is a great time for YOUR startup, provided you are going after a real opportunity. Here is why:
1. There will be a LOT LESS NOISE.
It seems that seed capital will be more scarce. It seems that it will be harder to raise money from angels and VCs. But maybe not.
Because the markets are cooler, there are will be A LOT LESS FOUNDERS starting companies. Anyone who is doing Tinder for this or Uber for that will now think twice or maybe even three times before jumping in. Most likely they won’t do it.
Less noise will be great for the founders with domain expertise, building businesses with customers and revenue from day one.
Less noise will be great for the founders who are going after real opportunities.
Angels and VCs will likely pay a lot more attention to you if you have something real, and that will an awesome, awesome thing.
2. Capital efficiency is great for baby startups
One of the traits of great founders is scrappiness. Great founders hack and bootstrap. They find a way to get the company off the ground, to prove that it should exist, without spending a ton of capital.
Raising a lot of seed capital should not be a pre-requisite for starting 90% of software startups.
When you start with the capital efficiency it becomes part of your core value, and part of your company DNA. That fiscal responsibility will be really helpful as your company gets bigger.
3. Professional angels & VCs aren’t going anywhere
Accidental or occasional angels are likely to stop investing. Venture funds that haven’t performed will likely disappear. But professional angel investors and VCs will continue to invest.
In fact, here is a little secret. This is their favorite time to invest, because they will be investing in YOU, amazing founder, and the great opportunity you are going after, BUT they will be able to get into the deal at a more attractive price.
The keyword is “professional” investors. They do it for a living.
Professional investors will not stop or back down when the market is attractive.
Everyone learned value investing from Warren Buffett and investors in the downturn will go after great founders and great businesses. Great investors are looking to buy low and sell high.
4. Lower valuations are better earlier than later
Founders obsess over valuations.
But raising on a lower valuation early in the company lifecycle is not necessarily a bad thing. It is a lot better to take a valuation hit early in the game, than to do a down round.
Two things are important to understand for the founders here:
a) You have an option of raising less capital at a lower valuation, and end up selling the same percent of your company. Read this awesome post by Fred Wilson for more on this topic.
b) You are betting that lower valuation now, will turn into a higher valuation later. It is actually a smart bet when the market is down.
5. What starts at the bottom must go up
Markets are cyclical. They go up and down. This is a fundamental law of markets.
Jim Robinson IV, General Partner at RRE Ventures, my friend and mentor, who has more than 20 years of experience in venture capital explained it best.
Jim said that startups that rise with the tide make the most money. He said that historically, when they invested in the downturn, returns were significantly better for the founders and for the investors.
It makes perfect sense. If you start on the bottom, grind, and build the business, the tide will turn, and you will end up on the top.
So, really, this IS the best time to start a company, IF you believe that YOUR company is needed, that the business will be profitable and will create wealth.
That’s why we at Techstars NYC are very excited about our upcoming Summer 2016 class.
We know that the founders in this class will be ever more determined, and will be more focused on capital efficiency and building a real businesses.
If you are one of those founders, we can’t wait for you to apply. We can’t wait to meet YOU.