Stop, Breathe, Think

By Keith Teare • Issue #317

So many points of view about the venture ecosystem. Some panic, some optimism, some ‘wait and see’. Modern media likes to take sides but all of these sentiments are appropriate because more than one thing is happening. All at the same time. And many of them are good.


Essays of the Week

  • Venture Capital Feels the Stock Market’s Pain — WSJ
  • Coatue’s View of the Market — Newcomer
  • What’s really happening in growth-stage VC — Samir Kaji
  • Startup Markets, Summer 2022 Edition — Elad Gil
  • When AI Becomes Table Stakes — Tomasz Tunguz
  • Will the crypto crash derail the next web revolution? — FT
  • Metabook Launches Web3 / Metaverse Reserve System — Benzinga
  • Sequoia and Tiger Global Take SoftBank to the Cleaners — WaPo

Good News

  • Tenacity raises $60m in three months
  • Startup Founders Say Venture-Capital Investors Are Driving Harder Deals
  • Sequoia Capital’s China Arm Raises $9 Billion, Exceeding Target

Bad News

  • Coatue’s Funding Numbers Take Significant Dip in First Half Of Year
  • Creator Economy Startup Funding Drops 60% From a Year Ago

Startup of the Week

  • UK’s Oxford Quantum Circuits snaps up $47M Series A for ‘QaaS’

Tweet of the Week

  • Elon Musk is a Dad again.


The most thoughtful writing this week comes from the land of newsletters, much of it hosted on Substack. The least thoughtful belongs to the Financial Times and the Wall Street Journal.

I think we have passed the line in the sand dividing the amateurs from the professionals — at least when it comes to analyzing Silicon Valley. The amateurs draw a salary from the old media and the professionals are writing newsletters.

The Essays of the week dominate the newsletter and most of them are well written and carry insights into one or another part of Venture Capital.

Shoutouts to Newcomer, Venture Unlocked, Elad Gil, Tomasz Tunguz, Crunchbase, The Information, and TechCrunch.

I titled the newsletter Stop, Breathe, Think because in times like this we really have to be analytical and calm before thinking and acting.

As many of you will read below, the public market corrections and the macro-economic situation, along with geopolitics, dominates the week.

But inside the excellent insights into the late-stage of venture, startup markets, AI, and crypto there is a strong underlying trepidation that in my view is unwarranted.

The dramatic reversal of the public markets seems to have stalled and in most cases has turned back the clock to 2020 or so.

And the most beaten up public companies have already recovered between 15% and 60% from their low points. This is Datadog. 33% up from the low point.

Or Cloudflare, up 35.3% from the low

And Snowflake, up 44% from the low

So a buyer of these stocks in the past few weeks has done really well. But not as well as those who bought earlier. Let’s use Snowflake as an example.

The left chart shows the high point of the stock prior to the correction. Immediately to the left of the red column is today’s price. So a big drop of more than 50% if you bought in late 2021 or early 2022. But the right chart shows the gains based on B Round investors from October 2014. Still a whopping 389 x the price they paid as of today.

What does this tell us? Venture Capital is a long game for firms able to find winners early. These firms are very different from public market stock traders. They collectively do very well, despite market volatility.

Those investors are today busy making new B Round investments in future winners. SignalRank Research — powered by Crunchbase — shows $48 billion of B Round investing so far in 2022 with combined valuations post-round of over $220 billion. This is 1,200 rounds from which the top 10% will become some of the largest companies on the earth over the next 5–10 years.

SignalRank — powered by Crunchbase

Stop, Breath and Think allows us to reflect, contextualize and then act. This is a wonderful time to be an early-stage investor. Let’s not lose our heads.


The video accompanying That Was The week is published after the newsletter. It is a conversation about the week with Andrew Keen and Keith Teare. it is available in full for paid subscribers.

Venture Capital Feels the Stock Market’s Pain

Some companies are delaying IPOs as valuations fall and money gets tighter

By Lori Ioannou

July 4, 2022 10:00 am ET

The rout in the stock market has cast a shadow over the private-equity market, with valuations tumbling for many companies and some delaying plans to go public.

“Fears over the falling stock market, inflation and a potential U.S. recession have spilled over to the venture-capital industry, and multiples on mid- and late-stage valuations are rapidly compressing,” says Asheem Chandna, a partner at Greylock Partners.

Valuations aren’t down across the board. But venture capitalists say the situation is worsening for many companies as investors become more selective. “There is a flight to quality among investors,” says Andy Areitio, general partner at TheVentureCity, a global startup fund.

Mr. Chandna says companies’ business plans are getting more scrutiny and investors are looking for more evidence of financial health. “They are not solely valuing companies on revenue-growth projections; they are looking harder at a venture’s free cash flow,” he says.

Deal-making has slowed overall. U.S. venture-capital funds invested about $47.5 billion in 2,251 deals during the second quarter through June 15, versus about $70 billion in 3,369 deals in the first quarter, according to CB Insights. And in the secondary market for private equity, Forge Data says 55% of the equity offered for sale on its trading platform in May was offered at a discount to the companies’ valuations per share, compared with 47% in March and 35% in January.

Some venture capitalists say they are advising companies in their portfolios to shore up their balance sheets and focus on sustained growth to weather the economic turbulence ahead. Some companies are delaying plans for initial public offerings of stock.


Essays of the Week

Coatue’s View of the Market, Or Why Catching a Falling Knife Is Dangerous

Coatue sees “zero valuation support” for Robinhood and Lemonade. The hedge fund makes the case for Tesla, Nvidia & Datadog in slides obtained by Newcomer.

A few takeaways based on Coatue’s presentation:

  • The market can head-fake rebound significantly on the way down. During the dot-com bubble, the NASDAQ fell 37%, climbed 32%, fell 61%, etc.
  • Questionable technology companies can be the first companies to reset but that doesn’t mean the correction is over.
  • So far we’ve seen valuations fall — but earnings revisions, driven by a potential recession, could still be ahead of us. If earnings projections erode, then declining multiples won’t be the only reason for tech stock prices to continue to fall.
  • Retail traders flooded the stock market during the pandemic and we’re only starting to see that trend unwind.
  • The market is failing to differentiate between good companies and bad ones.
  • Coatue sees “zero valuation support” for both Robinhood and Lemonade. The firm tags each business with having a “broken business model.” (Robinhood’s market cap sits at $7.5 billion today and the company’s stock price is down 53% so far this year. Lemonade is worth $1.3 billion and has seen its stock fall 51% since the start of the year.)
  • Pinterest and Snap have both seen their stock prices fall since the start of the year, but Coatue identifies positive user growth for Snap and U.S. user decline for Pinterest. (Snap is down 69% year to date while Pinterest is down 46%.)
  • Similarly, Coatue is a believer in DoorDash’s business as the number one food delivery business in the United States, but is less optimistic about Lyft’s financial prospects as a money-losing, second-place player.
  • Even as Coatue identifies stocks that it believes in, heavy correlation between tech stocks make it risky to pick stocks. A favored stock could end up trading on broad, market-driven factors rather than the company’s fundamentals.
  • Coatue sees the potential for $1 trillion to go missing from the startup and IPO market. If the startup world reverts to historical averages, then private funding could shrink from $700 billion in 2021 to $175 billion. Funding through public offerings could fall from $700 billion in 2021 to $250 billion. The idea that the startup ecosystem could run short on money contradicts the thinking from some startup world optimists like former YC partner Aaron Harris. He argued this week in The Information that investors aren’t suddenly going to check their pockets only to find them empty. Harris wrote, “Venture capitalists are sitting on more cash than they’ve ever had.” Coatue seems to thinks there’s less dry powder out there than it might appear.


What’s really happening in growth stage VC amidst the downturn?

TL:DR Summary

  • We are experiencing a reversion to the mean as the market downturn is acting to offset the late 2020–2021 spike in asset prices. We anticipate new deal data to validate this observation starting with Q2 (and certainly Q3) numbers.
  • Private company mark downs will take quarters (or years), not months to fully be represented.
  • The market reset provides a return to a rational environment where underwriting of deals has shifted away from a “growth at all costs” mentality, and inclined toward fundamental metrics such as margins, capital efficiency, and the current public market comps.
  • 2020/2021 vintage year late-stage funds that had accelerated deployment timelines are at the highest risk of underperformance.
  • Large hedge/crossover funds have generally vacated the late-stage private markets, instead opting for earlier stage or public market investing. It’s uncertain whether this is simply transitory.
  • Deal velocity has slowed down dramatically, with a particular slowdown in $50MM-$100MM+ ‘mega rounds’ as bid/ask spreads between companies and investors remains large.
  • Growth stage investing will return to being a dependable area of investment marked by lower risk and shorter times to liquidity. However, generating outsized performance will require careful manager and deal selection as the extended bull market era where “everyone wins” is unlikely to be seen anytime soon.

Follow me @samirkaji for my weekly thoughts on venture capital TL:DR Summary We are experiencing a reversion to the mean as the market downturn is acting to offset the late 2020–2021 spike in asset prices. We anticipate new deal data to validate this observation starting with Q2 (and certainly Q3) numbers.


Elad Blog: Startup Markets, Summer 2022 Edition

About a month ago, I wrote a tweet storm on the changing startup financing and employment environment. This blog captures aspects of that tweet storm and some of its predictions and extends them further. Like all predictions this is what I view as a highly likely scenario versus the only potential future path for the next 3–18 months or so.

The high level view is that things have yet to get truly bad in private tech. 2021–2022 were an anomaly due to COVID policies which both created an incredibly cheap low interest money environment, pumped the stock market, and facilitated adoption of certain types of tech. This environment led to both excess in fundraising but also in hiring. This means that as money transitions back to to “normal” levels teams that were hired too far ahead need to shrink. Many areas (hiring plans, valuations, time venture capital raised lasts, etc) are roughly reseting to 2018/2019 norms, which themselves were all time highs prior to the COVID era.

If interest rates and money supply continue to tighten and a recession happens, then things should get worse. The below largely deals with the base case of things roughly stay where they are now. More likely, things will get worse before they get better. Nonetheless, it is still a great time to start a company.

So what do the next few quarters look like?


Valuations will continue to drop and are not stable yet

Private markets tend to lag adjustments in public markets by 3–9 months and tend to adjust from the later stage, pre-IPO companies first to the pre-seeds last. Private technology startup valuations are still unstable and for some stages will continue to drop.

Series D and later have come down and closer to public comps with pre-IPO companies roughly at public comparables. When you fundraise matters a lot — rounds started 3–4 months ago are pricing much higher than rounds kicked off now. more……


When AI Becomes Table Stakes

Last week, I installed Github’s Copilot, a machine learning tool that helps engineers write software. I often code in R, Go, Ruby, markdown, bash and other languages to automate some task or update my CRM, so I was excited.

I typed in def get_tweets_for_user(username) in ruby. Copilot completed the entire function in less than 5 seconds, like a GMail smart reply but for programming. I entered my API credentials, executed the program, and it ran. 5 minutes’ work compressed to a tab-key-press and a copy/paste.

By the end of the day, Copilot had become essential — I won’t code without it. I suspect millions of others will feel the same way.

I use applied AI elsewhere. Two distinct machine learning systems have analyzed this blog post for grammatical errors, clichés, brevity, style, and weasel words.

Over the past decade, I’ve watched applied machine learning become table stakes for sales people at Chorus records calls between an account executive and prospect, then analyzes it for insight on style, structure, and content.

When IBM’s DeepBlue dueled Gary Kasparov in 1996 for the chess supremacy, players wondered if the computer sitting on the other side of the chessboard harkened the end of the game. Similar questions arose after AlphaGo. Today, top grandmasters spar with supercomputer-powered chess engines to improve their play.

Many articles were written twenty years ago about the potential demise of the human chessplayer. Those sentiments echo in the articles about the end of software engineering that popped up after the Copilot launch.

They have it wrong. AI enables us to focus to higher level tasks, not worrying about an errant semicolon, the syntax of a particular API, or taking notes during sales calls.

These assistants are the future of work, anticipating, suggesting, guiding, correcting — helping us accomplish more by abstracting away toil. That’s why they become table stakes — everyone needs them to keep pace.


Will the crypto crash derail the next web revolution?

Richard Waters and Hannah Murphy in San Francisco and Scott Chipolina in London JULY 5 2022

Ethan Buchman, co-founder of blockchain network Cosmos, is doing his best to sound stoic. Since January, the collapse in cryptocurrency prices has wiped 80 per cent off the value of the atom tokens that underpin Cosmos, slicing $10bn from their total worth. “Some people get shaken out, some people get scared,” Buchman says of the price collapse in the tokens, which are used to secure the network. “But others see it as an opportunity to double down on what they believe in.” “It is always a scary moment for everybody [when markets crash],” adds Joseph Lau, co-founder of another blockchain company, Alchemy. He insists that the falling crypto prices don’t mean that all the projects involved are doomed, or that developers working on them will lose interest. The fall in prices doesn’t mean crypto projects will not get “traction in the long term”, says Lau. The people working on them “are building no matter what the prices are”. But if Lau and Buchman are wrong, the crypto revolution could be stopped in its tracks. This year’s market collapse — part of a broader retreat from risky financial assets in the face of rising interest rates — could seriously weaken the incentives that have made crypto one of the hottest corners of the tech world. No two tech manias are exactly alike. But the market collapse and the claims that it will not derail the crypto revolution recall another seminal moment in recent tech history: the dotcom boom and bust at the turn of the century. Both bubbles were sparked by a supposedly revolutionary technology that would weaken control over online activity by the political and business establishment, ushering in a decentralised online world in which power would flow to the people. In crypto’s case, something that began as a vision of digital money around bitcoin has broadened into a movement known as Web3. It holds that the same underlying blockchain technology, which records and tracks crypto assets, will support a new generation of user-controlled online services that will dethrone today’s internet giants.


Metabook Launches Web3 / Metaverse Reserve System — Benzinga

Top-20 Metaverse heroes who inspires the hope in a new innovation cycle.

Thanks to Jamie Burke and other open Metaverse / Web3 leaders. There is Metabook top-20:

  • 1. Tal Eliashiv. Managing Partner at SPiCE Venture Capital
  • 2. Bill Tai. Metagood founder.
  • 3. Matthew Ball.
  • 4. David Namdar.
  • 5. Jamie Burke (and the entire Outlier!)
  • 6. Chris Hitchen. He invested in more than 100 startups and worked as venture partner with VC funds EQT Ventures, Project A and SquarePeg Capital prior to establishing Inventures, the Inventures Collective and now Possible Ventures.
  • 7. CZ. Binance founder.
  • 8. Hrish Lotikar. CEO at SuperWorld. Ex-Global Evangelist at Toptal (backed by Andreessen Horowitz, this company now is hiring thousands of IT/marketing profs).
  • 9. Sandeep Nailwal, Polygon founder
  • 10. Alesis Ohanian, Reddit founder, his new fund is focused on this area.
  • 11. Brendan Wallace
  • 12. Brendan Blumer
  • 13. Bryan Feinberg, Plato / W3 Networks
  • 14. Tomasz Tunguz, Redpoint
  • 15. Kathryn Haun
  • 16. Gigi Levy-Weiss, NFX
  • 17. Jeff Jordan (Andreessen Horowitz)
  • 18. Fabrice Grinda
  • 19. Niko De Jonghe
  • 20. Sheridan Tatsuno.

Metabook will return Johnny Depp, to return the hope to the market

Metabook’s Rating Methodology, based on Cycle of Market Emotions, has the answer to the market crash situation.

Toxic people. They make problems for good people. It is right in the Depp — Heard case, it is right in the markets crash situation.


Sequoia and Tiger Global Take SoftBank to the Cleaners

If the fiascoes at WeWork Inc. and Greensill Bank AG were not enough, Klarna Bank AB should serve as another fine reminder that SoftBank Group Corp. is the unluckiest whale in a crowded venture capital world. Founder Masayoshi Son somehow always manages to hold the worst cards.

The Sweden-based fintech, known for its buy-now-pay-later offering, is in talks to raise about $650 million — mostly from existing investors led by Sequoia Capital. If completed, this deal would reset Klarna’s valuation to $6.5 billion, a fraction of the $45.6 billion it was priced at just a year ago in a $639 million funding round led by SoftBank.

It is a round-down of epic scale — unless you are SoftBank. Two years ago, the $100 billion Vision Fund manager slashed its WeWork valuation to $2.9 billion from $47 billion in 2019. While the absolute dollar amount involved with Klarna is much smaller, the blow to Son’s reputation is nonetheless as damaging. The second Vision Fund will soon have to write down its Klarna stake, wiping out much of its returns. At March 31, this $56 billion fund recorded only $0.8 billion investment gains. A SoftBank Vision Fund spokesman declined to comment on the queries sent by Bloomberg Opinion.

Washington Post


Good News

Venture capital giant NEA spinout Tenacity raises $60m in three months — AltAssets Private Equity News

Former New Enterprise Associates venture partner Ben Narasin has closed its new venture on $60m in three months.

Tenacity Venture Capital beat its initial target of $50m, with new capital added despite its final close on May 5.

The fund will invest $1m to $3m into pre-series A rounds in technology startups primarily in North America and the UK with a focus on helping coordinate series A rounds.

Narasin said, “I know over 300 VCs at the top 15 firms, and have 36 VCs as LPs, so getting founders to the right people at the right time for their A is my primary focus.”

Narasin joined New Enterprise Associates in 2017 as partner after a one year and 10 month stint at Canvas Ventures.

He has more than 30 years experience of building businesses and investing in early stage start ups.

Venture capital giant New Enterprise Associates hauled in more than $5bn across its latest pair of hefty fundraises two months ago.

The firm has picked up capital close to its $2.9bn target for a new early-stage investment fund and registered $2.3bn for its latest flagship growth equity fundraise, NEA 18 Venture Growth Equity , which is out seeking up to $3.7bn, according to filings its submitted to the US SEC.


Startup Founders Say Venture-Capital Investors Are Driving Harder Deals

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.


Sequoia Capital’s China Arm Raises $9 Billion, Exceeding Target

Sequoia Capital’s Chinese affiliate is about to close $9 billion in fresh capital for four new funds, higher than its original target of more than $8 billion, according to two people familiar with the fundraising.

The final amount could represent the biggest pool of capital ever raised by a single venture capital firm to bet on Chinese technology startups. It also shows how Sequoia Capital China and its backers, including numerous U.S. institutional investors, continue to make aggressive moves despite the downturn in tech stocks and private valuations, which prompted some of Sequoia’s global rivals slow down their pace of investment.


Bad News

Coatue’s Funding Numbers Take Significant Dip in First Half Of Year

Crossover investor giant Coatue has significantly cut down on funding deals as the venture sector continues to see a pullback after a record-shattering 2021.

After taking part in 56 funding deals in the fourth quarter of last year, the New York-based firm took part in only 16 such deals in the just-completed second quarter of this year, according to Crunchbase data.

In addition, whereas the rounds the firm participated in in the fourth quarter totaled more than $14 billion, the rounds in the second quarter came out to only $1.6 billion, according to Crunchbase.

In fact, only one round this calendar year makes the firm’s list of the 10 largest since the beginning of 2021 — a $1 billion round to London-based e-commerce startup in January.

The pullback

It is unclear exactly how much money Coatue invested itself as specific stakes in a round are not usually divulged. But the numbers seem to indicate the venture pullback of 2022 is very real as valuations get slashed and the search for funding gets harder for startups.


Creator Economy Startup Funding Drops 60% From a Year Ago

Creator economy startups in the U.S. raised less than $700 million in venture funding in the second quarter of this year. That’s 26% less than the previous quarter and marks a fourth consecutive quarter of decline in venture investments tracked by The Information’s Creator Economy Database.

The quarterly drop reflects a decline in the value of crypto-related investments, fewer big late-stage rounds and smaller check sizes overall, after a record year of fundraising for the sector. Funding for creator economy startups dropped more than 60% from the same period last year. Still, more than 25 U.S. startups providing support for online influencers raised venture capital in the quarter — lifting total fundraising to more than $6.6 billion since we started tracking these investments early last year.


Startup of the Week

UK’s Oxford Quantum Circuits snaps up $47M Series A for ‘QaaS’

Quantum computing has been making quantum leaps of progress in the last several years — going from theoretical concept to multiple testing environments, to help organizations prep for a time when quantum computers, and their unparalleled processing power, become a scaled reality. Now, UK-based Oxford Quantum Circuits is announcing £38 million ($47 million) in funding […]


Tweet of the Week