Venture capital has always been a cyclical business, going between periods of booms and busts. While it feels pretty gloomy right now in many ways, experienced (older) investors understand that downturns often present the best opportunities. Since early 2022 when the first rate hike hit, the VC ecosystem really started to experience significant challenges. So lets take a look at why it’s simultaneously the worst and best time to be involved in the tech world right now

💔 The Worst of Times - Bad New First

1. VC Liquidity Crunch - No Exits

Venture capital is currently experiencing a really bad liquidity crisis. In Q2 2024, fundraising dropped by 40% compared to the previous year, marking one of the steepest declines in recent history. The impact on startups is profound because fewer funds being raised, meaning there’s less capital available to fuel growth, elongating fundraising cycles and slowing down deal-making across the board.

For founders, this means more time spent chasing scarce capital and fewer investors willing to write the big checks needed to scale. Investors, in turn, face the dilemma of wanting to support their portfolio companies but being unable to commit large follow-on investments due to limited available capital.

2. Early-Stage Funding Is Drying Up - Less Capital To Invest

Pre-seed and seed investments—traditionally the lifeblood of innovation—have been hit especially hard. Early-stage funding rounds in Q1 2024 saw a 50% reduction compared to the previous year. Many startups, particularly those at the earliest stages, are being forced to bootstrap for longer or seek alternative financing mechanisms, such as revenue-based financing or debt, to survive.

For many early-stage founders, this has meant slowing down hiring, cutting costs, and delaying product development, which could significantly impede their ability to compete when the market rebounds. Aka slower growth but surviving to fight another day.

3. AI Development Costs Are Skyrocketing - No End In Sight

While AI remains one of the hottest sectors in tech, the cost of developing cutting-edge AI models has risen dramatically. Training sophisticated AI models today can cost upwards of $10 million to start, placing significant strain on smaller startups. For early-stage AI companies, the barriers to entry have never been higher, as only the well-capitalized can afford the steep costs associated with building and scaling AI technologies.

4. No Clear Exit for AI Startups - For Now

Even though AI is booming, exit strategies for AI startups are far from clear. Initial public offerings (IPOs) are stalled, and mergers and acquisitions (M&A) activity from big tech has slowed. The path to liquidity remains foggy, making it harder for investors to confidently back AI ventures without a clear exit timeline.

This uncertainty creates a Catch-22: AI is a critical future technology, but without clear exit paths, investors have FOMO not to invest even though everything will eventually use it.

🌟 The Best of Times - Soon To Come!

1. Less Competition, Better Opportunities - Choose Wisely

The liquidity crisis, coupled with market cooling, has driven many casual or "tourist" investors out of the VC space. With fewer players chasing deals, serious investors are finding themselves with more opportunities and less competition. This has resulted in lower valuations for startups and more favorable deal terms for investors (outside Ai).

Investors with capital to deploy can now secure equity in high-quality startups at discounted rates, positioning themselves for significant gains when the market rebounds.

2. Resilient Founders - Battle Tested

One of the bright spots in this challenging landscape is the quality of founders who have endured. The founders still in the game are battle-tested. They’ve weathered economic uncertainty, adapted to changing market conditions, and demonstrated resilience in the face of adversity. These are not founders who give up when times get tough—they’re the kind of entrepreneurs who build enduring, lasting companies.

Investing in these founders gives VCs a unique opportunity to back teams that have proven their ability to thrive, even in the most difficult environments.

3. Investing for the Future - Where The Puck Is Going

Historical data shows that VC funds raised during downturns tend to outperform those raised in boom times by an average of 3x. Why? In tough times, valuations are lower, and companies are forced to be more capital-efficient. Startups founded in downturns often grow into more sustainable, long-term businesses because they’ve had to prioritize cash flow over growth-at-all-costs.

Investors who deploy capital in 2024 are not betting on today’s economic conditions but rather on the opportunities that will emerge when the market rebounds. History suggests that downturns are followed by periods of strong economic growth, and the companies funded today will be ideally positioned to capitalize on that recovery.

2007 Startups

• Twilio (public)

  • Latest valuation: $9B

  • IPO date: June 23, 2016

• Flipkart

  • Acquired by Walmart for $16B in August 2018

• Dropbox (public)

  • Latest valuation: $7.6B

  • IPO date: March 23, 2018

• MongoDB (public)

  • Latest valuation: $21.5B

  • IPO date: October 19, 2017

• GitHub

  • Acquired by Microsoft for $7.5B in October 2018

• Glassdoor

  • Acquired by Recruit Holdings for $1.2B in June 2018

• Tumblr

  • Acquired by Yahoo! for $1.1B in June 2013

  • Subsequently acquired by Verizon, then sold to Automattic in 2019 for reportedly less than $3M

2008 Startups

• Airbnb (public)

  • Latest valuation: $72.8B

  • IPO date: December 10, 2020

• Pinterest (public)

  • Latest valuation: $20B

  • IPO date: April 18, 2019

• Cloudera

  • Taken private by Clayton, Dubilier & Rice and KKR in October 2021 for $5.3B

• Beats

  • Acquired by Apple for $3B in May 2014

• Yammer

  • Acquired by Microsoft for $1.2B in July 2012

2009 Startups

• Uber (public)

  • Latest valuation: $145B

  • IPO date: May 10, 2019

• Block (formerly Square) (public)

  • Latest valuation: $37.8B

  • IPO date: November 19, 2015

• Slack

  • Acquired by Salesforce for $27.7B in July 2021

• Nutanix (public)

  • Latest valuation: $14.9B

  • IPO date: September 30, 2016

4. A Flood of Top Talent - Musical Chairs

With many startups scaling back or shutting down entirely, a massive amount of top-tier talent is now available. Engineers, product leaders, and operational experts from some of the most innovative companies are searching for new opportunities, providing startups with a rare chance to build world-class teams at a lower cost.

The talent crunch of previous years is over. Startups that can tap into this pool of talent will have a significant advantage when it comes to building out their teams and accelerating growth in the coming years.

5. Perfect Timing for Market Recovery - Buy The Dip

No downturn lasts forever. The venture capital market operates in cycles, and while 2024 may seem challenging, many economists and industry leaders believe that recovery is just around the corner. As exit markets reopen—whether through IPOs or increased M&A activity—the startups funded today will be perfectly positioned to take advantage of these opportunities.

For those with the patience and foresight to invest in today’s companies, the potential for substantial returns is significant. By the time the market rebounds, these startups will have matured, and early investors will be sitting on portfolios primed for success.

Smart Money Bets on Tomorrow’s Opportunities

Despite the current challenges, the smart money in venture capital is betting on tomorrow’s opportunities. The paradox of VC investing in 2024 is that while conditions may seem grim, they’re also ripe for those willing to embrace long-term thinking. By investing in resilient founders, leveraging reduced competition, and taking advantage of today’s market conditions, VCs can set themselves up for significant success.

Downturns separate the casual players from the true visionaries. For those emerging managers, early-stage investors, and institutional LPs with the ability to see beyond the current moment, now is the time to act. The best opportunities are often found when everyone else is stepping back.

1. How do you feel right now about the startup world?

2. When do you think IPOs will come back?

3. Will someone buy some of these massive Ai startups?

4. Half my wardrobe www.tommyjohn.com

FIND ME: 𝕏 @Trace_Cohen / in LinkedIn

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