Venture Capital Doomsday Prep Guide

The world is coming to an end. Please plan accordingly.

Now, before you scoff or freak out, you have to understand that I spend a decent amount of time staying up to date with a variety of venture capital and tech startup bloggers and news-people (weird flex, but okay). Being current is something that I have found is helpful in any industry that I have worked in, but seems to have a special importance since I started my career as an early stage investor. Understanding trends and shifts in the marketplace for tech companies is tricky, especially considering how opaque the space can be at times. And because of this, I have found that almost all of the tech experts that I read are the ones who have led me to believe that the world is coming to an end, the sky is falling, fire and brimstone, and so forth.

Okay, maybe not the literal heat-death of the universe, or the biblical judgement day end of times, but the end of the current tech bull market. The people who are commenting in the venture cultural conversation seem to be increasing their level of weariness - and it seems that many of them have good reason. Valuations are ever-increasing, mega funds and mega deals are becoming more and more common, due diligence seems to be at an all-time low - you have probably heard this line of reasoning too.

It has been quite some time since the last venture capital bear market. You might say it was as far back as dot-com bubble bursting. Or maybe you think the tech sector slowed down during the Great Recession more than some give it credit for. Some investors would even say that we experienced a rather serious market correction in the early stage sector a couple of years ago. All of these hypotheses have plenty of veracity. But the point is, there are plenty of market barometers that say the next one is coming soon.

I am not here to try and argue about the fate of our venture capital world.

But I do want to at least ask the question: what should we do if we experience a market downturn? I can’t answer this question with complete confidence for a couple of reasons: (i) I was 8 years old during the dot-com bubble, (ii) I have never worked through a downturn, and (iii) my career in venture capital is still very nascent. This definitely feels like something that you have to live through to totally grasp and understand. However, I think it is at least worth talking about the theories behind what to do and how to come to grips with the end of the world as we know it.

First of all, I think it’s important to put into perspective what a sector downturn really means. These financial periods are called market corrections for a reason - this is when the market takes time to correct itself from bad behavior and bad judgement. High valuations need to have evidenced-based logic supporting them - without that, it is unhealthy to watch term sheets explode in value and get looser on terms. This is a natural part of life. With every market correction typically comes an ensuing rebound, recovery, and then full blown bull market again. Hopefully this impending doom will act as a way for the VC market to reevaluate what it finds valuable and why. Hopefully it will bring more logic into the marketplace (without too many people losing their jobs).

Secondly, if you are doing your own due diligence and investing on strong fundamentals, you shouldn’t worry too much. Venture Capitalists typically deal with a pretty long term investment horizon. Venture Capital is not about making short-term gains and taking advantage of arbitrage opportunities. Venture Capital, or at least the limited experience that I have with it, is about building strong, lasting companies that make a legitimate economic impact. Strong companies disrupt industries at any point in the economic cycle.

Of course, this is all mostly conjecture. You never know what is going to happen today, tomorrow, next year or in ten years. But that doesn’t mean you should start acting irrationally just because tech opinion writers think the sky is falling (I guess I am writing an opinion about tech, sorta).

I recently attended a venture capital conference at which VC luminaries discussed this very topic. Their response was fairly uniform: if a company is built to last and managed by good people, you can’t spend too much time worrying about high valuations, pricing bubbles, and loose term sheets; just don’t be a lemming - come to your own conclusions. Focus on the fundamentals like consistent growth, sticky customer contracts, defensible technology, capable management teams, and and all of the other things your personal investment thesis focuses on. A wild valuation might still lead to a strong exit if you can play your cards right and stay level headed.

Bad things will happen when a recession hits, but then again, bad things are always happening. This is an industry based on failure, and what is the apocalypse if not one big epic fail.

Peter G Schmidt