The New Normal for Venture Capital: Navigating a Slowing Market
As a seed-stage investor, I’ve noticed a significant change in the venture capital landscape. The National Venture Capital Association reports that deal count for seed-stage startups decreased by 52% year over year in Q1 2023. While this might be an opportunity for VCs to take some time off, it’s essential for founders to evaluate their investors’ capabilities during a downturn.
The Value of Investors During a Downturn
According to Navin Chaddha, managing partner at Mayfield Fund, "founders need to know whether the people they’re getting into business with understand how to operate during a downturn." This is particularly crucial for seed-stage startups, which often rely on their investors for guidance and support.
In this article, we’ll explore ways inception-stage investors and board members can support early-stage teams. We’ll also provide a 10-question checklist that can help founders assess whether the VCs they’re talking to are a good fit.
Building Trust in Today’s Climate
While it might seem daunting for founders to question potential investors in today’s climate, remember that you need to build a mutual zone of trust for the long journey. As Navin Chaddha writes, "the world we used to live in — the one that revolved around using cheap money to pump up ARR — is gone."
10 Questions Early-Stage Founders Should Be Asking Investors
Here are some essential questions to ask when evaluating potential investors:
- What experience do you have investing in seed-stage startups?
- How will you help me navigate a downturn or market fluctuations?
- Can you provide examples of successful exits or returns from previous investments?
- How will you support my company’s growth and expansion plans?
- What are your expectations for milestones, progress, and communication?
- How do you handle conflicts or disagreements with founders or other stakeholders?
- Can you introduce me to your network of mentors, advisors, or industry experts?
- What role will you play in the boardroom, and how often can I expect meetings?
- How will you help me build relationships with key partners, customers, or suppliers?
- Are there any potential conflicts of interest that could impact our partnership?
Assessing Investor Capabilities
When evaluating investor capabilities during a downturn, consider the following factors:
- Experience: Look for investors with experience in seed-stage startups and navigating market fluctuations.
- Track record: Evaluate their past investments and exits to ensure they have a proven track record of success.
- Support: Assess how they plan to support your company’s growth and expansion plans, including providing guidance, resources, or introductions.
- Communication: Ensure they have an open and transparent communication style, with regular updates on milestones, progress, and expectations.
The New Normal for Venture Capital
As the venture capital landscape continues to evolve, it’s essential for founders to be prepared. By evaluating investor capabilities during a downturn and asking the right questions, you can build trust and ensure that your partnership is aligned with your goals.
In conclusion, while the current market may seem challenging, it also presents opportunities for growth and innovation. By working with the right investors who understand how to navigate these challenges, you can position yourself for success in today’s fast-paced and competitive landscape.
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