Part 2: In a bear market, we're bulls on early-stage startup investing

Not a morning has gone by in the past weeks when we haven’t been bombarded by troubling economic news: stocks have moved into bear territory; inflation at levels not seen since 1981; layoffs and hiring freezes abound - you can see the impact to startups at layoffs.fyi.

All the public market turbulence certainly leaks into the venture market. Most VCs — us included — are advising our portfolio companies to plan for less funding, and longer periods of time between rounds.

Despite the swirl of fear, uncertainty and doubt, though, we are incredibly bullish on the early-stage startup market — and on the UW community’s early-stage startup market, in particular. Founders keep building great new companies that push technology and society forward, no matter the market conditions.

The only difference today is that the venture market conditions haven’t been this favorable to investors in a decade.?We believe we will continue to see data published about the return of reasonable valuations for startups at the pre-seed and seed stages where we invest. We are also seeing some of the biggest names in venture capital announce new, early-stage venture funds to invest in this market.

Here’s what I’m telling Pack Ventures’ current and future LPs:

• Time horizons are in our favor. The stock market is looking at current conditions. But as early-stage investors, we are looking far into the future — seven to 10 years into the future. As Wayne Gretzky said, “Skate to where the puck is going.”?
• This turmoil has prompted the venture market to become much more pragmatic. For the past five-plus years, VCs have been price takers, and FOMO has dominated the market. Now FOMO is gone, and we can make more strategic conversations about price. This is to everyone’s benefit — not just VCs. With a reasonable valuation, the founder’s ability to raise again increases, giving them the best shot at an eventual exit.
• Decision making is taking longer, meaning investors have time to do deeper diligence and spend more time with founders. Instead of a two-week investment decision, we’re going to start seeing two-to-four-month processes. That’s going to result in more discipline from founders, and the ability for VCs to make smarter decisions. At Pack, we meet founders early in their process, often before they are even fundraising; for some portfolio companies, we spend 6+ months getting to know them, their business and why they will win, before they ever ask us for a check. We also have the flexibility to move quickly on the fastest moving fundraises.
• Terms are becoming more balanced between investors and entrepreneurs. We expect to see deals in the near future where there is some downside protection, allowing VCs to be able to see more predictable returns.

This is the type of market where early-stage startup investing can make a lot of sense for an individual’s portfolio — especially if you have a long time horizon. Pack Ventures LPs invest $25K or more, and we invest exclusively in early-stage startups from the UW ecosystem. We continue to raise our fund, so let us know if you’re interested. We are continuing to meet new LPs every week that are curious to invest in the venture asset class.

Schedule a time here for a coffee or zoom chat.

As always, this is not investment advice, but merely our perspective on the market and opportunity.