The venture capital market is effectively frozen. Here is why.

Update: This post was written in early March 2020. As of April the market has obviously evolved with some market segments opening up again and some still quite frozen.

TLDR: For the foreseeable future the venture capital markets are almost entirely closed while VCs triage their existing investments, and wait to see how this all plays out. Beware though, they have a lot of time on their hands.

If you read VC twitter right now, you will see a lot about how the best companies are built in downturns, how VCs have tons of cash and how they are all open for business. All that is true. But, it turns out things are more complicated.  

First, the knife is falling right now. Hard and fast. Go look at the headlines from a week ago. They look sort of cute. Now imagine the headlines in a week where the virus is doubling every few days. They will probably be worse than you imagine. The trend is terrifying. No matter how you cut it, a lot of people are about to die and the global economy is about to go into a recession. If you are an optimist, it will just be a really really bad flu season and a sharp V shaped recession. If you are a pessimist, millions or tens of millions will die, many many businesses will go bankrupt, and it will be potentially the worst recession of our lives. It is scary. But the important point here is that while we don’t currently know where the knife will land, we do know it is falling fast.  

Now imagine your everyday VC. Yes, they are sitting on a ton of committed capital. But, they are human. They are watching the knife fall and their limited partners are watching their investments in the public market evaporate. Do you really want to make a capital call right now to pay yesterday's top of the bull market prices and look like an idiot? Not a chance.  

So VCs are delaying. What is another week of diligence? Oh, things are stuck in legal, that term sheet will get to you soon. One more question about how your market works. Etc. VCs are really really good at this game. We all know in one week we will have a lot more information about how this is going to play out. And in that one week it will become apparent that in another week after even more data will come in. Thus a nasty slippery slope and endless delays while entrepreneurs watch their cash shrink. In VC we don’t get paid to make bets about how the market will be next week, we make bets about what it will look like in years. But those bets are massively affected by the state of the capital markets, macro economy and the structure of international trade. These are all wide open questions right now and until they get sorted out, VCs will be very cautious. VCs can easily wait and see. Sure, there may be a diamond here or there that can be funded regardless, but they will be very very rare while this repricing event occurs.

But, then why are all the VCs so loudly proclaiming they are open for business? First, deal flow is critical to this business. If you tell people you are not investing they might not send you deals any more, and right now the “look how busy I am” and "I just signed term sheets" VC theater is in full effect. Second, VCs have a ton of time on their hands at the moment. So much of our normal days are taken up with travel, events, coffees, vest shopping, etc. That is all gone now. So why not take a ton of pitches on Zoom, learn some things, and maybe find that one diamond that is so awesome that you would still invest in it anyway. But, if you are trying to fundraise right now be warned. It will be an endless time suck, delay after delay and you probably won’t succeed. 

If you are an entrepreneur there are three takeaways. First, welcome to becoming a war time CEO, I have specific grey hairs I got in my 20s from 2008. It is going to suck. Second, the best companies really are built during the recession. But that is because only the best companies survive, all the rest die and there is less competition. To get funded in an environment like this you need to be able to grow quickly while the whole world is shrinking around you and that is really hard. Third, if you need money right now, get it from revenue, debt, existing investors or figure out how to stop needing it asap.  

I know this opens up a ton of more things to talk about and I am hoping to write about how to get funded in a downturn, becoming a wartime CEO, how to operate when blood is in the streets and how VCs are going to triage existing investments. 

* There has been a lot of "Whataboutism" in response to this article. Obviously there are lots of exceptions to this hence I used the phrase "effectively closed". For instance lots of stuff in Biotech, Work from home, Security, Health and many other sectors will still get funded. But for 90% of tech startups the window is closed.