By Marc Schröder
Many of the world’s leading VCs earned their reputations (and returns) by investing during the 2008 crisis. Startup valuations were lower, providing VCs with excellent investment conditions, and amid a macroeconomic crisis, the founders envisioned and built a whole new future. This included ride sharing (Uber, Lyft), messaging that eventually improved over email (Slack), and more.
Some of the companies they financed at this low level became multi-billion dollar public companies over the next decade. It was the best-case scenario for these investors, and their willingness to invest in the face of a recession and economic collapse generated returns that secured their place in venture capital history.
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History repeats itself, and I think we are about to see that history repeat itself. The very essence of venture capital is investing for the long term in paradigm shifting companies. If you are able to do this at a discount during downturns, your returns can be accelerated significantly.
Right now, many economists are predicting a recession that will last until 2024. At the same time, many VCs have recently raised significant new funds and have a lot of dry powder to roll. As startup valuations descend from the stratosphere, many of these funds are biding their time to step in and secure significant equity at a discount. When that moment will come, we don’t know yet, but if history is any indicator, it’s on its way. If you have a ton of dry powder, this may be the time to place big majority stake bets that will be massive home runs over the next decade.
If you’re a fund trying to keep the powder dry, now’s a great time to hit the dollar cost average. Business profits will certainly suffer, but their budgets and their need to compete technologically will remain intact, even potentially high.
The economic boom of the past decade and more has created enormous value and wealth for the world’s largest companies, and they are all actively seeking opportunities to outperform the competition using software, web3, proptech, energy and other startup verticals where innovation is thriving.
Early stage survival
Many companies, from seed to Series B stage, are well positioned to survive (and potentially even thrive) as the labor supply expands and competition diminishes. Many investors have already created their shortlist of these companies and are waiting to pounce when the time comes.
These investments will be their marquee positions to weather this downturn and enter the next wave of growth, high valuations and foam. Instead of chasing after the best deals, they will be able to sit back and watch their positions evolve into mature, highly profitable businesses that have proven their ability to survive the worst the global economy may face.
Despite the volatility, fear, and risk in front of us, these things present an opportunity for keen investors. This cycle has repeated itself several times and there is no reason to think that this time will be any different.
As a newbie VC, I deeply feel all of these concerns, but I’m also excited about the potentially generational opportunity they present. As investors, how many of these chances will we have in our lifetime? Maybe two or three?
They can’t be wasted, and no doubt the best investors will take advantage of them as they always have. Of course, many funds and many startups will fail, but those able to position themselves well in this coming cycle will be the next a16zs and Sequoias – I plan to be among them.
Marc Schröder is the managing partner and co-founder of MGV, and is focused on collaborating with world-class technology entrepreneurs and establishing the MGV legacy. Prior to co-founding MGV, Schröder served as Head of Global Sales at Maschmeyer Group and was an investor at Seed + Speed Ventures. Originally from the Netherlands, he grew up in South Africa and earned a law degree from Bertolt-Brecht University.
Illustration: Dom Guzman
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