How Venture Capital Will be Impacted by the Next Recession

Many within the startup community believe we’re staring the next recession in the face. Founders I’ve been working with are trying to figure out what that means for go-to-market strategies reliant on venture capital. While I won’t attempt to predict when the next recession will strike, I will make some predictions about how the VC market will react…

1. Funds and investors will still be seeking deals
The venture capital market itself is an acyclical industry. When public markets are down, venture capital funds are still looking for opportunities. Given that venture returns will appear more attractive relative to equities in a downturn, institutional LPs will still be seeking managers to fund too. The trouble is that portfolio holdings may take longer to exit…

2. Growth-stage bridge round activity will soar
The M&A market will certainly dry up in a downturn, and early-stage startups will look even riskier. My bet is that VCs will prefer to deploy their dollars into their mid-stage companies to sustain their active portfolio companies until there’s a better market environment for exits. Prepare to see many Series B and C bridge rounds as funds buy-up larger shares of their most promising holdings.

3. Early venture activity will favor startups in counter-cyclical industries
Startups focused on the downswing of the business cycle will fare best (i.e., need-to-haves like utilities, B2G, consumer staples, commodities, real estate, health care, etc…). Ventures not already focused on non-cyclical product startups should take a moment to think about how they might better orient themselves, and do so if it fits their mission. Those that are already in durable industries will want to play up how they will combat unfavorable macroeconomic trends.

4. Newer fund managers will outperform the establishment
Those that survived the Great Recession will overreact to the next recession which will assuredly be more moderate. They will underperform their peers by being overly risk-averse.
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Regardless of how these predictions play out, founders should remember that recessions present opportunities whether they be deep or shallow. Airbnb, Beyond Meat, PagerDuty, Pinterest, and Slack — some of 2019’s most heavily anticipated IPOs — were each founded during the most recent financial crisis (12/2007 to 6/2009), and not all economic slowdowns result in a crisis.

Author

Harlan Milkove is a repeat VC-backed startup founder, and Managing Partner at Foundational where he works with early-stage startups to expedite their pursuit of venture capital. His prior venture Reonomy, a commercial real estate data analytics platform, has gone on to raise $125M+.