Startups looking for venture capital funding are having a harder time finding it this year, but Valley investors say there are still opportunities for founders to land an investment in the rebalanced market.
Creeping inflation and fears of a recession have caused some VCs to pull back from the record investing during the Covid-19 pandemic, but the market is still active, the power has just been redistributed.
“The dynamics have shifted from a founder dominant market over the last couple of years, to a more investor dominant market,” Leib Bolel, a partner at Scottsdale-based Grayhawk Capital, said in an interview. “Most founders have come to terms that valuations have decreased quite a bit.”
2021 was by far the best year for startup funding across the U.S., with more than $340 billion invested in hundreds of companies, up from $167 billion in 2020, according to Pitchbook. Arizona startups too saw record investment last year, collectively securing more than $1.89 billion in 2021.
This year investment in startups has slowed, but the money is still flowing. Arizona startups hauled in $463.08 million across 39 deals during the second quarter, up from $201.49 million a year earlier and $227.69 million in Q1.
Grayhawk Capital closed its third fund at $76 million last year and has been deploying that capital all year, most recently leading an $8 million seed investment in Utah-based Bacon. Bolel said 2022 will likely be their busiest year in recent years.
Bolel said some local companies have put capital raising plans on hold for the next year or so, in hopes of avoiding a round of funding at a lower valuation, commonly called a down round.
“[Founders] are doing one of two things: They're either taking convertible notes, they're doing SAFE notes or they're just putting their head in the ground and growing and waiting for the cycle to have an uptick,” Bolel said.
'Bitter medicine'
In addition to looking at new investments, VCs also work with their existing portfolio to help them scale and weather tough spots.
Romi Dhillon, co-founder and managing partner of the Sonoran Founders Fund, said their fund has been serving some “bitter medicine” to portfolio companies at times, giving them advice on how to go longer without previously expected rounds of VC funding.
“We tell them to adapt quickly, we advise them to make cuts and to review salaries and to employ a heavily commissioned sales structure,” he said. “We want them to build businesses that are financially sound, as opposed to before where it was really around funding.”
Dhillon said the fund is also helping bolster balance sheets for some of its companies, usually by deploying SAFE notes.
But investing continues despite macroeconomic uncertainty; The Sonoran Founders Fund has invested in Scottsdale’s Botco AI and in Terkel’s $1 million seed round in July.
Dhillon said that in the current market, founders are realizing that the valuations they expected in 2021 are no longer realistic so they are deferring to investors as they had in years past.
“The pendulum has now swung back to the investor side of the table after a few years,” he said. “There's still capital looking to be invested, there's still dry powder, but we’re waiting now for the founders who really are ready to have meaningful conversations with investors.”
