Between his roles as co-leader of Mayfield Fund’s engineering biology practice and founder at IndieBio, Arvind Gupta reviewed approximately 470 startup pitches last year.
He describes his process as “simple,” but that’s a bit short-sighted: after viewing a deck and scheduling a meeting with the founders, he’ll spend many hours getting to know both the underlying technology and the individuals in it. the team.
“For seed deals, I spend up to 10 days so I can give an answer to a founder and I make a promise to it,” he said at a MovieUpdates+ Twitter Space last week. “In 10 days I can do the primary research and work with the founders to come to a conclusion there. For a bigger Series A check. It could take a little longer, but not that much.”
I interviewed Gupta last month to learn about the opportunities he seeks and get his advice for new founders, but last week’s Space was an opportunity to dive deeper. When I suggested that the downturn in the public markets would give startups a chance to focus on finding a product-market fit rather than chasing growth, he gave me a personal market correction:
Recessions or downturns are always the hardest times to build businesses, always, for the entrepreneurs, for VCs, for everyone involved. Because nobody cares if the market is terrible. It’s not like you’re getting a bargain: “forget it, we just don’t mind the returns being terrible.”
Our conversation uncovered a lot of helpful advice about fundraising in a down market, why he believes now is still a good time to start, and how founders can avoid waving one big red flag that discourages many investors. :
“Like [some] VCs are arrogant, I think it is important to have a learning mindset for entrepreneurs.” said Gupta. “Entrepreneurs who think they know everything better be right, because it becomes difficult to learn right away if you already know everything.”
This transcript has been edited for space and clarity.
MovieUpdates: The downturn in public markets is impacting early-stage valuations, but early-stage funding still seems fairly stable. Is now a good time to start?
Arvind Gupta: I think so, especially in what I do, which is reversing climate change and curing disease. It’s always a good time to start, because those things can’t wait.
What’s happened to the stock market is that as valuations have fallen, the multiples have compressed… So let’s say revenue is $100 million and if a company’s IPO value is $2 billion, that’s 10x the turnover. That’s dropped significantly, about 30% from where it was. The private markets are not repriced every day, so it will take some time to catch up.
Late stage investing has certainly dried up a bit… It’s only a matter of time before it seeps in a bit, but there’s a lot of money in the system now. Most of the major VCs are raising huge startup funds, there are micro-funds everywhere and angels are extremely active. There is a lot of optimism that technology can still create real solutions that can drive real value creation. So I haven’t seen any lag at all in the seed, pre-seed or Series A areas.
The seed stage persists even during economic downturns as people still seem willing to make small bets. What is your feeling as far as that is?
When you invest huge buckets of money, you generally don’t invest in a story and a hope and a dream, but in a company that shows traction. Now there are some extremely capital intensive companies where you need tons of money to generate that traction, and that gets harder to fund in times of recession.
You can still fund hopes and dreams, but only with smaller dollars, and you’ll generally give up a little more of your business in terms of dilution. Arvind Gupta
You can still fund hopes and dreams, but only with smaller dollars, and you’ll generally give up a little bit more of your business in terms of dilution during an economic downturn, so I expect that to happen in the next year as well.
Who is going to have a harder time in this new environment?
I’ve always said that the low-interest-rate environment that we’ve really had since 2008 has provided an interest-free loan for risky startups.
So when you start looking at, “oh, it’s going to be $150 million before we get our first dollar of revenue,” you’ll take a deep breath into the meeting. When that $150 million is in, tell me about that next phase — it requires more creative business models, different go-to-market strategies that generate revenue along the way. There is always a way for good entrepreneurs, right? It’s just different in different economic environments, it’s never closed, so to speak.
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You asked me for some categories? I think climate investing, which I do, is still extremely alive. And there seems to be little hesitation among investors to question business models or downstream capex, I think for other industries, you know, with SaaS and things like that, that’s traditional businesses, where you have the revenue, you have the statistics, there are multiples, it’s almost like an equation that people fill in, “Okay, this is what this company is worth.”
I think it depends on where the world is going in the next year: if the world stays like this and goes lateral, everything will be fine. And there will be enough money to go around.
What kind of market conditions should we look for that precede a late-stage startup financing rebound?
What will happen is that when the IPO market reopens, many of these IPOs that are now under water will go back to the original IPO price and LPs that are beginning to write down their portfolio will see their portfolio bounce back up, that venture capital allocation continues to grow, and then venture capital continues to deploy and rearrange the money that comes in.
The exit value is what drives it all. So if we see the technology sector and the NASDAQ start to recover near its old highs, or even within 20% of its old highs, that will be the driving factor in keeping the market open and money flowing.