Collision Conf. - SVB: What happens next for funding?
The funding landscape of 2023 is described by most as being “turbulent”, especially in the aftermath of Silicon Valley Bank's (SVB) collapse. In this session of Collision Conf, the speakers offer profound insights into the current economic climate, where startups face unprecedented challenges in securing funding amidst rising interest rates and shrinking venture capital funding.
The panel first discusses the economic environment and the events that led to the crisis. With interest rates surging and global funding experiencing a 44% decline, startups are grappling with the effects of the downturn. The conversation then shifts to the perspective of investors in this changing landscape: the market appears to be bifurcated, with later-stage companies struggling to raise capital without a clear path to profitability. On the other hand, early-stage startups with strong unit economics and a clear monetization plan still attract investment.
The discussion concludes with a focus on specific sectors like gaming, consumer web, and web3. Panelists emphasize the importance of backing founders who align with their vision for the future of the industry.
Huge thanks to the panelists who made the session so entertaining and educational!
- Amber Atherton, Partner @ Patron
- Joe Dormani, Founding Principal Investor @ Thomson Reuters Ventures
- Don Muir, Founder & CEO @ Arc
- Bill Saporito, Editor-at-large @ Inc. Magazine
P.s. if you're looking funding we'd love to help! Get in touch!
Transcript
Good morning. We're here to talk about the implications of the SVB collapse, but before we do that, let's talk about the general economic environment and how we got here.
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We've had a period of rising interest rates. The Fed has indicated today that. We expect another couple of rounds. They've been followed by the central banks in the UK and Canada earlier this year, which got us thinking about recession, and of course, recession gets everyone a little bit nervous.
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Money got tighter, money got more expensive. Then comes March. And Silicon Bank happens and money gets terrified. So where are we now? If we look at the scorecard, I can tell you that Inc reported this week that global funding was down $22 billion in May. That's a 44% drop. Startup Genome reported that.
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There's been a 60 to 80% contraction in series A and B since 19, 2021. 20% of those are down rounds. And this morning Bloomberg reported that if you look at the broader deal market, it's down a trillion dollars. Asked the question, where are we now? And now we have. A couple of panelists who have money for you Joe and Amber, and then if you get that money, then Don can run it for you.
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So let's talk about Silicon Valley Bank, what happened to it, and how you reacted as a banking services provider. Definitely.
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Hi everyone. My name's Don Muir. I'm the CEO and founder of Arc. We're a digitally native banking and growth capital platform for startups. We went live today on product time in celebration of this panel here at Collision.
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So check us out if you have a minute. Arc was on the front lines when the startup ecosystem experience an unprecedented shock in interest rates. Spiking and venture capital funding down 50% year over year. The last thing that founders and the venture community needed was a shock to the banking system.
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The week that SVB failed. Arc’s Inflow spiked 15 x higher than the historical average since we launched our banking platform. And ARC was there with the ability to spin up. FDIC-insured accounts in less than 10 minutes, helping safeguard cash and diversify cash across a network of offline financial institutions.
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And so the question in this panel is what's next for the startup banking ecosystem? As we saw in the consumer banking world in April, with the partnership between Goldman Sachs and Apple, it's my view. That the largest, most systemically important financial institutions will start partnering with tech companies such that founders can access a personalized software-driven tech banking experience with the security of the largest balance sheets in the world.
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And to bring that to life at Arc, we're partnered with BNY Mellon and have cash feed programs with JP Morgan Chase, Wells Fargo, Goldman Sachs, and Citigroup. Which provides a customized software-driven experience with the security that comes with banking with the largest banks in the world, with trillions of dollars of assets.
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So it's my view that the next phase for tech banking won't necessarily lie with the community banks, but with the largest banks partnering with fintech to deliver that customized personalized banking experience that Silicon Valley has come to expect and deserves. But does this suggest that we're gonna see more problems with smaller banks?
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And traditionally investors in startups have looked to these smaller banks to help them. SVB had a great reputation. So is that, do I now have to go through JP Morgan? SVB, FRB, PAC West? These were the bedrock of Silicon Valley for the last four decades, some of the greatest, most durable tech brands were built on the backs of these banks.
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They serve a purpose and that serve that purpose is a customized banking experience for the tech community. I don't think it's the end for community banks. I can't predict what's going to happen more broadly across the community banking ecosystem. What I can predict and what I expect and what we're seeing since we're growing another two x three x.
Month over month since SVB went down big banks and small banks will continue to partner in a more meaningful way with tech companies to distribute their products across the tech ecosystem.
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Okay, so let's turn to the investors. Tell us about how the world shifted or did not shift this year in a rising rate environment.
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We've had three banks go under this year. Yeah, I guess I would just start by saying there's a level of recognition for the founders in our portfolios and the way they navigated the banking crisis with the Silicon Valley Bank. In, my portfolio TR Ventures, and many peers the founders were the ones that left to action and drove with leadership through, through that crisis.
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And, there were a lot of investors that had to step in with, backup capital, and that was spearheaded by the founders. And so huge admiration for the founders. I think where we are now is we're in a bit of a bifurcated market. There's, for some companies it is tough to raise venture capital, but for other companies, there's still investment out there.
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And what I mean by that is, For later-stage companies it's a get-fit environment If you do not have a path to profitability if growth is decelerating and you'll have a tough time finding and raising capital. We're lucky enough, we're focused on series A and the early stage, but we also see a fair amount of late-stage companies as well.
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And we talk to a lot of growth investors and I think it's a pretty consistent point of view. But the bifurcation is that in the earlier stage if you are building a company, particularly, an AI-centric company in a market where there is a known definable answer to insight or analytics or synthesis of information particularly in, B two B or a variety of different enterprise verticals.
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There, there are plenty of investors that are at. Investing at all layers of the technology stack, from foundational models to infrastructure to verticalized applications. So I think it's a sort of a tale of a bifurcated market at this point.
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Amber, what have you seen? Yeah. Hi.
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Hi. I'm Am Ratner. I'm a partner at the Early Stage Gaming Fund Patron, but I was on the other side of the table. I took my startup through Y Combinator in 2018, and then we were acquired by Discord in 2020, which was a very risk-off. Environment. But when we were in the midst of the s v B crisis, I wanted to give our portfolio a sense of community.
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So we were all in the Patron Discord. We don't have an office Patron lives within Discord, that's our virtual office. And so as the crisis was going down, we and my co-partners and the rest of the portfolio were in the Discord voice chat for probably three days. And everyone was hopping in, as real-time information was coming from Twitter because.
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All bar three of our portfolio companies were banking with SVPs. So I think from a venture partner perspective, we are Capital Plus service, and the service there was, okay, we need to help our founders in the trenches figure this stuff out. So I think it was a really good lesson for VCs to just have a ton of empathy with what the founder experience is and has, I think, set up a lot of funds.
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To better support founders in the future when these types of unprecedented events happen? I think in terms of the environment now, if you're raising seed, the bar is just a lot higher than it was, coming off the back of Covid. We're in this enormous bull run now, it's a lot more. Do you have a path to profit, to profitability, not just to like series A, but also venture to venture outcomes?
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So we are looking at founders in our specific niche, which is broader gaming, to see do you have a really strong ability to conserve cash and do you have a plan to get to some type of monetization. So does that suggest we need a different kind of founder with different skill sets? I think it might be very beneficial for the ecosystem.
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We might see, some incredible startups being built now because you have to lean into resilience, and perseverance, to be honest about whether you have product market fit. So I think it's gonna be an interesting time, particularly at the early stage of the fundraising ecosystem to back these types of new founders.
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Joanie, what do you, what would you say to that?
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Yeah, I think a lot of the founders that we work with are pretty dynamic. I think it's about which muscle to exercise for lack of a better term. It's more of a founder focus. Focus more on unit economics, focus more on having a story around why your product makes sense, why you're building something that people need, and how you're gonna make money.
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How are you going to have your path to profitability? How can you quantitatively defend that? And maybe the unit eco economics look a certain way today, but if you can tell a story around how those unit economics can, sta can scale and what you need to believe to be true for, the unit economics to scale and for that to produce cash flow or profits.
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I think, depending on your stage, I think it's, that's something that I would embrace, as an investor. Okay. So when you say a path to profitability, what kind of timeline are we talking about? And we've had there have been issues about fake it till you make it.
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That era seems to be over, but what kind of discipline does that take now as opposed to a couple of years ago? Yeah, so it depends on the stage of the company and the position, but I wouldn't assume that there is another round coming. It depends on what your cash position is today.
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So my starting point on that would be how much runway I have and with that runway, what do I need to believe or what needs to happen as a business for me to get to profitability within that timeframe? I just add onto that, that I think in the last cycle you are at Steve Stage, you are raising money to burn, to get you to the Series A, and that's just not the case anymore.
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In this current environment, we're looking at more sustainable growth and how you can truly build product market fit for the long run, not just to the series A milestone. And how does that play in your, in the sector that you're focused on? Gaming consumer web three? Yeah. Games take a long time to get to market.
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But I think we are trying to back founders who. We believe in the long run, we'll build a huge company. So our deal pace is a lot slower. We've only done two deals this year. But I think that's starting to pick up now. But again it's looking for very special founders who are not necessarily building on the hype wave of ai.
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For us at Patron, it's more about do you believe that the next version of the Internet's gonna feel more like a game. And if you align with our thinking, then we could be a good partner. So you've done two deals this year. How many did you do last year? 16. Okay. So here's what you're up against. Joe, how many deals have you done this year?
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Four with one or two at the finish line. And how does that compare with last year? We did about eight last year. Okay. So we're on base. So what you're seeing here is that the deal rate is down substantially. Now, that's because you're getting pickier. Because the investors are getting more strict or what does it mean?
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What's driving it this year? I think we're investing at pace. I think we are still riding the back of a technology paradigm shift in ai. And we see a lot of companies, particularly in the verticals that we focus on, which is. Legal tech, software, fraud, risk, and compliance.
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And we're very focused on machine learning and natural language processing in those spaces. We're seeing a transformation in those markets, and we're seeing companies being built according to that transformation. And, from our standpoint with a fundamental shift like this, we feel like it's prudent to be deploying capital at pace.
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Okay, now, your customers were coming to you in a panic about a couple of months ago. What do they need now? What are these startups asking in terms of financial services? What do they need in this? Yeah, in this environment. So it's two things. It's securely storing their capital.
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They're venture dollars that they've worked so hard to raise, oftentimes in a different funding environment, where now the goalposts have shifted. They were told to grow at all costs. Their boards, their investors, gave them piles of cash and told 'em to spend it. Grow at all costs didn't just mean growing net revenue or gross profit.
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It meant growing GTV, headcount, expanding operations, and even the head of product market fit. That wasn't a zero-interest rate environment. Now in a different environment. It's, we want cashflow positive businesses, we want ai. And that's a tough transition for a lot of founders and operators out there.
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And so I just take a moment to acknowledge the amount of pain in Seed through. Series C funding environment for startup operators, they need to make challenging decisions across the cost structure. And that has consequences not just for the startups and the founders, but for the employees at these businesses.
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And so in terms of what they're looking for today, it's securely storing their cash and knowing that they can sleep at night. That their funds are fully FDIC insured or SIPC insured, and that they have access to capital. And there are alternative sources of financing available to startups today outside of the equity markets where founders don't need to take unnecessary dilution in a flat high-rate environment.
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Venture debt is picking up revenue-based financing is becoming more and more ubiquitous across the startup ecosystem. And so what we encourage founders to do is to invest their cash in a high yield. Products like t-bills and money market funds that today are yielding north of 5% to extend the runway, maybe avoid an unnecessary layoff, and then look at alternative sources of financing beyond equity markets.
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Instead of taking that down round, perhaps you can raise a term loan or venture debt product, or you can tap into your future revenue streams to pull forward revenue-based financing and invest in growth or extend your runway today to get through the cycle. And we are seeing glimmers of hope.
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That the days are brighter ahead of us here in the equity markets. The i p O markets seem to be thawing out. The AI boom is bringing some venture funding back to the ecosystem, and so there are some positive tailwinds and indications that things will get better and we're helping founders weather the storm to get there.
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So how would you raise money now? So today we have two products, banking and lending. Within lending, it's RBF and venture Debt. And If I was to eat my own medicine what we would do is we'd tap into our ecosystem of venture debt partners and we would identify a term loan opportunity based on the fundamentals of the business, not based on hype and fomo and who's on the cap table, but based on pure fundamentals, AR gross profit and cash flow.
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And you can tap into this without incurring any incremental dilution to get through cycle.
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Okay, last question. What is it gonna, what is the deal situation gonna look like in the next six months? I think, as a VC you're in the business of optimism.
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So I think at the early stage we're optimistic that there's a, a new generation of founders who are gonna build very big sustainable companies.
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So I think it's just persevering and it's a relationship business at the end of the day. So find a partner that shares the same worldview as you, who can be in it with you for the long run. Yeah, I'll go back to the bifurcated comment. I think for later-stage companies that don't have a path to profitability and growth is decelerating.
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It's gonna be a tough time. They're gonna have to figure out a way to re-accelerate growth, reinvent the business, pivot to something, launch a new product, and they're gonna have to do it in a way that is lean and efficient from a unit economic standpoint. And I think, in the earlier stage with the companies that are building around generative ai, I think they're going to continue to find interest and they're going to continue to find investment interests as long as they are building their companies along an operational with operational rigor and discipline for growth and profitability.
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Okay. Thanks very much. I think that's all the time we have for her, so if you're raising money out there, good luck to you. Thank you.