24Q1 Market Snapshot📸

The Latest

Today, I’m breaking down the Q1 2024 Pitchbook-NVCA Venture Monitor market report with a specific eye on the state of pre-seed and seed activity.

Let’s dive in.

The Observer Express

Don’t have time to read the entire post right now? No worries, here are the main points:

1. It’s a buyer’s market.

2. Dealmaking is down overall and at the seed stage.

3. There is an increasing preference for “safer” bets.

Special Early-Access Opportunity

I've got something exciting in the works that I can't wait to share with you.

It's called "Angel Ops: The 5-Step Framework for World-Class Angel Network Deal Management," and it's an e-book that's going to change the game for angel networks everywhere.

I've been working on this for months, and I really think you're going to love it.

Want to be one of the first to get your hands on it when it launches on May 8th? Click below to join the waitlist, and you'll be all set!

Gratefully,Andrew

1. It’s a Startup Buyer’s Market

Demand for startup capital > Supply of startup capital. Investors have more options, can afford to be pickier, and can generally obtain better terms than previously.

I’ve seen it in the markets where we’re engaged, and based on this data I expect to continue seeing the pattern continue. Investors are picky picky picky.

• “Investors have increasingly added downside protective terms, such as cumulative dividends and liquidity multiples into term sheets, enabled by the lower investor competition and the increased competition on the company demand side.” - Page 6, emphasis mine

• “Exacerbating the problem of high company count is the lack of capital on the supply side. The venture-growth stage capital demand/supply index jumped to 2.2x, highlighting the chasm between company needs and investor willingness to invest.” - Page 7

• “Our capital demand/supply model indicates that as of Q1 2024, for every $2.20 needed by venture-backed startups at the venture-growth stage, only $1.00 is being provided from the investor side.” - Page 9

2. Dealmaking is Down Overall and (Finally) at the Seed Stages

In recent years, the earliest stages of the venture market seem to have been relatively insulated from broader pullbacks. That trend seems to be ending, at least in Q1. It’s been a tight quarter and even though demand for capital is rising; deals just don’t seem to be closing.

• “The sluggish dealmaking pace has trickled down across the venture lifecycle, and nascent startups were not immune from the headwinds. The quarterly first-time financing deal value settled at $3.1 billion in Q1, roughly on par with the pre-pandemic level. During the same quarter, $2.6 billion was deployed at the pre-seed/seed stage, where quarterly deal value slumped by 39.0% compared to Q1 2023.” - Page 9, emphasis mine

• “In Q1, we observed a significant drop in deal count and value at the pre-seed and seed stages. The sharp decline contrasts with trends from recent quarters, wherein pre-seed and seed activity held up relatively robustly.” - Page 10

3. Investors are Doubling Down on Proven Winners

Why take a flyer on a new deal when you can double down on a team that you’ve already seen prove they can get it done? While this strategy does tend to drive cost basis up, it seems like many investors are comfortable with this risk/reward tradeoff given the hesitancy/pickiness to commit to new opportunities described in points 1 & 2.

• “Finally, pre-seed / seed rounds are at their lowest relative share than at any time in the last 10 years, and later rounds are up commensurately. Investors seem to be circling their wagons and making sure their most promising companies are positioned for success before they make new bets.” - Page 3

• “Regardless of the ways in which VCs diligence deals, the criteria has become more stringent, and investors prefer to either double down on the best performing portfolio companies or invest in the highest-quality companies that have demonstrated traction and product-market fit. This wariness has also translated into an increase in extension rounds.” - Page 10

Final Thoughts

It’s a “defensive” climate out there. If you’re a check writer, expect to become even more popular in the coming months, and plan to say “no” even more than you already do. I expect we’ll continue to see a rise in startup shutdowns as funders tighten their belts and prioritize their winners.

What do you think?

Are you seeing this “defensiveness” in your investor community?

Weekly Observations: 3 Lessons Learned

1. Clean financials are music to a banker’s ears.🎶I met with 3 bankers this week. I was surprised to hear every single one of them comment on how well-organized and clean our financials were. I guess paying for a good bookkeeper is less common I thought.

2. Say no.🚫This week I said no to a half dozen opportunities I was pretty excited about. That allowed me to prioritize what’s most important. It didn’t feel great, but it felt right, and it’s a pattern I aim to continue.

3. How to lose a customer 101: blame the customer and make them fight you.📉This week I realized some businesses don’t understand the concept of LTV, and some do. Amazon’s return, shipping, and customer service policies are incredibly easy and simple. They definitely lose money on quite a few individual transactions as a result of this ease. In contrast, Dani and I recently sold something through another marketplace (ask me separately if you want to hear the full rant) and I got slapped with a massive unexpected shipping fee. After fighting with customer service for over a week, we got nowhere and are pretty much stuck with this insane fee. Maybe the marketplace protected their bottom line on this deal, but we’ll never do business through their platform again (where we otherwise would have). Was it the right business decision on their part? Absolutely not. Next time I’ll stick with Amazon.

Weekly Links: 3 Things I Found Interesting

1. Angel returns by vertical from 247 TCA outcomes (link)📊

2. Top startup cities according to PitchBook (Austin is #16) (link)🗺️

3. Doing diligence well from TDK Ventures and 6Pages (link)🕵️

Thanks for reading, have a great week.

-Andrew

If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.

P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.

How did I do this week?

👏😄Fantastic

🤷‍♀️😐Okay

👎😖Not great

About Me

I cultivate flourishing.

I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.