VC’s are notorious for slowing down their activity during the summer. Raising capital in August is a definite no-no, but overall pace and engagement sometimes starts to slide well before that.
This year, I’m guessing that the summer slowdown will be the most pronounced than we’ve seen in a while. The soft first quarter VC activity data is a precursor of things to come. This is because of a few reasons.
First, overall market weakness has a paralyzing effect. Even though investments today should have a very long time horizon, short term market challenges hurts one’s confidence and optimism, and creates distractions within an existing portfolio.
Second, a large number of funds rushed to raise capital in the first half of this year. A bunch have closed, and a few more will be closing in the next several weeks. After raising this capital, expect funds to reward themselves with a little breather before getting back into full gear in the fall.
Third, this rush to fundraise was in part fueled by high private valuations that were going to come to roost later this year. The thinking was, raise now while markups still look good. But the late stage correction is in full swing, and whatever free time that was taken up by fundraising will be diverted to these troubled but highly valued companies.
The counter-argument is that many firms raised their new capital while they have a lot of dry powder left in their current funds, so they should have an incentive to now be really active. This might be true, but often for a fund’s last few deals, it makes sense to invest in companies that are more mature so that the time horizon of that investment is shorter and so you can deploy more capital faster. So this doesn’t help early stage companies as much. What we may see is that we see some larger financings this summer or into early fall, but the activity on a deals basis will be low.
All that said, I love investing in this sort of market and don’t have a house on the Cape/Nantucket/The Hamptons to go to. So… you know where to find me 🙂