The venture capital market could be seeing a shift in power dynamics away from founders and more toward investors, data indicates.
The information, collected by DocSend, a service that founders often use to send information about their startups to investors, indicates that after a hot start in the year, investor interest is declining, leading to what could be the start of a sea change in private-market dynamics.
For most of the last decade, the venture capital market has been more founder-friendly than not, a trend that seemed to peak in 2021 when a confluence of private capital and a hot public market made for a rich fundraising landscape for startups. Founders were able to raise successive rounds quickly, often at attractive terms, and at times with slim due diligence.
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Fear of missing out on hot deals weighed more heavily on the minds of some capital allocators than concerns about valuations, governance rights, and other investment terms. It was a frantic period, leading to some companies raising capital at price levels that are now causing some headaches among unicorns and other late-stage startups.
A material change in how founder-friendly the venture capital community is would upend the startup fundraising game, moving the balance of power away from those building more toward those investing. For those familiar with venture investment during recessions that last more than a few weeks, such a correction would merely be another swing of the power pendulum that Silicon Valley has long endured between VCs and startups.
The global venture capital market slowed in Q1 — but not as much as you might have expected
For founders only accustomed to having in-market clout above historical norms, such a shift could be a shock.
Let’s examine Q1 data from DocSend (which Dropobox bought back in 2021), and see what we can glean about how startups and the venture industry are changing.
Investors could gain the upper-hand
DocSend tracks a number of metrics relating to pitch decks sent using its service. According to a short digest shared via email, the company reports that the “trendline for investor demand in the start of 2022 has steadily decreased throughout the quarter, dipping below 2021 levels.”
Founders moved in the opposite direction, with 10% more entrepreneur pitch decks created in the first quarter than in the same period of 2021. DocSend summarizes the diverging chart lines in the following way: “For the first time since 2020, founder supply is outpacing investor interest (or demand), indicating a distinct shift in the market.”
It’s early, yes, but with investors openly discussing pulling back from 2021 pricing — especially among late-stage startups — and a general climate of slipping risk tolerance, the pitch deck data provides a confirmation that the slowdown we are hearing about is real.
Don’t expect the fundraising market to revolutionize immediately, however. Recall that while venture capital totals in Q1 2022 were down from Q4 2021 levels, the declines were not shocking. In a sense, the DocSend data backs that up, as it indicates a pretty quick start to the year regarding investor interest, but not a quarter that surpassed what we saw in the final three months of 2021.
DocSend data, when combined with venture capital results from Q1 2021 more generally, helps paint a picture of what the second quarter may bring. Investor interest was hot at the start of the year but declined as the first quarter went on. When we consider that sentiment shift and the fact that totals fell from fourth-quarter levels, we can infer that Q2 2022 could easily report another sequential decline in global and U.S. venture capital activity.
If that does happen, it will indicate rather strongly that the market really is shifting from extreme founder-friendliness to a more guarded climate where investors will hold more sway. As much as they did in 2010? Or 2002? No, but still more. It’s looking increasingly like 2021 will be the current startup cycle’s peak. The question for 2022 is simply how much the market will deflate.
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