When Did The Banking and Venture Crisis Begin....
Now that the next banking crisis is upon us and the Jim Cramer 2.0’s are pointing out how they warned us, I thought I would share a story about the craze. If we are being honest, the crisis began back in 2009 when we bailed out the banks the last time and started on a path to zero percent interest rates. It really stared heating up in 2016 as the media embraced the nonsensical idea of calling late stage growth companies ‘startups’.
As seed investors, I can tell you it was difficult to stand down the last few years. It was difficult to avoid ‘FOMO’ when the media was cheerleading new ‘unicorns’ every day. Even the limited partners notice the unicorns that you are not a part of.
The one event that really raised our eyebrows about the beginning of the end, was a Softbank investment of $300 million into our portfolio company Wag Walking. Wag was founded and launched in 2015 (let us call it Uber for Dog walking) and we invested at a valuation of approximately $5 million. By 2016, the app was live in a few cities and we had invested a little more capital under a $10 million valuation. Later in 2016 the valuation started to skyrocket. The ‘Uber’ fever was gripping the venture community and Softbank decided to invest $300 million. As Social Leverage tends to do, we wanted to sell some of our position into the ‘hot’ round. But, Softbank did not allow any sales. How can a deal be so ‘hot’ and there be no room for seed investors to take some gains off the table?
Anyways, the way the momentum game was happening back in 2016 was Softbank offered to invest vast sums of money that would go to your company or a competing company. Eventually, all the growth funds played the same game, stuffing young founders bank accounts with cash. The venture industry turned early stage companies into binary outcomes. As seed investors this was an awful turn of events. The cynics (count me as one) will say this strategy was an easy way in a loose monetary environment to go raise a next fund (fees on assets under management pay a lot of bills).
It is useless to play the blame game in 2023, but at the time I wanted to have a ‘Softbank’ clause (which would have been a Coatue, Tiger, Softbank etc…clause by 2020) in our documents that allowed for us to sell anytime a company raised from Softbank. I probably would have been blackballed by the venture community and the venture capitalists would have figured out a way to invest around us anyways. The game is the game.
Today, Wag is a public company with no Softbank on the cap table, the founders long gone and a valuation of $100 million. The new management has done a great job surviving and rebuilding the brand and company. We did exit our position with a good gain for our fund/limited partners but it was a nonsensical rollercoaster ride.
Fast forward to 2023 and Tiger is mostly gone, Coatue and now Y Combinator have pulled out of late stage growth (‘momentum’) and we are getting closer to a bottom than a top. There is still too much money chasing too few great founders and great business ideas (not just ideas anymore), but that will now more quickly work itself out. I imagine the headlines will be terrible for the next 12-18 months, but the best investors will be making great investments that you will not read about because the media will remain skeptical of seed stage and venture capital for the forseeable future. Good riddance.
The circle of life…