Market Update | May 2022
If you’ve been living under a rock for six months, you probably haven’t heard that the markets and overall economy are going through a volatile time right now, with its effects being felt all the way from Sydney to San Francisco, and beyond.
Rising interest rates, inflationary pressures, the War in Ukraine, rising energy prices, stock market corrections, and supply chain constraints are all events contributing to these current market events.
However, given all that’s happened, what does this mean for the venture capital and the technology space going forward, and more specifically what are we doing here at Metagrove to ensure we can protect ourselves and our portfolio companies to be resilient against such exogenous factors?
Growth Investing
Investor sentiment in later-stage growth companies — those being funded typically beyond Series A is now reeling back from a period of intense growth over the past couple of years. Valuations of these hyper-growth companies are now being reevaluated and reset as we’re starting to identify a self-correction of sorts across this entire pipeline.
Growth investing in and of itself is a great mechanism to create fly-wheel effects within companies that have demonstrated promising traction of verified product-market-fit, a growing user base, and strong Annual Recurring Revenue (ARR) numbers. However, in recent years, later-stage investors have been more lenient when it comes to validating company traction, and this has resulted in gross overvaluations, but also a pressure on founders to continue growing at unsustainable rates leading to exceedingly high rates of cash burn.
As a result, we’re now seeing investors and the market come to this realization and figure out that such companies need to take a few steps back and reconsider their cashflows, growth projections, and overall outlook. This has already been validated in the public markets with Uber, Netflix, and many others slowing down their operations and hiring practices at least for now, with intentions to grow at a more sustainable pace.
Early-Stage Landscape
But what does this mean for the earlier growth side of companies?
The early-stage environment (pre-seed to Series A) is by no means shielded completely from the effects of the market, but what we know historically is that they do offer a safe haven for investors, who are looking to reallocate their assets for a more stable return over a longer period of time.
These companies operate at a much smaller scale than their later-stage counterparts. Most founders are still validating the market during this time, but also have the chance to make early decisions on their capital efficiency and resource usage at a nascent stage that don’t trickle over into long-term cash flow problems.
It’s also important to note that companies at this stage operate on a much leaner structure giving them the ability to be flexible in their hiring practices, team structures, and overall operations. This allows founders to be more adaptive to changing market factors and adjust when needed.
However, we must also acknowledge that even pre-seed and seed companies may be affected in some way. For example, we’re now seeing various startups be more cautious about their growth strategies and factoring in cash that will keep them afloat for much longer than expected. Also, founders are now focusing on getting strong traction at the onset to ensure they are ready for VC funding, but also getting the capital from the right investors to help them on their journey — we couldn’t stress this out enough — partnering with the right investors will be the key factors that will define a company’s success, even through the swings.
Overall early-stage investing will be here to stay, albeit at a slower rate than before, but this is also an opportunity for founders and investors to work closely on proper execution and strategy — innovation does and will not stop.
What about Metagrove?
We are an early-stage fund — this means we operate at the pre-seed and seed levels — this is good. But, what does it mean for us, our investors, and our founders?
First off, we are continually working with our founders to work on strategies that optimize for cash burn and capital efficiency, but at the same time focusing on maximizing growth as much as possible at a sustainable rate. We also encourage our founders to seek active advice from our mentors to learn more about how best to operate with limited resources, and cutting costs where they need to.
Additionally, when deciding to invest, we are also working on ensuring that valuations are fair and representative of our companies. This is extremely important for us to ensure our participation is accurate for both sides. But we have also updated our investment criteria for prospective startups and raised the bar so that we are confident they can weather any storm that comes their way — this includes but is not limited to; a proven MVP, validated recurring revenue, strong Daily Active Users (DAU) numbers if applicable, signed pilot programs (if applicable) and verified product-market-fit backed by thorough due diligence.
Moreover, because of our focus on such specific industries, we ensure that we have and always will continue to invest in founders who are these domain and sector experts, and who understand the problem intimately, but also have the drive and fortitude to build a sustainable solution and company.
Finally, going back to the notion of working with the right investor, we feel strongly that we only invest in companies that we can help and support. This mandate allows us to keep our founders on track but make sure all stakeholders are aligned for the long term.
What’s Next?
It’s fair to say that we’re now experiencing volatility in the market, and we need to be wary of these uncertain times. However, this is also an opportunity for us to go back to the drawing board and carefully think about how and what we invest in, and make sure we continue to work with founders with a strong and proven sustainable business model.
The good news is that we’re still operating at the early stages, which means such companies won’t be ready for primetime at least for the next few years. Right now we’re hunkering down and focusing on building alongside our founders to make sure that when the storm has passed, we’ll be ready to showcase our companies under the right spotlight and prepare them for their next stage of growth when the time is right.
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Metagrove Ventures is an early-stage investment venture capital fund, focused on supporting founders and companies who are building the future of industry by creating inflection points in the market.
