Michigan venture capital sees slowdown as opportunity

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To say the economy is upside down is an understatement.

Inflation is galloping and interest rates are soaring. Local mortgage companies in Metro Detroit are under increasing pressure as mortgage rates reach levels not seen since before the Great Recession.

Capital markets fell. Indeed, global M&A activity has fallen off a cliff, hitting its slowest period in a decade by at least one point.

And yet, despite these harsh conditions, many companies still see plenty of leads. And nowhere was that more evident than at the Michigan Venture Capital Association’s annual dinner, the group’s 15th annual gala.

While celebrating 20 years of the MVCA’s existence, there were few signs of broader economic turmoil.

About 175 venture capitalists, startup founders and other industry-related people who attended found a bar that approached high end and plenty of opportunities to discuss potential deals.

Ask most Michigan venture capitalists who attended the event in Greenfield Village what their current level of activity is — and I did — and the answer was consistent: “busy.”

But peel back a layer and the reason becomes obvious: the venture capital market – the primary funding mechanism for high-growth emerging tech companies – has seen a shift in recent months.

In June, as the economy slowed, Metro Detroit entrepreneur Sergio Rodriguez told me he envisioned the market no longer favoring founders — who have been able to achieve high valuations for their companies for decades. years – and reverts to the one in which the VCs are in the driver’s seat.

This prophecy, at least to some extent, has come true.

For VCs — especially those who raised funds last year or early this year — that money now goes much further.

“You’re absolutely right,” a Michigan venture capitalist admitted to me at last night’s event when asked if he was able to get a better deal on his investments. current than last year – or even years before that – when founders could command at the highest. valuations.

And the data backs that up, at least to some extent. According to Pitchbook, the median pre-cash valuation of an early-stage startup fell 16% quarter-over-quarter in the second quarter of this year, the first drop in more than two years.

Companies with some level of traction – commonly referred to as the seed stage – fare better, according to the Pitchbook report, which found that such a company’s median pre-money valuation rose 33% this year compared to last year.

2021 was, by most accounts, a high point for the industry.

Last year, US venture capitalists invested $329.9 billion in about 17,054 deals, according to a year-end report from Pitchbook and the National Venture Capital Association. According to Pitchbook and the NVCA, some 730 U.S. venture capital funds raised a record $128.3 billion last year, a 47.5% year-over-year increase from the record. of 2020 by $86.9 billion.

So given the banner year, yes, things have slowed down for most accounts. But it’s probably for the best, said Erik Gordon, professor of finance at the University of Michigan’s Ross School of Business.

“I don’t think it’s so much that the VCs have control now,” Gordon said. “I think it’s more than it’s back to normal. The better looking companies get higher valuations and the less attractive companies that can be financed get lower valuations.”

In other words: The booming days of 2021, when a Web3 startup could reach a valuation of over $1 billion simply because it claimed to be in the industry du jour, are largely over.

Some level of “health” has returned to the market, a VC source said.

And whoever has the upper hand at the negotiating table is something to celebrate.

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