Making Sense of Uncertainty with Madrona’s Tim Porter – GeekWire

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Tim Porter, Managing Director of Madrona Venture Group. (Madrona Photo/GeekWire Illustration)

What the heck is going on in the economy and how will market fluctuations impact startups and venture capital? The backdrop to these issues is dynamic and complex at this time.

To help make sense of this turbulent environment, we invited Tim Porter to join us on the GeekWire podcast. He is a Managing Director of Madrona Venture Group who has invested in early-stage tech startups at the Seattle-based venture capital firm for the past 15 years, focusing on cloud, AI and enterprise software companies.

Listen below and keep reading our notes from the chat.

It looks a little dark there. What do you see?

  • The last few years have been an absolute roller coaster, for the world, the tech market and the startup market as well.
  • In some ways, what is happening now is a return to historical normality rather than a “the sky is falling” scenario. There has been a compression of multiples from unsustainable levels last year. Businesses are now focusing a bit more on efficiency, not just growth at all costs.
  • At the same time, the world has been through so much trauma (pandemic, wars, supply chain issues, energy shocks, inflation), and these are having a real impact on businesses and individual consumers.
  • It will be more difficult to raise funds in the short term. Investors have largely pressed the pause button at the moment. Startups need to think about expanding their track, rebalancing the trade-off between efficiency and growth. Grow a little less, but be much more efficient.
  • Companies are not hiring as aggressively, but there are no hiring freezes or widespread layoffs.
  • In many cases, demand from end customers is still strong. Companies have achieved their first quarter targets and the second looks solid.
  • That said, there is a general sense of caution and an acknowledgment of the need to preserve capital.

It feels like a bit of an odd slowdown. This isn’t so much a business or customer reset; it is simply a market and valuation reset. Is this an accurate assumption?

  • “I don’t want to say that there is no impact on some of these end markets, but there is largely the case.”
  • The forward income multiple for the 25 fastest growing public SaaS companies, the median was 52 at the November 15 peak. Now that’s a median of eight. And so you saw a rating reset.
  • Public companies beat earnings expectations but tempered their forecasts due to issues such as the impact of exchange rates. (See Salesforce and Microsoft.)
  • For hardware companies, supply chain challenges also have a direct impact. (See Valve’s Steam Deck Dock Delay.) Consumer spending has become more subdued as the stimulus has worked its way through the economy.
  • “So I don’t want to say that there is absolutely nothing to worry about regarding inflation and the economy in general. But most of the fundamental trends we’re investing against – digital transformation, shifting to the cloud, machine learning, software impacts – all seem very enduring.
  • Looking ahead, people seem to be in wait-and-see mode, not slamming the brakes, but also not putting the accelerator pedal to the floor.

We had COVID and a war and all these supply chain issues, inflation. Entrepreneurs need to feel like they can’t take a break. It’s exhausting and it has a psychological impact. How do you support entrepreneurs to get by?

  • He was wild. All the uncertainty and challenges of COVID in 2020, then the best fundraising market in history in 2021, the biggest run on tech valuations we’ve seen in 20 years. Now things are coming home with inflation and wider global issues.
  • Yet the founders are resilient and optimistic. Some of the best companies were created during past recessions. For Madrona, examples from the 2007-2009 era include Smartsheet, Apptio, and Extrahop.
  • “We want to partner with founders who want to build something meaningful and sustainable for the long term. The cycles will go up and they will go down. …and so you just have to react, put your head down, and keep building.
  • “We try to always have a view on, every dollar demands a return. And if you see an opportunity, yes, be aggressive and invest against it. But don’t just pour money on something because the money is available.
  • This type of effective growth mindset is what people are focusing on right now.

Let’s say you’re an entrepreneur at the end of your Series A funding cycle and you’re going out for your Series B. What advice would you give to this entrepreneur?

Madrona is still figuring this out right now with several factors in mind.

  • Very late-stage private markets are essentially closed at this time.
  • Until three weeks ago, the very early stage market (pre-seed and seed investment) was in full swing. We have seen many early-stage deals continue at robust prices. Over the past three weeks, this market has started to slow down.
  • In the world of Web3, the fusion of Terra and Luna contributed to a slowdown.
  • At the same time, the bar for startups to show progress in their metrics has been raised, with greater emphasis on capital efficiency. Valuations are therefore lower than entrepreneurs had previously anticipated.

So the advice is, if you don’t need to raise, don’t. Instead, extend your track to do more with existing capital. If you need to raise now, consider a smaller round and readjust your valuation thoughts. Play for the long haul, make your pie bigger later, don’t just focus on diluting now.

We are seeing hiring cutbacks from small businesses to large ones. What do you see in terms of hiring? Is this an opportunity for start-ups to attract talent?

  • It seems like an opportunity. Just like in funding markets, there is a cascading impact in the talent market that starts with late-stage companies and trickles down to earlier-stage companies. It takes some time.
  • The competition for talent has just been intense in Seattle in recent years, certainly on the technical and engineering side, but also on the sales and marketing side.
  • “It’s still quite competitive from what I see. But I think it will subside and normalize a bit more here in the second half of the year and next year.

This is another example of this weird downturn – all these macro issues and yet the hiring continues and the clients keep coming in. How does this represent groupthink versus reality?

  • A popular observation is that the tech market is rapidly changing from greed to fear. When it shifts to fear, all of those things build on top of each other.
  • A truism across many cycles is that when a downturn hits, you never want to react too late.
  • However, things did not completely stop. There is possibility to build. It really depends on your business, your track, and your end market.
  • The movement towards efficiency is real and necessary. You don’t want to go into pure survival mode, but neither do you want to ignore the warning signs and burn your money.
  • Tim has yet to see any bearish rounds (where valuation was lower in a new round than it was before). However, there was a deal where the price was adjusted in real time, thanks to a collaborative discussion between the investors and the founders.

Does a downturn like this change your investment focus?

  • “That is largely not the case. We try to invest in trends that we believe are more than ten years old, and invest early for companies that can grow over the long term. And so it hasn’t changed at all.
  • Madrona’s investment pace has also remained relatively stable.
  • One thing that slows things down is price discovery, determining how to value companies. So there will likely be a slower pace of follow-up rounds compared to the previous year. New investments could slow down, but to a lesser extent.

Is there anything specific about this slowdown that concerns you the most?

“I think it’s whether inflation and a broader downturn in the global economy will turn this into a much longer downturn or recession. How long is that going to last? The longer it goes on, the longer I think you’ll see the markets have to pull back. …Will it turn into a full recession? I’m not sure. And we hope not. But that’s the question.

How worried are you on a scale of 1 to 10, with 1 being no worry and 10 being massive devastation?

Sept. “I think the fundraising market is going to be tougher for a while here. And I think there are broader issues around inflation and the economy. I don’t think it’s a 10. I don’t think it’s as bad as it was in the Great Recession in 2008. But I also think you have to exercise proper caution and be really focused on efficiency, and really understand the leading indicators of your business to see how things will continue to react.

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