Things I Think I Think - Q3 2024
Today is YC demo day! Next week is YC demo day! Every day is YC demo day!
In homage to legendary sports columnist Peter King, here are 5 Things I Think I Think - Q3 2024 Edition:
1. SF’s Slow Recovery is Accelerating
For nearly a year, I’ve been asserting that SF is back. I’ve been encouraging founders to go to SF at a time when many media outlets were still scaremongering. But at this point, there’s no denying that the San Francisco Bay Area has reclaimed its position as the center of the tech universe. Which is why many of the people who left during the pandemic are quietly (and not-so-quietly) coming back.
While many people around the world got hung up on the media narrative of San Francisco’s demise, more and more San Franciscans have been directing their energy towards turning the tide of the City by the Bay. Folks like San Francisco-born Garry Tan and transplant Zach Coelius, who made these comments in 2022:
It’s taken time, but the collective energy — and dollars — being put towards revitalizing San Francisco by the private sector is unlike anything I’ve ever seen. Earlier this week, San Francisco-born VC Neil Mehta was revealed to be the sole backer behind a $100M effort to restore the city’s Fillmore neighborhood, where he grew up.
The tech landscape in San Francisco is certainly different than it was pre-pandemic. You’d be forgiven for being skeptical if you only visited Soma and FiDi, both of which are shadows of their former selves. The Dogpatch (where YC is now based), Hayes Valley (“Cerebral Valley”), Jackson Square and the Presidio are the focal points of New SF™.
Bottom line: if, at this point, you’re in tech and are still not spending at least some of your time in San Francisco, it’s going to be increasingly difficult to compete at a global level (which is why the entire Panache Ventures team plus many of our portfolio founders were in San Francisco last week 😉).
2. YC is Boxing Out
Speaking of New SF™, since returning as CEO of Y Combinator two years ago, Garry Tan has made increasingly confident moves at the helm of the world’s preeminent tech accelerator. Most recently, YC announced that it was moving from 2 to 4 batches per year, ensuring that the accelerator will be in session all year round.
YC clearly sees an opportunity to box out its competition (which includes both other accelerators and early-stage investors), while delivering a better experience to founders and higher returns for its LPs. As a result, pre-seed investors the world over (yours truly included) must reevaluate how they fit into a puzzle where YC + San Francisco is capturing increasing mindshare amongst the world’s best young founders.
3. We Haven’t Hit Bottom Yet
At the other end of the rink are the startups and VC firms that are struggling to adapt to this new world order.
In my Q1 update, I noted that “the great shutdown” was underway, as startups that hadn’t raised funding since the ZIRP heyday reached the end of their runways. That process continues on. Many such companies (particularly later stage startups) still haven’t reached the finish line.
But now, the corp dev sharks sense blood in the water.
Earlier in the year, we saw failing companies find reasonable landing places, with outcomes that were fair (but not great) for founders, employees and investors alike. More recently, we’re seeing an increasing number of drawn-out acquisition processes as potential acquirers cut, and cut, and cut their offers, until founders have no choice but to accept a pittance for their years of hard work.
Thousands of companies around the world are looking for landing spots right now. And hundreds of VC firms are simultaneously insisting to their LPs that those companies are still deserving of their inflated 2021 valuations. But as Marvin Liao recently noted,
Many of these Unicorns are not run by their original founders anymore. Many founders were able to take out 10s of millions of dollars of secondaries in the 2020 & 2021 mania. Unlike in prior downturns, these folks have FU money and are now doing the chairman of the board thing.
Why stick around in crap times, when you have to fire half your staff, you have no business model and probably have to take a down round (or more). Easier to chill out cuz you have the cash, join the board, promote your COO to CEO and chillax. I mean, my god, if Frank Slootman of Snowflake, wisely known as one of toughest CEOs in SV quit, most [unicorn] founders will definitely not stick around.
4. A Lot of Deals are Getting Done
Summer is historically a bad time to fundraise, but Q3 2024 was absolutely on fire. The team at Panache made more new investments in Q3 than we have in a single quarter in 3 years (and that’s saying a lot!). In fact, we had three portfolio companies publicly announce new funding rounds on the same day:
And we were far from the only VC to have had a busy Q3. But many of those funding rounds remain unannounced and unreported, leading to some misguided and misinformed reports that Seed funding is down. Take my word for it, credible founders with credible companies are getting funded at a rapid pace. And nearly every such deal is highly competitive, with multiple term sheets surfacing within a matter of days.
5. VC Struggles are an Issue for VCs. Not Founders.
A lot has been written recently about the struggles that some VCs are having raising new funds. And some of that is leading to fear mongering that it’s going to be more difficult for founders to raise capital.
I’m calling BS on that.
While it is absolutely true that many LPs are sitting on the sidelines as they wait for returns to materialize — which will make it harder for funds to raise capital — we’re also seeing new LPs enter the fray. But much like the next generation of founders, these LPs are looking for unique insights and innovation in the VCs they choose to partner with. So what’s really happening is a changing of the proverbial VC guard. Firms that haven’t evolved and adapted over the past few years are finding that the old way isn’t resonating (with founders or LPs). “I’m an experienced GP with differentiated deal flow” just isn’t cutting it any more.
In some cases, GPs are retiring, returning to operating roles or shuttering their firms entirely. A handful of GPs are lashing out and blaming everyone but themselves for their inability to fundraise. Some are even suggesting that this will lead to doom and gloom for founders:
Founders aren’t going to have to bootstrap longer or eat more ramen than they otherwise would because a handful of old guard VCs couldn’t raise new funds, even in smaller ecosystems. To my earlier point, right now there is plenty of capital flowing at the early stages around the world. (As for crossing the border to fundraise, I hate to break it to you, but for most founders that’s the goal.)
At the end of the day, global competition is coming to the VC asset class. That’s tough for VCs, but it’s great for founders.
The founders will be alright.