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Jonathan Ehrlich discusses how tighter startup funding is driving a return to fundamentals
Key Takeaways
- The market for startup funding has changed, with a return to “first principles”, including a growing focus on building durable companies for the right reasons.
- Capital efficiency is crucial, and founders should be thoughtful about where they spend their money, prioritizing revenue-earning activities and building their team.
- While there may be a pullback in the seed asset class, creating a more Darwinian environment, this is an opportunity for great founders to take advantage of models and markets with fewer competitors.
Transcript
Hey, I'm Jonathan Ehrlich. I'm the founder of Roar Ventures. Roar is a $25 million seed-focused fund based in Palo Alto, California.
The market for sure is different than it was a couple of years ago. Two years ago, people were throwing money windows at startups and at that funds, and that has definitely changed. I actually think that's changed for the better. We're going to see a return to first principles. Gone are the days of only looking for the highest valuation and the biggest check. Gone are the days of having to make a decision in 48 hours about whether to invest in a specific startup. That is insane. Now we're seeing the right kind of founders who want to build companies that are durable for the right reasons. We're seeing the opportunity for founders and investors to truly understand what they're getting into because these relationships are a decade long.
I think this notion of being really thoughtful on capital efficient is something that has really come back and hopefully will never leave us again. You only want to spend money in two areas as a founder, places that earn revenue and on your team. Fancy offices, conferences, Twitter promote like all that stuff is completely irrelevant. What matters is putting the dollar in a place where it can get the most leverage, and it's forcing founders to be super thoughtful about capital efficiency. So capital efficiency is one factor that that I really look for.
The second is a founder that's focused on the right milestones and not getting distracted by the things that don't matter how often a tweet was liked is completely irrelevant. What matters is, does your customer love you? Are you able to grow the business cost-effectively? And at the end of the day, can you build some kind of durable moat around the business to make sure that the value capture is long-term?
There is still a lot of money in venture. It is being a little bit more careful in terms of how to deploy it. And I do think we're going to see some pullback in particularly the seed asset class. We're going to see a little bit more Darwinian environment for access to capital, which I actually think is a good thing. It's going to force the right kind of people to be in the market, and it's going to force us to stay super focused. And for companies themselves, it's going to be way less competitive because you won't have 20 companies spinning up by firms backing competitors.
It's a return to first principles. It's a return to 2008. And I'm hopeful that the 2024 and 2025 vintage is as good as the 2009 vintage because in 2009, we had Airbnb, we had Uber, we had a handful of other companies that emerged on the back of the great financial crisis. And I believe we're going to see that same vintage today. And yes, there may be more challenges in terms of fundraising, but those are opportunities for great founders to take advantage of models and markets where there's going to be way fewer competitors.
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