With fears of an economic hurricane approaching the U.S. economy, venture capitalists are advising tech companies to cut expenses and extend their cash runways as boom times come to a halt.
But for the Pacific Northwest startup ecosystem, there is reason for optimism.
That’s the word from Chris DeVore, founding managing partner at Seattle venture capital firm Founders’ Co-op, who said the region’s focus on enterprise software may provide some resiliency in an uncertain economic environment.
“Whether it’s cloud infrastructure, developer tools, business process automation — technologically, we build plumbing infrastructure,” DeVore told GeekWire this week. “We solve problems that people know are problems and are willing to pay to have solved — and I feel like that is the best place to sit in a down cycle.”
Seattle has long been known for its enterprise clout. It is home to cloud giants Amazon and Microsoft, and startups that sell to other businesses — also known as B2B companies — make up half of the GeekWire 200, our ranking of top privately-held Pacific Northwest technology companies.
“Companies here are making businesses better and stronger and smarter and faster through software,” DeVore said. “That might not be as fun when the market is frothy and there’s lots of money going to glitzy, glamorous stuff. But when the world gets real again, the plumbers are the ones who still get called.”
It’s a similar thread laid out by longtime tech industry investor Hadi Partovi in February 2020, just as recession fears began at the outset of the pandemic.
Seattle startups went on to have a blowout 2021, with record fundings and several new unicorn births — part of a venture capital investment surge for startups globally.
Read on for more from DeVore on the downturn and what it means for startups. The conversation was edited for brevity and clarity.
Thanks for speaking with us, Chris. Let’s talk about what everyone is talking about: the downturn.
Chris DeVore: The end of easy money had to come to an end at some point, and that’s probably good. It’s going to be uncomfortable and painful and people are going to lose their jobs and that’s all super shitty. But endless up-and-to-the-right creates all types of unhealthy disassociation with real value. We’re not just trying to drive enterprise value based on private investment. We’re trying to create companies that work and solve problems for money. And I think we had lost sight of that. So I’m kind of grateful for a re-centering of the economy around creating real value for customers.
What’s different about this downturn?
The Ukraine situation, particularly coming after the pandemic and supply chain shocks. To have this new exogenous factor of war and the impact on energy prices in the supply chain — it adds a certain level of uncertainty and unease to it.
How long do you think this one will last?
It’s hard to see a V-shaped recovery here. There’s no way for the government to stimulate our way out of it. It’s going to be hard for a lever that anybody could pull to accelerate a reset to normal operations. By the end of the year we may have clarity on inflation and interest rates, but there’s still uncertainty around supply chain issues and refactoring of the geopolitical situation. There’s just a lot of long tail potential of uncertainty.
What about impact on specific verticals or sectors?
I’m very interested to see how this cycle settles on the crypto market. The engineering ideas behind crypto are really elegant and interesting. But I have struggled as an investor to see where the value is.
I’m also really interested in the geopolitics of trade, and what it means for companies that rely on hardware manufacturing. If there’s a cooling of relations between the U.S. and China in particular, what happens when nationalism plays a role in the innovation industry? I think it’s going to open interesting opportunities around how goods and ideas move across borders.
Is Founders’ Co-op changing its investment strategy?
No. With our business, we raise a fund every three years, you deploy it over 3-to-5 years, and the fund lasts 10-to-12 years. We’re in the middle of a deployment cycle for a fund that we closed in the first quarter of last year, so we have plenty of time. But I’m glad about not having to raise money right now. Even if people like our returns, it’s an anxious time to ask people for money.
What are you advising founders?
It’s helpful that we sit at the bottom of the capital market stack because we’re seed stage and pre-seed investors. The lifecycle of the companies that we work with is probably 10 years to liquidity. That clock sits comfortably outside the typical business cycle.
I was just on a call with an entrepreneur who was asking if it’s a bad time to start a company. My short answer was that it’s never a bad time to start a company if there’s a problem that you’re sure needs to be solved right now, and if you have deep conviction about a problem that you can solve better than anybody else.
There’s no shortage right now of capital for venture capital. There’s still lots of money sloshing around, particularly for the small check tier. And there’s never a bad time to start a business if you’re sure that it’s a business that needs to exist today.
What concerns you most about this downturn?
There’s going to be an ugly human toll to the reset. It’s like 12 years of expectations around people’s careers and employment and compensation. A lot of people are losing their jobs. And a lot of big companies that might have picked up that talent have hiring freezes. Never underestimate the human toll of a downturn, even if it’s healthy for the economic situation. It’s real lives and livelihoods of families that are impacted and that’s what’s hardest about it.