For venture investors, noise is ironically important. Wading through constant streams of capital-seeking founders and startup pitches may be the hardest part of the job, but it’s also imperative to the success of the same job.
So, what happens if energy around entrepreneurship slows? As the downturn looms, are fewer founders going to take risks? According to Redpoint managing director Annie Kadavy, there will be fewer total companies started in the next year than there were in the last two. And, somewhat counterintuitively, the investor thinks that the looming slowdown is “a great thing.”
“In an environment where it’s really easy to raise a seed round, it’s really easy to get your first product up as long as you can throw more money at the problem you’re trying to solve…that is a different profile of risk,” she said, “versus it’s really hard to raise money, and I have to build those products because I care so deeply about the problem.”
She added: “I think that the total number of founders we’re going to see will be fewer, but the quality bar is going up.”
Led by Kadavy and managing partner Erica Brescia, Redpoint Ventures’ early-stage team announced today that it has closed a $650 million fund to back startups. The investment vehicle is the firm’s ninth early-stage focused fund closed to date, which it will invest in companies from seed through Series B stages. The check size will range between $2 million to $15 million, depending on the company.
The firm is targeting the majority, around 70%, of its investments from this fund to be in the Series A space, with the remaining 30% dedicated to seed and Series B startups. It’s aiming for Series A ownership stakes of between 15% and 23%.
Brescia, who joined Redpoint last year after getting plucked from her role as GitHub’s COO, says that the firm hasn’t seen much activity lately from megafunds such as Tiger Global or SoftBank.
“The more players you have in the market, especially [last year] does tend to drive up prices…and now we’re seeing valuations come way back down,” she said. “I think that’s healthier for founders and for investors, and I’m sure that part of that is because we’re seeing fewer players actively pursuing the same company.”
It’s not just valuations that are changing due to a shift in sentiment; the investor said that competition is changing in startup land as well, thanks to the conservatism of megafunds. “One of the things that makes it much more challenging, much more expensive to build an early-stage company, is the number of well-funded early-stage competitors that you have to go down,” Kadavy said. “But if that can be two companies or three companies instead of 10 or 12 or 15, the likelihood of success, the ability of those companies to hire and retain great people, the ability for them to continue to fundraise, it all goes up.”
Brescia added that Redpoint’s product and a megafund’s product as a venture service look fairly different, with Redpoint’s biggest differentiation being that its early-stage GP team is all led by former founders. The firm did not share its IRR goal upon request.
The firm’s fresh capital comes after a spate of hiring. Last year, alongside Brescia, Redpoint recruited GitHub CTO Jason Warner. The team also added Meera Clark and Jordan Segall as investors, as well.