Last week, Sydecar CEO Nik Talreja joined On Deck Angels to discuss the current investing climate, and how SPVs are the best tool for those looking to build a track record in 2022. As interest rates have soared and public company valuations have tanked over the past few months, there’s one question on everyone’s minds.

Is now a good time to invest in startups?

You’ll likely get a completely different answer depending on who you ask. Of course, there are many nuances to consider: What stage company? Which industry? Who’s deploying the capital? And what are their expectations for a return? 

While there may not be a clear path to “yes” or “no,” one thing is undeniable: investing in venture capital is a long term game, and betting on early stage companies requires seeing or intuiting something about the future that others might not see. A startup may have a low valuation today due to macroeconomic conditions, but still have a viable path towards a 10x or 100x return. The mere fact that startup valuations are significantly lower today than they were six or twelve months ago is just another reason why now is the ideal time to be investing in venture. Lower valuations, along with the slower pace of the market, allow newer investors to get into valuable deals that they may have otherwise missed a year ago – and allows them to diligence those deals on their own timeline.

A slower pace of the market gives emerging VCs more time to search for under-the-radar companies that may have otherwise been overlooked. The companies succeeding and showing traction today have to fight harder than ever to acquire customers, resource appropriately, make strategic hiring decisions, and raise capital. The teams that are fighting today will be better for it, and only the best will come out the other side. The opportunity for returns on startup investments made in 2022 are immense.

A look at the numbers

There’s no doubt that startup investing today looks very different than it did a year ago. But when you look at the numbers, the impact to early stage investing via SPVs is minimal. At Sydecar, we’re seeing that SPVs take 30% longer to close and are about 15% smaller on average. While the average number of investors in an SPV has decreased since last year, the average contribution per SPV investor has increased. With early stage startups being so far disconnected from the public markets, where valuations have dropped significantly, a macroeconomic downturn is less impactful (and less relevant) than one might think. 

Building a track record during a downturn

So if you’re an aspiring VC investor that believes that now is the right time to get started, where do you go from there? How do you convince others to trust you with their money? And how do you convince startups that they even want your money? Venture investors, and the limited partners who invest into venture funds, look for VCs who can get access to good deals and pick out the winners. Using SPVs to pool small amounts of capital to invest into companies one at a time is a great way to build a track record as an emerging VC. The deal-by-deal nature of SPVs allows individuals to opt in to a deal based on their own analysis of the target company.  As an emerging VC, keeping your SPV investors up to date on the progress of past investments through regular investor updates can help build trust in your approach and start to build a track record. 

As a newer VC, it’s best to focus on raising capital from people who you already know, and who already trust your judgment. This will help you generate momentum, get some initial “reps” in, and ultimately build a track record of success. On the flip side, attempting to raise from strangers during a downturn may be a challenge. At a minimum, you’ll likely have to spend more time explaining an investment opportunity and why you’re excited about it. The time you’ll spend convincing these investors to trust you will be a barrier to demonstrating your ability to generate returns.

As you think about ways to generate quality deal flow, consider finding ways to be helpful to founders even before an investment opportunity is on the table. Building good grace with founders before they are fundraising will put you top of mind when they do approach a funding round. It will also keep you informed of their incremental progress, which will make it easier to raise funds for an SPV when the time comes. Last but not least, being in a founder’s good graces will give you some leeway if it takes you longer to fill your allocation, given the market conditions.

Now what?

So where do we go from here? How will the changes we’ve seen over the past year impact the future of venture investing? There’s no way to know for sure, but here are a couple trends we’re watching at Sydecar:

• Trust and relationship-building will be a fundamental part of group investing.

• Syndicates and angel groups will form around existing communities across verticals – from creative agencies to sports teams to coworkers. New, flexible investment structures will emerge that allow VCs to aggregate and deploy capital more flexibly with lower transaction costs.

• Regulation may tighten (or at least, won’t loosen significantly in the near term).There will be an increased interest in (and demand for liquidity) within private markets, and infrastructure will emerge to enable more liquidity.