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Editors Note: This is the second part in a two-part series looking at the lessons learned from the financial crisis and venture capital’s pandemic rally. Read Part 1 here.

Barely three months into this year, the current venture market already feels much different than that of 2021.

While last year saw sky-high valuations and VC dollars flood the market at a never-before rate鈥攖his year has been full of news about valuation cuts, a slowdown in funding, and a general malaise in the private market that was brought about by a shaky public market, exploding inflation, geopolitical tensions and a continuing pandemic.

However, it was not that long ago when the VC market hit its last major drop. While it鈥檚 true March 2020 brought about the dreaded uncertainty investors hate, the most recent significant dip was in 2008鈥攁 global financial crisis brought about by the implosion of the mortgage industry, cautionary lending trends and soaring unemployment.

Many VCs in the market remember those times鈥攁nd even the more infamous dot-com bust before it in 2001鈥攁nd while those moments do not provide exact parallels, there are lessons to be learned from previous cycles.

Tracking downturns

remembers both the slides of 2001 and 2008, as he was just co-founding the venture firm in 2000 when the dot-com bubble burst. But, Nada鈥攁 co-founder and partner at who has invested in such companies as , and 鈥攕ees those downturns as two distinct animals.

The latter in 2008 was brought about by a global financial crisis and was more of a V-shaped downturn鈥攚here the high for the time period on hit in October 2007 was eventually reached again less than four years later in April 2011.

The 2001 dot-com bubble burst had much more lingering effects; Nasdaq hit its high in March 2000, but did not get back to that level again until 2014.

For reference, last Nasdaq hit a new high last November, and now the question is how long it will take to get back there again.

鈥淚s this going to take four or five years?鈥� he asked. 鈥淥r maybe 24 months to recover?鈥� Nada said.

If he were to predict, this current market feels much more like 2008-09, and not the dramatic 2001 shift, he said.

鈥淲hile fundraising may be difficult right now, customers are still buying the products,鈥� Nada said. 鈥淭his is more of a financial issue than a demand issue.鈥�

Fundraising started to get difficult in the fourth quarter of last year, with the steepest cuts happening to growth rounds that can be down 30 percent to 50 percent, Nada said. Just last week, delivery startup slashed its own valuation by nearly 40 percent.

Valuation drops have not affected the early- or seed stages yet, but likely will, he added.

Despite those cuts in valuations, others view the current state of the startup world similar to how Nada sees it.

started in the venture world in the late 1990s and has been at for more than 20 years, now serving as managing director. He said he sees some parallels between now and the global financial crisis of 2008, but also some differences.

鈥淵es, there are some similarities,鈥� said Butler, whose investments have included , and . 鈥淧art of that is the unknown that we faced then and face now.鈥�

It鈥檚 true investors hate the unknown and uncertainty, but it鈥檚 equally true they love cash鈥攚hich also is a compelling difference between now and 2008. When the financial crisis hit, venture and startups were just starting to come off the Webvan and Pets.com highs鈥攁nd then lows鈥攐f the late 1990s and early 2000s. Nearly any startup had raised a warchest like many have done in the last 18 months, where valuations went nuts and investors couldn’t stop themselves.

鈥淐ompanies raised at these high valuations and they raised a lot,鈥� Butler said. 鈥淐ompanies have these high cash balances鈥攏orth of $100 million. The average company I see has about two years worth of cash on their balance sheet. People just have so much more money to weather the storm.鈥�

The storm itself also is very dissimilar, said 鈥攁 lecturer in management at and partner at firms including and .

The issues in 2001 were due to investments in companies that had no viable business model. Years later, the 2008 downturn was not about the tech sector, but rather large global financial institutions鈥攖hink Lehman’s collapse鈥攆acing mounting uncertainty.

鈥淚t was a time of terror,鈥� he said. 鈥淧eople were scared. People stopped spending money鈥�

That same fear does not exist now, Siegel said. Instead, he sees the industry digesting some of the past excesses and 鈥済ravity coming back鈥� as the 30x multiples on trailing 12 months (TTM) revenue are coming back to the more normal 8x to 10x.

Lessons learned: 鈥楬ave cash鈥�

Although there may not be panic, investors who remember 2001 and 2008鈥攁nd even March 2020 for that matter鈥攖hink there are lessons that can be gleaned from those moments in history, especially for an industry as young as venture.

鈥淥ne thing is to make sure your portfolio (companies) have cash,鈥� said , founding partner at and an entrepreneur in residence at the . Skok entered venture just after the dot-com bubble and was an early investor in companies including and .

鈥淎lso make sure they are running efficiently,鈥� he adds. 鈥淔or years, it鈥檚 just been about growth, growth.鈥�

There鈥檚 also the old adage that all investors sing: Great companies are built in difficult times聽(or however you want to phrase it).

鈥淭his is when you need to be contrarian,鈥� Skok said. 鈥淏e greedy when others are fearful.鈥�

Everyone knows companies like and were built in the runup to the 2001 collapse, while , , , , and scores of others were founded in the lead-up or during the financial crisis of 2008 as fintech, social media and the digital mobile economy was built.

鈥淏e bold,鈥� Skok said.

Another takeaway from 2008 includes forgetting about optics, Nada said. Founders may need to investigate raising the dreaded 鈥渄own鈥� round, or possibly a round with pay-to-play provisions鈥攚hich basically require existing investors to invest on a pro rata basis in current or future rounds or lose some of their preferential rights. Such provisions are sometimes added to down rounds to make sure previous investors pony up.

Moving forward

The current market shift also could be an accelerant for a societal jump to the next platform, Nada said.

The 2001 change helped bring about a transformation in how people used the web and the devices it鈥檚 accessed on. Less than a decade later, 2008 brought significant changes as social media took hold and mobile computing took off.

Blockchain, advanced sensors and a developing IoT network are all things Nada said he will watch as possible break-out stars during this market disruption.

Others, including Skok, said the COVID pandemic highlighted issues like supply chain disruption that could provide huge opportunities for tech companies鈥攁s could the crypto sector and the buildout of Web3 with many infrastructure startups being built up right now in the space.

鈥淧eople need the picks and shovels,鈥� he said. 鈥淵ou always start at the bottom of the stack.鈥�

A few control a lot

Another thing to watch is the formation of funds, VCs say.

Firms started to downsize funds and even give money back to LPs after the 2001 dot-com bust as venture firms disappeared. Then after 2008, the market saw an explosion of fund managers.

While there are now more firms than ever, the majority of the record-setting venture dollars in the market is concentrated in a handful of large firms.

Just this calendar year alone, announced a fresh $9 billion for its venture, growth and bio funds, San Francisco-based recently closed more than $5 billion in two new funds that will be dedicated to both early- and late-stage investing, and just this week it was is raising four new funds totaling $8 billion.

That鈥檚 just a small smattering of the large funds raised by some of the biggest names in the venture business recently. How these firms, which control so much, react will tell much about the immediate future of the market.

There have already been that large crossover firms such as and are pulling back on late-stage investments, with some partners at Tiger reportedly looking closely at more seed rounds.

鈥淭hat was certainly one thing we learned in both 鈥�01 and 鈥�08,鈥� Butler said. 鈥淵ou will learn some syndicate investors will work with founders and others will cut and run.鈥�

With fewer hands controlling the money, Nada said, how those firms react to the current downturn will have an outsized impact on the private market and bears close watching.

The unknown

With all of that said, the one thing to also remember is no two downturns are exactly the same鈥攁nd no one knows what comes next.

鈥淭his seems like more of a cyclical thing right now, because of interest rates, high valuations, inflation,鈥� Siegel said. 鈥淣ow could it be systemic? That depends on what happens next.鈥�

鈥淏ack in 2008, we were in a financial services meltdown,鈥� said , founder and managing partner at , which he started in 2004. 鈥淲e didn鈥檛 even know if your cash was safe.

鈥淓veryone went into triage mode,鈥� he continued. 鈥淚t was a race to the best companies. We aren鈥檛 seeing that much now.鈥�

Clavier鈥攚ho previously invested in companies including , and 鈥攕aid now he sees consumer businesses taking more of the brunt of the pullbacks in the markets, and by the end of April we may have a better idea of what is coming after a lot of enterprise SaaS companies close their books on the first quarter.

鈥淲e didn鈥檛 see a big pullback, pullouts,鈥� he said. 鈥淲e don鈥檛 see it like we did in 2008 鈥� Now could this change with geopolitical issues and other things? Sure. But right now it is still business as usual. 鈥� We will see if that changes.鈥�

No one knows what big event will occur next, or how investors take it, Siegel said鈥攋ust like the unknown led to wild 30-point daily fluctuations in stock back in the first venture dip of 鈥�01.

鈥淲hat comes next?鈥� he asked. 鈥淣o one knows and no one can say they know.鈥�

Further reading:

What We Learned About Venture Funding During The 2008 Financial Crisis And The Pandemic As The Markets Face Fresh Turmoil

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