As the ecosystem goes through its natural cycles, we find ourselves in a period of downturn. This can be unsettling, especially for those new to the venture capital world. But fear not, dear angels and entrepreneurs! For it is precisely during these times that the greatest opportunities arise.
The Tourist Investors
We’ve all seen them – the new angel investors who jump into the market with a fervor, thinking they can make a quick buck by throwing money at any startup that looks decent. But as we know, VC and startups are not a portfolio business; it’s an outlier/aberration business. A tiny number of companies generate the bulk of returns, while most investments lose money.
These tourist investors, as I like to call them, often don’t have the stomach for the long haul. They’re left with too little reserve capital when the tide goes out, and they’re crushed in resets or internal funding rounds. Their fledgling investments close, and they realize that they’ll need a lot more capital for the long haul.
It’s hard to watch, because their angelic hearts are in the right place. But it’s essential to understand that not every startup is a moonshot, and entrepreneurship isn’t as glamorous as it might look on TV.
The Good News
Fewer middling companies will survive on the backs of these tourist investors. This will free up talent to enable more innovative and scalable companies to grow. The great entrepreneurs and operators love the down market, so this is THE best time to invest if you can stomach it.
Moreover, our local pond is well-suited for investing in the downward part of the cycle. Israelis, blessed with an abundance of optimism, resilience, and scrappiness, are particularly good at starting companies when others are fearful. Wix was founded in 2006 but really got itself going in the crash of 2008. Mobileye was founded on the eve of the 2000 market meltdown.
The New Market Environment
This new market environment will favor crisp operators and deep strategic thinkers who build real moats around their businesses, develop deep technology, and tightly manage their unit economics. Constraints actually increase innovation; we couldn’t be more excited to partner with the next giant companies to emerge from a downturn.
As Marks says, great investors are looking for instances when the market is wrong or the entire herd is stampeding.
The Best Time to Invest
So, if you can stomach it, this is THE best time to invest. The down market will separate the true entrepreneurs and operators from the tourists. It’s a chance to partner with the next giant companies to emerge from a downturn and create something truly remarkable.
Conclusion
The downturn may seem daunting at first, but it’s an opportunity for greatness. Don’t be discouraged by the tourist investors; instead, focus on building real moats around your business, developing deep technology, and managing your unit economics tightly. The great entrepreneurs and operators love the down market, and with Aleph, we’re excited to partner with them to create something truly remarkable.
Michael Eisenberg is a partner at Aleph.
Related articles:
