What is actually happening during a VC slowdown?

The public markets have been stumbling around lately, trying to figure out what China and oil prices mean for the rest of the world economy.  

That uncertainty creates fear--and in a US Presidential Election where fear is the debate topic de jour, we've got plenty of that to go around.  Fear, not surprisingly, weighs markets down.

But, that's a short term thing, right?

Aren't VCs investing in companies that won't exit for another 5-8 years?  Shouldn't they be long term minded?

What does the current economic cycle have to do with raising your Series A?  

The problem is that VCs raise funds theoretically every four years, but in a sense, they never stop fundraising.  It might take them 12-18 months to raise that fund, and because more funds create layers of fees on top of fees, if they can, they'll raise closer to every three years.  

That means that while they're investing for the long term, their perception of their own portfolio is often short term minded.  So, when their latest unicorn raised last year, they were feeling pretty good about things.  Now that they have to go back into the market next year to pitch their own fund, they're going to have to answer some tough questions about valuations.  They might have to get another round in, and that round will most certainly be a down round.  Over the long term, the Series A they did in that company that was a billion dollar company last year and is a $600mm company this year will still look pretty good, it's going to take up a lot more of their time than normal.  

They might be doing board meetings more frequently, coaching first time founders through layoffs and debating with their partners which companies they should bridge until things thaw out.  

All that means less time for new deals.

It's not that they're concerned that the world will implode and that startups won't still be a good bet over the long term.  They're just... well... busy taking care of their wounded.

If you're a founder fundraising this year, that means spending more time getting VCs comfortable with the risks of your company.  That means getting out earlier, being more conservative and raising more capital, sometimes meaning more dilution, and taking a VCs fund into consideration.  Perhaps that VC who did nine new deals in the last two years isn't the person you want to be pitching versus that partner who just joined and who doesn't have a portfolio yet.

At the same time, this can be a very difficult environment for new partners to get deals done.  When VCs go to the mattresses, new partners who have yet to have a win under their belt may have a tougher time convincing the rest of the partnership to do a new deal, especially since that capital might be needed to preserve existing portfolio companies.

Thing of it as a VC hangover.  Your friendly VC isn't in a bad mood because you're doing anything wrong.  They're just feeling the effects of last year's excesses.