Weekly Thoughts


Venture Capital & EtA

Thoughts on market trends

We started Chenmark in 2015 at the cusp of a historic boom in venture capital funding, which peaked in 2021.  At the time, focusing on smaller, cash-flow positive, low-growth, main street-type businesses was exactly the opposite of what all the cool kids were doing.   They were moving to fancy places like San Francisco, Palo Alto, or Austin, having big ideas that were going to “change the world”, raising a massive amount of funding from investors, “blitzscaling” their operations, and not worrying much about unit economics or cash flow.

For a very specific (low interest rate) moment in time, some people capitalized on a great opportunity.  Some of those people built companies that have actually changed our lives for the better.  Many of them also currently have more dollars in their bank accounts than we do.  Kudos to them.  

Unfortunately, the market has changed, and that moment has passed.  Too many venture capital-backed companies have inherently unprofitable business models and are unable to fund their operations without access to external capital.  Others are profitable but raised capital at valuations that no longer make sense in the current operating environment and are facing painful down-rounds.  We see an increasing number of venture capital-backed companies shutting down and employees slowly coming to the tough realization that their promised equity may be worthless.  This point was well illustrated in a recent (always excellent) All-In podcast

“… The exit comps have changed.  If you were a tech investor or a real estate investor before the regime change, you were underwriting to a completely different exit comp and now those exit comps have totally changed so it’s going to be very hard for those investors to make a good return….

… They are going to lose their money (like Instacart) 

… I’ll give you a mathematical example just to illustrate [what David] just said. If you have a company with $300 million of ARR you are in a rare group of say, 30 or 40 companies period. Ok?  So, very, very, very few companies get to that level of scale.  But if you are at a 100% net dollar retention… which means that you are kind of treading water essentially… [the comps now say that company is worth]  3-5x ARR.  Now the problem is if you look back through Crunchbase or Pitchbook, the number of companies that traded about $1.5 billion valuation as a SAAS business there’s like 70 of them, but there are only 7 that have $300 million of ARR, so what happens guys? The jig is up. What’s going on here? 

What’s going on is that there’s going to be a somewhat unpleasant reckoning over the coming years as all of this gets sorted out.  But what does this have to do with the world of small business? 

Well, those operating in the small business space feel quite comfortable focusing on having solid unit economics and cash flow and as a result, their return profiles are suddenly much more attractive in the current market.   Consequently, the Search/EtA space has seen an influx of interest.  We’re now seeing historically venture-focused investors interested in cash-flowing boring businesses.  There has been record attendance at EtA conferences as ex-start-up people look for new opportunities, and we have seen an uptick in applications from employees working at wounded unicorns or zombie companies. 

Overall we believe that increased interest in the small business space is a wonderful thing.   If more Ivy League people left NYC and San Francisco to lead normal businesses and become involved in their local communities, the world would probably be a better place.  From a competitive standpoint, the opportunity is vast and fragmented and we believe the more the merrier.  Selfishly, the more people interested in the space, means more people interested in working with Chenmark, which is great. 

On the downside, we are wary that some investors are expecting unrealistic return profiles so there may be some sad people in 5-10 years.  We are also concerned that some might be gravitating towards this space because it’s just the next hot thing, not because of an authentic interest in small business operations.  The last thing our world needs is slick operators looking to make a quick buck.  Thankfully, the world of small business is pretty unforgiving, so those people might be in for a rude awakening. 

Finally, increased interest in the space doesn’t inherently mean anything.  It’s entirely possible that 10 years from now, the environment will have changed and there will be a new flavor of the month (maybe even venture capital again).  We chose this space because we like it, and we plan to stay here regardless of funding optimism or conference attendance.  So, the market may go up and it may go down, but our plan is to just keep trucking along whatever comes our way. 

Have a great week,

Your Chenmark Team

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