There are parallels between the recent tech market downturn and the dot-com bubble. But Seattle venture capitalists remain bullish on the region’s future, inspired by the abundant talent pool and rise of generative artificial intelligence.
That’s a key takeaway from a series of panel discussions at Seattle Venture Day, hosted Wednesday evening in downtown Seattle by Gainesville, Fla.-based venture firm OneSixOne.
After reaching a record-high investment level in 2021, venture capitalists have recently scaled back their deployment pace. Over the past two years, investors have shifted their focus towards profitable startups, exercising caution in their allocation of capital.
Seattle startups raised just $1.11 billion across 116 deals through the first half of the year, compared to $4.02 billion across 188 deals during the same period last year, according to a funding analysis from Ernst & Young.
Amid the downturn, some startups have been unable to meet their lofty financial forecasts, with potential customers cutting costs. This is resulting in companies being rapidly devalued, similar to the dot-com era.
“We’re at a stage in the cycle — much like the late 90s — where the revenue isn’t there to support a lot of the valuations,” said Kirby Winfield, founding general partner at Seattle pre-seed venture firm Ascend.
Down rounds, which involve startups raising funds at a lower valuation than their previous funding round, accounted for almost 20% of all venture investments in the first quarter, according to data from valuation software company Carta.
Winfield described the tech market during the dot-com bubble as a “terror show,” adding that it did not recover for at least four years since it started. Asked how it compares to the current down market, he said “we’re probably in it for a couple more years.”
There have been some signs of improvement. During the second quarter of the year, the median size of Series A through D venture funding rounds has increased, according to a recent study by Carta.
Bill McAleer, managing director at Seattle’s Voyager Capital, said there are three factors in play sparking a potential rebound in startup investing:
- recently laid-off tech workers from larger companies are seeking new opportunities at startups;
- early-stage companies are being reprised at lower valuations, benefiting venture capitalists;
- and the recent growth in adoption of generative AI. He said the market for AI tools will rival or surpass the impact of cloud tech.
T.A. McCann, managing director at Seattle’s Pioneer Square Labs, said that he and other entrepreneurs have been working on AI tools since the early 2000s. However, the recent introduction of consumer-oriented tools like ChatGPT has made this technology more accessible to a broader audience.
McCann said the excitement surrounding these tools reminds him of the transformative impact web browsers had in 1995, making the internet accessible to a broader market.
Emer Dooley, site lead at Creative Destruction Lab at the University of Washington, said tools like ChatGPT have a narrow focus on text. She believes that the potential of AI extends far beyond chatbots and can have an impact in other industries such as manufacturing.
Winfield said his venture firm is focusing on Seattle companies. He cited the fact that the ecosystem has developed a number of “off-ramps” that allow top tech talent from businesses like Microsoft, Amazon, and others to swiftly transition into startup roles, similar to Silicon Valley.
He said the region has also proven its ability to produce “unicorns,” with notable exits such as Tableau, Auth0 and Docusign.
“I think the ecosystem as a whole is poised to take off,” he said.
