* Since March, Business Insider has interviewed dozens of venture investors about the long-term impacts of an economic crisis on the startup and venture ecosystem.
* While many were split on the finer points, many investors agreed that founders will have less power during deal negotiations than they did before.
* This could mean the end of so-called "founder-friendly" deal terms, where founders were given almost total control of the company, outsized voting rights on the board of directors, and other clauses that essentially cemented their hold on the startup.
* Founder-friendly terms were becoming more heavily scrutinized prior to the current economic reality, with such terms having led to massive implosions at high-flying startups like WeWork and Uber.
* However, venture investors are feeling a crunch of their own, and might not be able to make the kinds of risky investments that mint gold in Silicon Valley now that their own investors are pulling back.
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Think of venture-funded startups as a complex, interconnected system akin to California's famous Yosemite Falls. The national park's loud, crashing torrent of water is a spectacular creation that's fed by the Merced River and shaped by a unique constellation of granite rocks.
But how far and fast the cascade falls is outside its control — it depends on external forces, like rainfall totals and winter snowmelt.
In Silicon Valley, the coronavirus and the economic downturn are transforming a startup ecosystem that has looked remarkably constant for the past decade and which has been marked by sky-high valuations and all-powerful founders.
Since March, Business Insider has interviewed dozens of venture investors about the changes they're seeing and those they expect to see. Many VCs have their own views on particular aspects of course, but a general consensus is that getting funding will become a much more competitive endeavor for startups.
And that will spell the end of founder-friendly funding terms.
"The money is out there but it is harder to get and the equity take will be higher," one VC who was part of a special panel organized by Business Insider said last month. Startup founders about to pitch VCs should "be prepared to be hammered," the panelist said.
Play the game, or lose out
The founder-friendly concept was popularized more than a decade ago when today's tech giants, like Facebook and Uber, were just getting started. In practice, it means giving startup founders outsized control of their companies through special classes of supervoting stock, favorable board structures, and other perquisites.
The appeal is obvious for startup founders, who get almost complete say in how to build, run, and grow their business.
VCs, on the other hand, have had no choice but to play along. A startup founder choosing between multiple prospective VC investors will go with the one dangling the deal terms that are the most in her favor. Resisting the founder-friendy trend meant losing out on deals. Many VCs like early-stage firm Benchmark knew that and would market themselves as "founder friendly" to preempt the competition.
This empowerment of the founder, designed to allow a startup's creator to carry out her vision without the encumbrance of short-sighted investors, have not always produced the intended results. In the case of companies like Uber and WeWork, it nearly drove the company into the ground.
Founders Fund general partner Keith Rabois told fellow early-stage investor Semil Shah in an April podcast that in the wake of those companies' examples, investors were reevaluating founder-friendly deal terms.
And with the economic downturn deepening, the shift away from the generous funding terms of old does not look likely to reverse course anytime soon.
VC firms are feeling the pressure too
There's another reason for the change. What Rabois didn't mention on the podcast is that VC firms are also feeling new pressures affecting the terms of funding deals.
VC firms function by moving capital from one place to another, generally from well-heeled institutional investors like university endowments or family wealth offices to high-risk, high-reward bets like startups.
Although the institutional investors — commonly called limited partners, or LPs — aren't part of the day-to-day decision making at the VC firms they invest in, they can dictate in broad strokes what amount of risk they are comfortable assuming. In boom times, many LPs sign off on big, risky bets hoping for a handsome payday. In a contracting economy, however, LPs can pull back.
Right now, many VCs are anxiously on guard for signs of their LPs holding off, or reneging, on promised capital contributions to the funds. These "capital calls" typically occur whenever a VC finds a new startup to invest some of the fund's money in. So far the incidents of LPs not answering capital calls have been limited, and primarily involving delays for more time, as Business Insider reported.
But if the trend becomes more widespread, VC firms could be left holding a very expensive bag.
There's less appetite, and tolerance, for risk among VCs and their LP investors.
The VCs that were not prepared for an economic downturn have started implementing policies that run downstream to founders, like lowering valuations or negotiating higher ownership percentages. Founders that are strapped for cash, now, aren't in a position to wait for the tide to come back in on better terms.
They have to take the deal, or risk going under.
SEE ALSO: Silicon Valley VCs have a new obsession that perfectly captures the grave danger facing startups : How long is your 'runway'?
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