From Both Sides Of The Table:
There is much discussion online and also in small, private groups, about why the price of technology companies – public and private – are falling. Valuing any company can be difficult because it requires a degree of forecasting future growth & competition and ultimately the profits of the organization.
And two big changes have happened that are widely known – in the past quarter the value of some very high profile companies such as LinkedIn and Twitter have fallen substantially plus Fidelity (usually a public market investor) has written down the value of many of it’s later-stage private-company investments and made the downward valuations known.
Most venture capitalists who have been in this business for a long time foresaw this correction and have been talking about it privately for the better part of the last year or two. I’d like to explain as best I can my opinion on what is going on because most of what I hear from entrepreneurs is not only wrong but is reminiscent of what I heard in 1997-2000.
What is the True Sentiment of VCs?
I recently survey more than 150 VC friends from all stages and geographies what they thought about the market by asking “Which of the following statements best describes your mood heading into 2016?” and you can see that the balance of caution vs. optimism is 82% to 18%.
I want to emphasize that this is “blind” data (I do not know which person or firm said what making this confidential and less biased) and nobody responding had any motive other than just telling us how they were feeling.
There is reason for despondency. Most are sitting on large portfolios of private companies that are raising money now or will need to do so in the future and they know that they’re up against some headwinds. 61% of the VCs survey said that prices in Q4 last year had started to drop and 91% said they expected them to continue to drop in the first 6 months of this year (with 30% expecting serious drops).
The Motive for Speaking Up
I have been talking about my concerns about valuations for the past couple of years because, well, they’ve been rising very rapidly the past two years!
It pains me to see the typical (and predictable) responses on Twitter, “VCs want prices to drop!” “This will be great for VCs and bad for entrepreneurs.” “Mark has a vested interest in talking down valuations of startups.” “Sure, prices are dropping. That’s just because the VCs are constantly saying so and making this a fulfilling prophecy.
All of these are false.
When I started blogging it was because I was inspired by Brad Feld. When I was an entrepreneur there was no public information about how term sheets worked or how investors thought. Brad was openly writing about this and it felt like he was giving the VC playbook away for free! I always wanted to work with Brad for this reason so I started blogging because I figured if transparency worked for Brad I would try the same approach.
Nearly EVERY smart VC I know has been talking privately for the past two years about how ridiculous valuations in private markets have gotten and how a reckoning was coming. Most prefer not to say this publicly for two reasons: 1) they have an entire portfolio of startups, many of whom are raising capital and 2) they prefer not to be attacked publicly or seem “anti entrepreneur.”
But I promise you they’ve been saying it privately. So my talking up over the years is more trying to shine transparency on what we’re already saying in private rooms.
But let me be even more clear. I do 2-3 deals per year and our firm does maybe 10-15 maximum. We write about $40 million of first-checks into new deals / year and about $40 million of follow-on investments. In 2015 in the US there were $77 billion written into startup tech companies. I’ll spare you the math and point out that this means we funded 0.104% of the market.
I am highly unlikely to fund your company strictly based on math and my only motive for publicly telling you what is going on privately is to help prepare you if in fact I’m right about the funding environment. If I’m wrong – at least you’ll have more data to decide how you raise & spend your company’s money. If I’m right my only hope is that more companies actually get funded and more companies reduce burn and survive.
That’s the entirety of my motivation.
Do Investors WANT Valuations to Drop?
Mostly, no. For good reasons – not the ones you think – yes.
Let me give you a non tech & thus non politically charged example. Let’s say you own a bunch of real estate property and you’ll likely buy more. You own 10 properties and you’ll probably buy 1-2 more per year for the next 10 years. When some properties have appreciated you like to sell them to get some liquidity and sometimes you sell the bad properties to get your money back and move on.
So prices start dropping. Are you thinking to yourself, “Awesome! Now I can buy more properties cheaply!” Of course life is more complicated. You’re really thinking that you had wanted to sell 2 of the properties that you thought has been over-valued and you were hoping to unload some poor performers. No you’re kind of fucked because nobody wants to buy any at all and your bank is calling you concerned that you may need to slow down your pace of new purchases for a bit.Previously from Both Sides of the Table:
Venture Capital in 2015: Mark Suster of Upfront Ventures on Valuations Creeping Up
Why Upfront Ventures Invested in Disruptive Rental Car Startup Skurt