My Chat with Dan Primack of PEHub

Posted on Aug 12, 2010 | 10 comments


In the technology world there are a few websites that most startups track to keep up with the latest financings, acquisitions, product announcements and gossip: BusinessInsider, TechCrunch, Mashable, GigaOm, etc.  In the VC & Private Equity world there’s a small number, too, with one of the most respected being PEHub.  That’s thanks to Dan Primack, founding editor.

I always wanted to have Dan on This Week in VC with Dan Primack (to see video click link) because he’s blunt, honest, opinionated and well informed.  He’s been a tireless champion for causes that he believes in (reform of VC carry taxation being one of them).  He’s a financial journalist and is damn good at his job.

So it was fun to get his perspective on topics that are sometimes too toxic for VCs to talk about publicly.  We had a great hour-long chat about the industry and the deals of the week.  For those that want the “cliffs notes” version – here’s what we covered (but if you have an hour to watch I don’t think you’ll regret it – Dan is informed and compelling).

We led off with a discussion about Slide being acquired by Google, which was breaking news in the time slot where we filmed this episode.  Specifically we talked about Slide having gotten a $550 million valuation before being sold to Google for $182 million.  Dan makes a point that you shouldn’t be telling everyone about your valuation as Slide did.  He said it’s best to talk about valuation only when you sell (if at all).  Minutes 4 – 8

Question: Some people are saying traditional VC is dead. What is going on?
Dan: “Let’s not forget that 50% of VC is still going to traditional VC like healthcare and hardware and this still requires the same amount of VC as it once did. There is an industry changing shift going on in the internet and mobile-based IT space for sure.  But this gets all the space on prominent blogs because it’s what bloggers like to cover.”  It’s self selecting. Dan believed that consumer internet entrepreneurs have a choice now: traditional VC vs. super seed investors. Minutes 8 – 10

Deals are getting done with a lot less capital which is creating a healthy debate in the industry. People like Fred Wilson who say let all the small companies fund and bloom, create more jobs,  etc. But there are also going to be those companies that require capex and growth equity (Zynga, Facebook, etc).

I believe that the different stages need to right-size, but you will always need the various stage investors. Dan also agrees with this. You are seeing a lot more entrepreneurs OK with selling their companies to Google or Facebook and not waiting for billions. A large part of this is due to Sarbanes Oxley which has made running a public company so much more difficult. Not as many entrepreneurs are aspiring to do it any more.  This is causing consternation with VCs who lament that entrepreneurs are “selling out too cheaply.” Minutes 23 – 26

Is there a bubble going on in seed investing?
Dan: Maybe in the future, but not now. Seed stage industry was left for dead over the last decade as VC investors moved later and later as they became risk-averse. This created a big gap for people to come in. A recent study said seed stage valuations have been quite static recently. Valuations have to be inflated to see a bubble. This could happen if every VC fund continues to launch a seed fund. Minutes 11-13

I actually think there is a small bubble going on in seed/angel rounds. Prices are creeping up and angels are feeling bullish. It is a lot harder than most people realize. Losses will come a few years from now and take steam out of the market. Minutes 28 – 31

The proliferation of seed funded companies will cause problems in the ecosystem in the future. Too many people have been burned in past and if angels get burned that will kill a lot of needed early investors. Angel investors need to be smart and not just follow-along. (ie. Retail investors were burned in IPOs in 2000, Consumers getting burned by services disappearing) Minutes 31-35

Is there a gap in Series B funding? (10-12mm fund raise at $25mm valuations)
Not many investors that specialize in series-B round. You are asking investors to take a little less risk than Series A and paying a lot more in dollars and valuation. DAG Ventures (follows 5 specific funds) and Scale ventures are two that do specialize in B’d  There are more but there are certainly less than there used to be.  We both felt there was a bit of a gap for B round funding. Minutes 36- 38

Deals. Minutes 41-56
o   Yousendit raises $15mm Series D.
o   ShopKick
o   Kiip
o   Hot Potato
o   Tuenti

  • Jayant Kulkarni

    Mark,
    I know that you have been pushing the analogy that there is a seed-stage bubble and that angels are being foolishly bullish but I am not sure if there is data to support your thesis that VCs see better ROI than angels. Is there any such data or is this your gut feeling?

  • http://bothsidesofthetable.com msuster

    I think “foolishly bullish” is a slight overstatement of my beliefs. I believe the following:
    - angel investing is a mug's game unless you are professional at it. This requires:
    - investing in at least 15-20 deals to have diversification
    - having deep enough pockets to follow the strongest of the bunch
    - have domain knowledge in what you're investing in
    - have access to proprietary deal flow
    - have great relationships with (and not stick your middle finger up at) future funding sources (e.g. venture capitalists).

    This is why people like Keith Rabois are so well positioned in my judgment.

    I am also on record as saying:
    - In “quick exit” markets (96-99 and 05-08) angels look great.
    - In tough markets their funds dry up more quickly than do those of VCs. Why? Because VCs have an allocation of professional money. Angels start looking at their real estate and stock market investments.
    - VC's dry up to – don't get me wrong. But less so.
    - I believe that many people have rushed back into the angel space in the past 12 months – it has become fashionable
    - Some will have great staying power. Some will be burned. When the tide goes out we'll find out who's naked.

    That's all. I never argued angel investing ROI vs. VC ROI. Never.

  • http://derrickshields.com Derrick Shields

    This was a great episode – you should have Dan back in the future, I really like his style.

    BTW, I've dubbed a little ritual I call “S4″.

    S4 = Sunday, Sunshine, Suster & Scotch (or Soda alternatively).

    Basically, I take an hour out of the day to kick back with a beverage and relax in the sun to catch up on the latest TWiVC – it's a great way to get fired up and inspired for Monday.

  • http://derrickshields.com Derrick Shields

    Perhaps we're seeing more early-stage companies that prefer to take Angel money over VC's that do seed funds. In other words, could it be that Entrepreneurs' preference to work with Angel's may be perpetuating the bubble, as opposed to Angel bullishness?

  • http://bothsidesofthetable.com msuster

    I think it's both plus less capital needed. My hypothesis is that this is an ebb and flow and right now more is getting allocated to this bucket of investors and less will be in 2011/2012 when the economy worsens.

  • http://bothsidesofthetable.com msuster

    Ha. Thank you. Yeah, I love Dan. He's agreed to be a regular guest. If you like the show your next three Sundays are set. Brad Feld was on yesterday and he was awesome. I could have just said “talk and I'll listen” and then listened to him for 3 hours. I pre-recorded the 2 weeks after that: Howard Morgan (co founder of First Round Capital) and Tom McInerney (angel investor … so we talk about that!). I really enjoyed all 3 shows. Three very bright and informed people. Happy S4 x 3!

  • Jayant Kulkarni

    I actually think that the terrible economy increased angel investing. There are people who have significant amount of personal wealth (regardless of the economic condition) and when they are surveying their investment options and see that the chance that GM will fail are comparable to a three-person start-up failing then they are more likely to invest in the start-up than before.

    In a world where everything is suddenly riskier and uncertain, start-ups seem relatively less so.

  • http://bothsidesofthetable.com msuster

    I honestly don't think this is accurate. Not from anybody I've spoken with. Sounds good, though ;-)

  • http://derrickshields.com Derrick Shields

    Awesome, I'm looking forward to it. Even my 3.5yr old gets into it: “dad, is it time for the thuster podcast?” The poor kid is gonna go to kindergarten talking about deals, valuations and liquidation preferences.

    Keep up the great work on TWiVC.

  • http://bwasearch.blogspot.com Donna Brewington White

    Great interview. Dan's one of my heroes. Love peHUB.