Angel / VC Funding in A Frothy Market

Posted on Jun 15, 2011 | 101 comments


I had the privilege of keynoting at the Founder Showcase tonight in San Francisco.

Adeo asked me to speak about fund raising. I generally don’t like to speak about fund raising in a frothy market. If you’re bullish you seem like a Cramer-esque cheerleader and if you’re bearish you sound like a party pooper.

But Adeo asked so I obliged. I don’t know whether they shot video. If they do I’ll post it. I think you can get the gist of it from my presentation although some slides don’t quite tell the full story.

Enjoy. See you in the comments section for our debate.

VC Funding in a Frothy Market

  • http://www.privatelabelinteractive.com/trend.html lksugarman

    Not to ignore the peace sign and chain.

  • Jkooner

    Hey Mark, thanks for posting, although I’m not too fond of the subtle political injection.  Let’s keep business and politics in a separate corner.  No need to offend the other 50% of the American electorate.   Thanks and hope to see you soon.

  • http://www.lexincapital.com Metin

    Hi Mark, great presentation.  Hope you are well.  Metin Negrin

  • Sean Crockett

    Great post/slides, Mark.   I have one question related to Slide 46:  In the Era of Social Media if You Can’t Get an Intro to a VC, Hang Up Your Cleats Now.

    What are your thoughts on the advice in today’s VB piece, “Hacking the System: How to land meetings with anyone you want” (http://bit.ly/jxPZM6)? The gist is that they suggest writing investors daily emails until they either (i) cave in and meet with you or (ii) ask you to stop. 

    There’s a fine line b/w being persistent and being annoying.  Do you think the daily email tactic approaches  the latter?

  • http://twitter.com/ericmjackson Eric M. Jackson

    Great slides, Mark. (Got a real chuckle out of Darth Vader.) Your most important point was probably the dangers of trying to time your funding vis-a-vis your progress to minimize dilution. I like to tell entrepreneurs that the best safeguard against dilution is execution. If you have a reasonable deal in front of you, the downside risk of fighting for every cent of valuation is typically greater than the downside of leaving some valuation on the table for the sake of getting the deal done. 

  • http://fundstorm.com Thorsten Claus

    I enjoyed the show last night (though I did pass on the mountains of meat o’deuvres). On slide eight you presented your definition of bubble as “blind enthusiasm paired with a separation of prices from underlying value”. Isn’t that the basic mechanics of any stock market, that you make assumptions of future values because you believe that’s how the value will develop? Isn’t there the need of information imbalance to make someone sell me his shares at a low price an make someone buy my shares at a high price? Or is this just a function of relative vs. absolute cost advantage?

    And is this trend of value-price-discrepancy across all “VC” industries and segments (“no”, you said yourself, “a lot is driven from SF with bad ripple effects”). Maybe in times of a hyper-local and mobile industry, bubbles are also hyper-local and mobile.

    Maybe on a whole, it is not “unrealistic expectations”, but everyone’s thinking that “the only way to dominate the market is great inroads through [Facebook|Google|Cisco|Juniper|VARs|SMBs|Direct|HTC|China|whatever]”. And if they are right, the companies value might actually be ridiculously high – given that distribution speed faster, reach wider, and production cheaper than ever before (as you argue), and first-to-market or fastest-expansion might be the only competitive advantage for lots of companies. Each of these companies could still have a great team (for their channel)  and a great technology (for their channel) and a great product (for their channel), but ultimately address the same market.

    The consumer will vote with their wallet, and who can product most cost effective is to be seen (who knows, right). Higher market velocity and lower entrance barriers increase risk but reward with higher potential returns, and the VC business just got riskier, and driven by the fund lifecycle, return expectations, and the last two years of insecurity the VC industry got less risk averse.

  • http://twitter.com/danemcleod Dane McLeod

    VCs as Darth Vader? That’s too kind. More like Darth Sidious.

  • http://www.plugandplayegypt.com Roham Gharegozlou

    What a phenomenal presentation – should be the text-book example for The Right Way to PowerPoint. Thank you AGAIN Mark for awesome insights. Longtime reader here. 

  • http://220volt.com.ua/Elektromontazhnij-instrument.htm электромонтажный инструмент

    this is such a great post and one of those post to be read over and over again!

  • Javier Rincon

    Great post as usual Mark. Thanks!

    Any luck on finding the video of this?

  • http://www.mattbartus.com Matt Bartus

    Great slide deck. Thanks for sharing Mark.  I am seeing an influx of unsophisticated investors coming into the market and asking for weird things that expose their lack of experience. I have been spending a lot of time talking to my companies about why this is going to be very dangerous to their company in the near future!

  • http://twitter.com/soumitra1 Soumitra Paul

    Great presentation. Some of the slides do not tell the whole story though, as you aptly pointed out. Come August, this problem will be solved. You would be able to share your presentations with the world. 

  • http://twitter.com/krudman krudman

    Enjoyed the deck, esp. the grammar-geekiness. Enjoy your posts on twitter and would love to see you present in person some time.

    Thx,

    Ken Rudman

  • http://market-by-numbers.com brant cooper

    Love the insight: “People are paying growth prices for market risk.”
    Even w/ ripple effect, there’s no bubble in San Diego. SV investors need to go regional (and let the companies stay there).

  • Smaxwell

    Great presentation Mark.  I wish I was there to here it live!

  • Anonymous

    Awesome keynote Mark.
    It was pleasure meeting you and a treat to witness your presentation.
    I especially enjoyed the subtle ‘color’ful remarks :-)
    Fun and insightful

  • http://www.ContactComplete.com Tony Mariotti

    A very artful presentation.  Somehow you’ve made this whole process sound like fun! ;-)

  • Anonymous

    Keeping it real! Engaging presentation with refreshingly real talk. Thanks Mark.

  • Abdul Khan

    Great presentation Mark!

  • Dave

    Great presentation Mark. The slide on number of exits over $100m is a great one and a point I have reinforced over and over and over again. It is a very important thing to keep in mind when raising capital. The vast bulk of positive returns are going to be in a $20-50m sweet spot for sales and founders in many segments should think accordingly.

  • http://www.weiksner.com Michael Weiksner

    That slide is interesting.  But if you look at the total returns for the industry, I would bet that they are driven by the small minority of grand slams (e.g., the return on an early investment in google dwarfs the returns on all investments of companies under $100MM).

    Great presentation, Mark–thanks!!!

  • Dylan

    Hi Mark,

    Great presentation.   While it worries me to see a frothy market in a stalling US economy, what’s your perspective on emerging market startups where the exact opposite is in place – great macro- economics but a seed investment market that is a field of crickets.    

    Kopo Kopo is a US-based company focused on emerging markets, starting with East Africa where there is a hotbed of innovation in mobile payments that puts most of what’s happening here to shame.  

    Is there room for Silicon Valley to look to the Rift Valley?    From what I saw at Founder’s Showcase, please don’t hold any punches.  

    Dylan

  • http://twitter.com/timbarnes10 Tim Barnes

    Mark – Guy Kawasaki would have appreciated this presentation.
    Hopefully you can release the video. 
    For slide  34, I am betting that there is a very healthy backlog of potential VC-backed companies that could conceivably exit at values greater than $100MM.  My bet is that this number is healthier than it has been in years.  I would be curious if you or your readers had access to this info?  I am checking with SVB Analytics.   

    I would be interested in getting a sense of the key decision points/metrics to go from lean to fat at the various risk stages (product, market, growth).   Broadly, what do you look at as an investor?  The decision has to include access to funding – how much capital is at your disposal and how confident are you to raise new capital once you pull the switch from operating lean to investing meaningfully for growth.
    On a macro level, there are a lot of concerns in the marketplace.  You mentioned a few on slide 56.  All these points could conceivably not improve much over the next few years.  Is that enough to derail the venture mkt in your opinion?  Does it take a stock market bust again to meaningful impact the VC market?  Right now, venture is hot…at what point does it tend to fall back in line with the general mkt if the broad market does not improve?   Fun to debate!     

  • http://www.facebook.com/profile.php?id=551891833 Jody Sherman

    Mark, Ralph is the definition of Super Angel, in my opinion. After doing thoughtful analysis and then investing from his own account, he proactively remains in contact with his companies in a non-invasive way. And when you get his time, you get great advice, connections, etc.  Kind of like you as an angel investor :-)

  • Anonymous

    Awesome preso.

  • Todd_Andelin

    Everyone have a great weekend!

  • http://x.co/Xjyg Watch My Crowdfunding Projects

    post edit

  • http://x.co/Xjyg Watch My Crowdfunding Projects

    try also the crowdfunding sites

  • http://www.rikhter.org/ vrikhter

    Mark, in slide 34 you have the # of $100M deals per year, are these all tech companies?  I’ve heard Marc Andreessen say that number is closer to 15 companies per year (or maybe that was total revenue).

  • Nathan

    Thanks! can you clarify, what is FOMO?  Btw…i noticed that GRP invested in EMN8.  You know Trevor Chong?

  • Dave W Baldwin

    Thought I’d share this (today’s Father’s Day) http://www.semissourian.com/story/1737565.html Cape 12-year-old scores 28 on college entrance exam …be sure to read the last few paragraphs.  Great Father/Daughter story.

    Unfortunately, we’re losing this family… they’re moving to San Diego… so you guys take care of ‘em.

  • http://www.demeterinteractive.com Jesse Bouman

    Great speech Mark.   Question: If it’s taking a while to get funded in this frothy market (4 + months), do you think (generally) it’s because the entrepreneur is not meeting the right people or the product isn’t perfect?  

  • http://www.alearningaday.com Rohan Rajiv

    Wow Mark! The consultant within couldn’t help but admire the  slides. Thanks for sharing.

  • http://www.taxlawpro.org/propertytax.html Richard Gates

    Nice debate!

  • Anonymous

    Fear of Missing Out (FOMO).

    The key is to not start the public funding clock until you see that you can get funded. Until then, just talk to investors and be thinking about a funding. If you are pressed, you need a general time and a general amount.

    FOMO capital = progress info – ‘deal’ info   

    Typically, founders have to pick a rough date to do a funding, not share the date with anyone until very close to the date, generate some lines (multiple points of contact with investors) and then publicly decide to raise very close to the original rough date.

    You need to have enough investor interest to ‘decide’ to raise. If you don’t have the interest, don’t decide to try to raise. The key is making a commitment to close on a short timeline. You do not want to be stalled or stalling. Financing is a momentum game.

    Some people are unhappy that such a key part of their business is a bit of a game, but most things that involve money or people are a bit of a game.

  • Anonymous

    Mark – do you look at this as just another part of the business where you need to make progress into the market? Customer market progress is one, employees market progress is two, finance is three, etc?

    ABR is great advice. ABH (hiring), ABM (marketing)?

  • http://twitter.com/Frank_leTanque Frank Martinez III

    Always Be Selling – Glengarry Glen Ross  ;)

  • Nathan

    Thank you James!  Have you raised money before?

  • http://www.princetonfamilyphysicians.com Family Physicians

    Rain Drop picture is awesome!

  • Iqbaljit Kahlon

    Techcrunch had posted the video and the slide deck a few days ago.  The video is available here: http://vimeo.com/25219791

    Hopefully Mark will get the video link at the top in time.

  • http://samedayessay.com/ essay writing service

    Nicely done! But here is some question !What is FOMO! Thanks!Great presentation!)

  • http://declandunn.com Declan Dunn

    Thanks for the deck, had me cracking up just on the visuals…I love when bubble’s burst, because when they do is when the real money starts getting made. Dot Com bubble was a wake up call with a crater that lasted a few years, and nice monetary growth for the survivors after that. Just like then, those who didn’t have a business model, or at least a temporary one, died, those that kept pivoting thrived. 

    Be sure to have Plan B for how to make money when the bubble breaks, don’t wait till it happens is the best advice I learned.

  • http://estrategypartners.com Jeff Cohn

    Sadly, if you dissect which VC funds are invested in these IPOs it’s probably 5 mega funds that control most of the IPOs.  Its still a rigged game of investment banks and VC mega funds.  This means that picking the right investors have access to the mega funds is almost more important the people or product.  :(

  • http://unystartups.com Julian Baldwin

    Hey Mark,

    As per slide 62 – are there less VCs because many have turned angel? Or from your perspective do you see something else going on?

    Julian 

  • http://twitter.com/grublev Greg Rublev

    Great presentation and very good insight for founders trying to raise funding.  I think this is all bad news for IPO investors for most of the big guys going public this year.  I outlined some red flags present now that we’ve seen during the last tech bubble 12 years ago.  http://ifyoubuild.com/2011/06/22/9-red-flags-weve-seen-during-dot-com-boom/

  • http://www.missi.com/ Peter Beddows

    Interesting observation Henry: Guess Mark must have touched a nerve there? {grin}

    Personally, I did not “read” either particular slide as an indicator of, or reference to, any specific “political” point of view or persuasion per se. Rather, I see these as apt visual metaphors that I might also have used to make this particular point since they are very visceral contemporary images conveying an idea to which many would immediately relate ~ good images that convey at a glance the context of what one wishes to express are hard to come by outside of pictures of politicians of any party.

  • Adrian Meli

    Thanks for posting Mark-has some of the most useful slides I have seen in addressing the prospect of a current frothy VC market.

  • http://joeyevoli.com Joe Yevoli

    FYI, an old post, I know… but we found our new lead engineer. 

  • http://joeyevoli.com Joe Yevoli

    FYI, found a new engineer – Thanks for the encouragement :)

  • http://about.me/humphrey HumphreyPL

    Great to hear Joe congrats!