I recently attended and presented at Dave McClure’s PreMoney conference in San Francisco. I go every year because I love events hosted & moderated by insiders involving discussions by insiders because it maximizes the amount of real discussions people have. What you’ll see if you watch the video is an unscripted and unfiltered look into how Scott Kupor & I see some of the changes and challenges of the venture industry.
- Scott and I agree on nearly everything: The VC structure is changing and there appears to be a bifurcation into small & large VCs with an impact on “traditionally sized” VCs. I wrote my version here and Scott wrote an excellent write-up of his views here.
- We both agree that the later-stage valuations are being driven up to a point that feels irrationally priced [he uses b-round SaaS valuations as an example and I am willing to be even more broad based]
- We both are concerned about non-traditional capital entering the late stages and the impact that may have in the next downturn in the economy to the startups who merely trying to optimize for short-term valuation maximization
Here is the video of the presentation that I gave that preceded our debate.
The only point we didn’t seem totally aligned on was what we happening to the “middle of the VC market.” I believe Scott’s argument is that the market is following many other services markets where you have small, expert, boutique small firms and a handful of mega players as we see in banking, law, accounting, entertainment agencies, et. I don’t totally agree with that view. Most of those industries are fee-based and are competing on revenue growth. Venture is a returns based and I believe has different characteristics.
I believe the middle isn’t being “gutted” but rather is being supplemented by “opportunity funds” and “growth funds” that sit side-by-side “core funds” allowing the firms to stay small and nimble while still being able to grab prorata rights of their best early-stage investments. I believe most LPs still want discipline in fund sizes, fees and focus. But my guess is that if Scott and I ever sat down and discussed this we wouldn’t disagree very much either and what Andreessen Horowitz has achieved in the venture industry in less than a decade is nothing short of remarkable.
So here are the two videos of Scott, Dave and I discussing the changes with my brief notes below if you prefer not to watch the videos. Each of the two videos is about 10 minutes long
- Late stage valuations are in a mini bubble. It doesn’t mean that these won’t produce great companies but the prices people are paying for today’s value exceeds what the underlying value of the business is worth and does not account for the risks the investor is assuming. (not in video but late stage valuations have grown 24% compounded years for the past 4 years which is higher than any segment. Four years ago people paid $66m median pre-money valuation and are now paying $155m. This can’t all be driven by increased company performance).
- Scott pointed to B-round SaaS valuations in excess of $100 million in $15m+ financing rounds with companies with very limited proof of customer traction or revenue. He said that a16z prefers to invest earlier stage in these types of businesses.
- Mark pointed out that on the one hand 6 months ago one of Silicon Valley’s best known ibankers told him that SaaS public valuations were the most over-valued since the dot com bubble in 2000. Yet Mark also pointed out that the recent corrections in the public market valuations and the scrutiny new IPOs have undergone is a health sign.
- Both Scott and Mark discussed the challenges of non-traditional VCs entering the market where valuation / returns may not have the same importance as it does to a purely financial investor. While this is temporarily a good thing for entrepreneurs it will turn sour when we go through the next inevitable downturn. We are 5 years into a bull market and all economic markets run in cycles. At some point the music will stop and we’ll find out which strategies were prudent.
- In part two of the group discussion Dave asked us about the trend of founders and early investors being able to liquidation some of their position in later-stage venture rounds.
- Scott and I both agree that this is a continuing trend because as companies stay private for longer before an IPO there is an interest for all early-stage shareholders to consider realizing some of their gains
- We pointed out; however, that some of the recent trends have moved in the opposite direction notably Uber trying to crack down on who can sell stock and to whom.
- Scott & I both agree violently that companies do care (and should care) who holds their stock for many reason and that also having a sensible plan for how founders can liquidate stock or every how early-stage investors can liquidate stock is important. Dave was a little bit less convinced on this issue but perhaps that’s driven by his stage and his potential desire to get early liquidity for his fund or for founders in general where Scott & I are both very long-term investors in companies. Either way it turned into a heated debate.
- Scott spoke about the a16z ethos to put more of the fees investors pay into “services” rather than partner pockets. Mark didn’t get a chance to talk about that topic but since he’s writing about himself in third person here he can confirm that is 100% the strategy of Upfront Ventures.
- Mark talked about the nature of “opportunity funds” and “growth funds” set up by great firms such as Union Square Ventures, Foundry Group, FirstMark, Greycroft and others and how they economics and structure of these funds often creates strong alignment between LPs and VCs and allows early-stage funds and traditional VCs to compete more effectively in later-stage rounds for prorata of existing, well-performing portfolio companies.
And we ended. But here is the deck I used to present before our panel if you haven’t seen it already: