Startup Lessons

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.

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There was so much great content at the Upfront Summit but I think one that held a special place in minds of most people I talked to was our panel on diversity led by my partner Hamet Watt (<– what? you’re not following him?).

The message of the panel was very clear – “We don’t need your help. We want to partner with you to make money.” And I’ll elaborate on this but I wanted to start first with an important quote from Magic, said with a very positive tone and at the end of a session in which he emphasized,

“You have to look like America looks, because right now the tech sector doesn’t look like America.”

– Earvin Magic Johnson

And of course he’s right. And we shouldn’t deny it. We should do more to fix it, even if it takes time and hard work. From left to right above is Tristan Walker (founder of Walker & Co),

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Much has changed in the past four months of the technology startup world and how outsiders value the business. Of course it’s too early to predict whether this is a trend or an aberration but the smartest people I know in the industry are predicting the former.

The startup industry may be “resetting,” which doesn’t mean a “crash” but rather just a resetting of valuations, timescales, winners/losers, capital sources and the relative emphasis of growth rates vs. burn rates.

As we noted in our  survey of more than 150 VCs we know in the industry, many saw drops in Q4 valuations last year with nearly all of them projecting decreases in 2016.

And when prices are dropping on a VCs existing companies in market, there is a substantial reduction in FOMO (fear of missing out) for new deals, which means that investors take their time in making investment decisions. Deflationary economics are well understood – in a market when prices are dropping one prefers to wait a few months to see if prices stabilizes before committing. We do this in our consumer lives with everything ranging from housing purchases to public stocks.

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I’ve been spending a lot more time on Facebook as a blogger than I ever did. So I thought it was worth explaining why. And I’m going to cross post this entire post on Facebook as an experiment rather than just posting a link on FB and trying to drive people to my blog.

If you want to follow me on Facebook I’m here.

So if you’re reading this on Facebook (or on my blog!) and want to subscribe to my newsletter you can click here.

We all have our Facebook experiences based on life stages that we joined. Some people complained that they had too many connections and it was no longer relevant. These are mostly people who joined in college or their early 20s and FB sort of became like LinkedIn – the place where you were connected to too many people you didn’t really know. Others had very few connections and they used it to share personal information.

I was always more the latter. I signed up for Facebook before many – in 2005 – when I first moved back to the US.

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Mitu Network is the largest digital media company for Latinos in the US and also targeting Mexico and South America. Founded in Los Angeles by Latinos to address the growing demand for short-form online video for Millennials it is probably single-handedly improving the diversity of the tech industry as the employee base is overwhelmingly Latino and proud.

And maybe that openness is what has attracted many on the management team of other ethnic groups of Chinese, Iranians and the like? And also why today Mitu attracted $27 million in funding from AwesomenessTV (DreamWorks/Hearst), WPP, Verizon and Upfront Ventures.

The first generation of short-form online video companies seemed to be a bit of a land grab as online video companies were mostly “horizontal” in that they produced video of nearly any genre that could drive views. The company that I invested in – Maker Studios – became the largest and covered video games, music, comedy, women’s life style, mom’s, animation and the like.

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We can often get lost in the sideshows of the political season talking a bunch of nonsense about immigration, China bashing, race baiting and overplaying social issues and fear.

We have reduced our discussion to a reality TV show or People Magazine and thus we debate the price of Marco Rubio’s shoes, the length of Hillary Clinton’s bathroom breaks and whether being born in Canada should exclude Ted Cruz from the presidency.

The reality is that world events and geopolitics will determine our future including climate change, combating terrorism, dealing with a world of scarce resources and an increasing population.

Some of the world’s biggest threats include: the increasing tension between Sunnis & Shiites in the Middle East, the ability to contain Iran’s nuclear ambitions, the impact of massive reduction in oil prices, the fact that China has been propping up its economy since 2008 by incurring massive amounts of debt, which often precedes a big recession.

I only know of one great political show on television that takes on these issues in a thoughtful and intelligent way with political analysts who are respectful and debate the issues without shouting. That show is

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