Q1 Startup Funding - Correction or Bubble Burst?
By Shani Shoham, an entrepreneurial GM, Business/Corporate Development Executive and COO.
When Fidelity, the world's second largest mutual fund, slashed its valuations for Unicorns like Square, Uber, Snapchat and Dropbox during Q4/15, memories from the 2000 dot-com bubble burst and the 2009 turmoil emerged. Observing the landscape over the last couple of month I personally feel this is a well timed correction rather than a bubble burst.
Back to basic investment principles
I’ve seen the market emerge from a dry land in 2010 to its peak in 2015. New funds emerged, competition intensified and companies were raising new rounds only months after their previous round. How many milestones can you achieve in 4 months that will justify higher valuation? Investors forgot basic principles like profitability and unit cost. Some startups scaled too fast without making sure they get the economics right first. They had piles of cash to deploy and the clock was ticking.
Iowa Technologies is such an example. The London based unicorn, raised over $220M and was valued at $2.7B at one point. Last month the company had $250K worth of cash and $16.4M of debt to pay. In 2013 they raised $76M on $3.3M of revenues and over $32M of loss. Rent, by the way, was it’s second biggest expense, having $18.7M worth of leasing agreements.
IPO Opportunities are rare, VC Fund in down for the second quarter in a row, valuations are down. Why do i think it's all temporary
Well first the market needed to correct itself. These valuations just didn’t make sense. In Q1/16 57 funds were raised for a total of $12B. This marks the strongest quarter for dollars raised by U.S. venture capital firms in the last 10 years. VC fundraising is actually improving. Once funds are raised VCs are pressured to deploy them. The average time for exit is 5-7 years so the current IPO momentum is less critical for such investments.
Interest rates remain low and VC 10 years returns are almost double compared to the S&P (10-year period ended September 30, 2015 were 11%, compared to S&P’s 6.8%). Venture funds are still an attractive investment for endowments and mutual funds. The pace of innovation is increasing and new type of companies emerge, addressing years of deficiencies in healthcare, banking and commerce. M&A pace is picking up and other than the lack of correlation between public market and private market valuation other indications are stable.
I believe we will experience a few more bumps on the road. A few more companies like Powa will fail and some Unicorns will have to IPO and adjust their valuations down but I believe solid companies with a sustainable business will be able to raise funds.
Update: A few investors i spoke to since this post was originally published pointed out that their portfolio companies are finding it more challenging to raise additional funds. I think the next couple of months are going to be bumpy. VCs still do deals but it takes more effort and due diligence for them to make an investment. They have reduced the pace and a decision that last year took a week, might take a month now. I think this is back to norm: doing more diligence, carefully analyzing the opportunity and taking the time to know the team.
Shani is an entrepreneurial GM, Business/Corporate Development Executive and COO. He founded four ventures, two multi-million Dollar business units and generated over $70M in channel sales. He built Partner Programs for multiple companies with a track record in bridging customer needs, technology, strategy and execution to introduce new products and partnerships that drive revenues. Having worked with startups and large corporations, he is passionate about combining both worlds to drive innovation.
Originally featured in:https://www.linkedin.com/pulse/its-2009-again-shani-shoham?trk=prof-post