What is happening right now in the Silicon ValleyThe Hitchhikers

What is happening right now in the Silicon ValleyThe Hitchhiker's Guide to Venture Capital
What is happening right now in the Silicon Valley
Posted on Feb 07, Posted by Andrew Romans Category Uncategorized
I’m in the valley every day in many meetings with CEOs, VCs, angels, corp dev folks, etc. with
most meetings tied to fundraising. With a constantly changing market here’s my view of where
things are right now.
The IPO performances of Facebook, Zynga and Groupon laid an egg in the public markets and
that proliferated through the entire chain of late stage pre-IPO financing, venture financings and
all the way down to angel rounds. This hit us in the spring pretty hard and the summer was kind
of “wait and see what this means”. By the time September and October arrived we knew what
this meant. It meant that raising new VC funds was on hold. That meant smaller exits for VC or
angel backed startups. That means harder again for VCs to raise new funds from LPs. That
means less VC funding to go into startups at any stage. It meant that the terms for early stage
funding rounds got worse for entrepreneurs. Pre-Facebook IPO there were tons of seed rounds
for Y Combinator type deals with a $19m cap on a convertible note or no cap and sometimes no
discount rate or an insulting discount rate.
Now we have $4m caps. This is back to what I always said was $2.5 to $5m caps which can be
shifted for first money in and climb as the round fills in to reward early investors and punish the
investor that delayed and came in last. Simply put, prices have come down. Probably too many
companies got funded in 2011 and 2012. These companies are now facing tough decisions.
It’s one thing to raise funding when you are a new idea with an enthusiastic team ready to go
out and conquer the world. It’s another thing when you burned through $750k to $1m and failed
to get market traction and want to go back to the same or new investors and raise more money
now that you figured out the excel financial model hockey stick is not even remotely happening.
Reality is setting in for these companies and they need to stop seeking investors and start
seeking cash paying customers. The focus needs to shift from investors and press coverage to
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What is happening right now in the Silicon ValleyThe Hitchhiker's Guide to Venture Capital
product, market traction and cash. These companies also need to cool their burn rates.
Engineers should figure this out and join a company with revenue or go to a large company that
can meet payroll.
When the market moves like this investors move along the continuum from seed and early
series A investment to later stage series B and beyond. Venture capital starts looking more like
private equity. The firms on Sand Hill Road are now investing in series B and later. Angels are
filling in the seed and series A. There are a few firms like Floodgate that are doing genuine
series A, but the usual suspects are not.
Regardless of economic cycles the Valley will always be a “winner take all” place where there is
always a red-hot startup that raises its seed and series A round effortlessly at sky high
valuations with everyone on Sand Hill Road (SHR) scratching and clawing to get their money
into that deal. So when there is not a drop of water to drink for the unwashed masses there is
always a team that gets a super hot buzz going and closes trainloads of cash and launches a
rocket business. That will never change.
There will always be a new graduating flock of Y Combinator, TechStars, 500Startups and other
new shiny objects and angels will take a punt. These guys should expect to close smaller sized
rounds and move faster into revenue than a year ago.
We are now looking at a sheer numbers game. Tons of companies raised angel funding rounds
of $500k, $750k, $1.5m and a few chunkier angel rounds of $2m - $7m. These rounds closed in
2010, 2011 and 2012 and now these companies are running out of cash. The VCs will not
invest in more than 10 to 15% of them. Angels will only tank up those that have market traction.
When this happens B2C drops out of favor and B2B comes back in style. Why? Because B2B
generates cash revenue faster and that makes investors comfortable knowing where the next
meal ticket is coming from.
The Valley has always been infected with “herd mentality”. Like a mob, investors jump into
cleantech one day, into games or social networks. Then sectors are orphaned. Right now
games and social networks are dead. Solyndra put the death nail in the coffin of cleantech.
Reputable VCs on SHR have fired their cleantech partners and just exited the building. Games
and social networks are dead zone sectors too.
BTW, I never roll with the heard. I’m always open to buck the market so send me your deals. I
do know that if I get into an orphaned sector there may be no funding for my deal and I need to
see enough cash to get us through 2 years or to profitability. That’s reality when the flavor of the
month expires.
What’s coming in vogue now? The low cost revolution has hit hardware manufacturing and so
hardware deals that were once impossible to fund are coming back in style. Enterprise deals
are becoming sexy again. Particularly if there is a consumerization of enterprise technology. K
een Systems
is a good example. Big data is now generating revenue and market traction. Go
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What is happening right now in the Silicon ValleyThe Hitchhiker's Guide to Venture Capital
Palantir
! Big data is a good fit with venture capital and investors get it. This space will gain more
momentum.
My advice to entrepreneurs is to focus on revenue, product, team, industrial partners,
distribution deals and real business. Make investors find you. I heard a friend recently say
“Startups these days are unfundable until they are oversubscribed.”
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