Good morning, All,
First, a big thank you to Sumeet Shah, Senior Associate at Brand Foundry, who was the guest investor at last week’s Breakfast. And who shared two awesome slide decks on investing and what funds look for, with our attendees. Pays to show up!
Our next Breakfast with an Investor will be Wednesday, February 18th and our guest investor will be Alicia Syrett, Founder and CEO of Pantegrion Capital, an angel investment firm that focuses on seed and early stage investments, and a member of several angel networks, including Golden Seeds and NY Angels. She’s a very active investor and startup advisor – and she’s currently looking for NYC-based early stage investments. For the record, because we keep the group small, every investor who has spoken at one of our breakfasts so far has made him or herself available to attendees afterwards, meaning private consultation. RSVP here and hope to see you there!
As Editor in Chief of AlleyWatch, we meet with emerging or newly-minted startups and/or entrepreneurs all the time. We’ve noticed that lately, a number of these startups have relocated from Silicon Valley, where – from what one hears in the press – investors line up to write checks. Of course, our question to the founders always is: why did you move to NYC from Silicon Valley?
The answer is always the same: Silicon Valley isn’t necessarily about building businesses that can sustain themselves, but rather, how quickly will we see an exit? (Startup Life: Why I’m Leaving Silicon Valley For The Big Apple)
Rocketships make for great press. Meaning, a company that comes seemingly from out of nowhere, becomes the darling of investors, and is quickly touted as the next billion dollar company. The now defunct Fab comes to mine, although, that’s just one in a crowded field (Cuil, anyone? Color?). We personally heard founder Jason Goldberg’s pitch when he was in a small room of founders. We voted no confidence and within the month, heard that the company was suddenly the darling of investors. We had been there with a friend, who pinged us to rub it in that we’d lost our touch.
In retrospect, not so much, what, eh?
Goldberg has pivoted to Hem. Or, to our way of thinking, a-hem.
History is always the best teacher and to get a better idea of the current investing landscape: in the wonderful world of finance, reengineering happened in private equity markets, where cash-rich investors would buy companies, present the books in a way that it painted a nice picture, then dump those companies at huge valuations. Numbers are so much fun, and so easy to manipulate.
In the case of startups, it’s even easier, because there isn’t the same level of bookkeeping/accountability, and valuation is based rather on made-up metrics, or as our own industry often refers to them, ‘bullshit metrics.’ Pageviews, unique views, registered users, and many other forms of metrics used to define online popularity are ‘bullshit metrics.’ In the days of Web 1.0, it was ‘eyeballs.’ That helped to make traction look great but remember: everyone has two eyeballs and every good Web 1.0 founder knew that.
Another point that we heard from the transplants is that in Silicon Valley, investment money goes – in large part – to companies that can get the bullshit traction quickly. In other words, they’re aimed at the Millenial market, which is always quick to jump on the Next New Thing – and equally quick to follow the herd to the Next New Thing.
Fast in, fast out, which also seems how many a Silicon Valley investor functions.
They haven’t changed the playbook. They simply moved the game. For the most part, west.
Dave McClure tweeted this past week: quotable @alanjpatricof: “At some point #Unicorns will be valued on EBITDA.” http://fortune.com/2015/01/22/the-age-of-unicorns/ … cc @500Startups
“Greycroft Partners founder Alan Patricof, who has been investing in startups for more than four decades, is wary. “People are buying traffic growth and revenue growth, but it’s the ‘emperor has no clothes’ theory,” he says. “At some point all of these companies will be valued on a multiple of Ebitda. If the IPO market goes away, or for any reason there’s a blip in the outlook, people could be left holding a lot of inventory they wish they didn’t have.””
For the record, Patricof is known as the Grandfather of Venture Capital and ‘the emperor’s new clothes’ was a term you heard a lot in the Web 1.0 days – mostly, after the fall. It is not heartening to hear it creep back into the lexicon, as it is an indicator that we’re looking at another iteration of the smoke-and-mirrors economy. And you’ve got to be wary when money-losing companies are winning big in the stock market. According to USA Today, “The five most recent IPOs that lost the most money over the past 12 months (including Box) are up a staggering 39% from their offering prices. Meanwhile, the five most profitable IPOs are up just 2.1% from their offering prices.”
“If you are a CEO today and you’re age 35 or below, you did not go through 2000, which means you have not actually seen the capital markets shut off,” says venture capitalist Marc Andreessen, who nonetheless remains bullish. “People who went through 2000 are psychologically scarred and arguably have been risk-averse for the last 15 years. If you didn’t go through it you’re in danger of always believing you can raise money at a higher valuation.”
It’s not that we’re gun-shy. It’s that we’ve read this book before. And not that Marc Andreesen is some paragon of virtue. One used to be able to find a lot more stories about Andreesen’s less-than-straightforward business dealings and behavior. The search engines have been scrubbed.
The good news is that there is a focus on building real businesses – and tech hubs where that is the focus, NY being one of them – are coming into their own. Between all of the above and the Silicon Valley hegemony, it’s no wonder that the area is holding sway and drawing the best and the brightest, less and less. Might be a good idea to fall back on the manifesto that brought Silicon Valley to where it is. Heads up: it’s difficult to stay in power forever in an industry whose primary focus is disruption and disintermediation. With the industry getting more sophisticated, the barriers to entry dropping, and entrepreneurs – including the Millenials – getting older and maybe a bit wiser, how long will it be before the focus turns to robber barons? Onward and forward.