18-02-2016, 07:31 #1
[EN] Out with the Unicorns, in with the Cockroaches
'The Great Reset': Venture capitalists and startups have shifted from greed to fear
Feb. 13, 2016
If the terrible headlines and stock prices are to be read like tea leaves, then the tech industry is about to face a major reality check.
Investors have already labeled this period "The Great Reset." Why?
- There wasn't a single IPO in January for the first time since September 2011.
- As the public market has slashed the value of tech companies like LinkedIn and Tableau almost in half, their private counterparts look oversize.
- The industry is facing death (or at least pain) by a thousand cuts: Startups everywhere are laying off people, jettisoning businesses, and firing CEOs. Some of its biggest innovators have admitted breaking the rules, and suddenly things aren't looking too rosy.
At the Upfront Summit in Los Angeles last week, the shift was palpable. There was still plenty of cheerleading for companies, but there were also plenty of nervous conversations between sessions and even on stage.
No longer is it growth at all costs. "If you haven't built a real company, you're dead," one investor bluntly put it.
Here's what I learned from a week in Los Angeles talking not only to Silicon Valley investors, but also those doing deals across the US:
Out with the 'unicorns,' in with the 'cockroaches'
For the startups that are currently valued at more than $1 billion — the so-called unicorns — there's no doubt from investors that the public market will be painful.
Given their name, these companies are supposed to be rare, bordering on mythical. Yet in 2015 a whole herd of unicorns showed up. Fortune Magazine lists 174 on its site. Venture capital database CB Insights counts 152.
There's no way they're all going to go public and meet their valuations.
"You would have to be blind to not see the disconnect between public and private multiples," said one early-stage VC.
Some investors are starting to split the unicorn camp into three buckets:
- The ones that are still growing with strong numbers and can find investors. (Airbnb and Uber were cited in this camp.)
- Struggling unicorns that might need to go public to look for cash or face a down round — that is, a fundraising round that values the company at less than the previous round. A down round isn't necessarily the kiss of death — it's better than not raising money and going out of business — but it means founders and early shareholders probably aren't going to make as much money as they thought they would (and sometimes none at all), and it can be demoralizing for the entire company. It can also forestall later investments.
- Never going to exit. These failures will likely be few and far between, investors think, but there will be at least a couple from the group that can't even manage to sell for pennies.
As a result, the once cherished unicorn title is being replaced by a new one: "the cockroach" — companies building sustainable businesses that can survive anything. Especially among the Los Angeles startups, revenue is talked about more openly (at least five local companies are hitting nine-figure revenues, according to Science Inc.'s Mike Jones) and investors, like Accel's Rich Wong, have admitted that they're asking different questions of the companies they meet.
"That fear of missing out on that next Facebook rocket ship is starting to be replaced by actual fear of losing money," Wong said in an interview this week with USA Today. "If I'm doing a deliver-vodka-to-the-office company, it's probably a different conversation to raise money than I was having two years ago."
Dragged to the IPO altar
For non-unicorns, going public might be the "cleanest" way to raise capital, said one investor. That's because so many late-stage investors are throwing in protections, like ratchets, in the face of sour public markets. If there's a sustainable business built, then going public is better than raising from growth funds like Fidelity that could mark startups down publicly too (a favorite topic of conversation among the early-stage investors).
In fact, the struggling unicorns might find their only option is going public, according to investors. CB Insights founder Anand Sanwal predicted several companies, like Dropbox, Cloudera, and Jawbone, will have to be dragged across the finish line to avoid having to raise a down round — a round that's at lower value — or to find funding at all.
A lot of investors are complaining that companies are staying private too long.
Fred Wilson gave an impassioned speech on why Uber should go public, while Benchmark's Bill Gurley said "staying private longer" is the worst advice he's ever heard.
"We need to go back to looking at the IPO as the objective," Gurley said in October 2015. "Until you get liquid, you really haven’t accomplished anything."
Get ready for more second-market sales
Which brings us to liquidity. Second markets are springing up for shares, and companies are trying to find a way to provide some liquidity to both their investors and their employees.
The most recent example is Andreessen Horowitz and Founders Fund. The two venture capital firms sold some of their shares of ride-hailing company Lyft for a small profit. Saudi Arabia's Prince al-Waleed bin Talal wanted more shares as part of Lyft's December Series D round, and wasn't able to get them from the company itself, according to a source familiar with the situation.
This was the first time Andreessen Horowitz decided to sell a small number of shares and take some money off the table. Some took it as a lack of confidence in Lyft, but as Fortune's Dan Primack also pointed out, these VCs do have a fiduciary duty to return some money. It's sometimes a smart business move to take some money off the table when you can, as other firms have done in the past.
Investors aren't feeling the pressure of returning funds to their investors, the limited partners, yet — most funds have a 10-year cycle — but secondary-market sales are something that will continue to increase anxiety unless M&A activity picks up, some investors cautioned.
18-02-2016, 07:31 #2
Managing momentum versus cutting costs
So where does that leave the startups going into 2016?
From here on, the stronger should get stronger, and the weak will start to show.
There's been a slew of layoffs as companies begin to trim the fat. Billion-dollar messaging app Tango cut 20% of its staff on Friday. Earlier this week, data storage and analytics company DataGravity "preemptively" dismissed staff to cut costs. Even widely considered IPO candidate Practice Fusion, an electronic health-records provider, has cut back.
While cutting costs is advised for startups in desperate need to buy themselves time, GGV partner Glenn Solomon recommended that founders really look at their metrics and not be influenced by outside trends as much. If they have the numbers and valuation to keep on only building, that should be their focus — not pulling back out of fear.
"CEOs have among their most important jobs is managing momentum," said Solomon.
That's momentum across every metric: hiring, growth of the business, morale, investor sentiment, and valuations.
Once startups start cutting costs, momentum is reversed. Morale sinks as headcount shrinks. At that point, it's time to reset your sights on what the endgame is and adjust, Solomon said.
In a later blog post, Solomon summed it up neatly:
At the conference I heard a bunch of people talk about the need to cut burn rates. Obviously, companies should never waste money. But, its VERY rare to see a company turn it around and create a huge outcome once it finds itself in a position where it must drastically cut burn to extend runway. Particularly for founders who’ve raised high priced, large financing rounds on the premise of rapid, yet expensive growth, in a down market, these folks are faced with a Gordian knot that will be very challenging to untangle. On the other hand, for founders of high growth, highly valued startups who’ve smartly raised plenty of cash, I’d argue that NOW is the time to accelerate smartly. While the competition cuts burn to prolong runway, the strongest companies have a chance to gain ground, becoming the dominant player in their respective spaces.
Always look on the bright side ...
While there is a lot of doom and gloom, many see a bright side in all this.
For one, some expect round sizes to come down. Or as Joanne Wilson put it, "more egos in check."
That's what USV saw with Foursquare when it pivoted (or just realized) that its strength was as a data company and it should be valued as such. It's better for them to have a down round and get leaner and more focused than to raise too much money and squander it away working on an ill-defined or unrealistic goal.
Meanwhile, the limited partners who fund the VCs are still optimistic: Their funding of venture capital firms is back to prerecession levels, and, as Mark Suster from Upfront Ventures points out, it's expected to increase.
That means there will still be capital to fund the startups the deserve it. If anything, a more hostile market will reduce the noise of startups that are just going for fast cash versus those building sustainable businesses. For those startups raising, their next round might not quadruple their valuation, but only double it — or not raise it all.
While there may be a "great reset" in terms of the valuations of companies funded and the rates at which they grow, the tech correction is likely not going to be as bad 2001 or even 2009. The tech industry is just hitting refresh.
"We can't be too paranoid. Bad markets bring opportunity," Suster says.
Read the original article on Business Insider.
18-02-2016, 08:16 #3
Uber says it losing $1 billion a year to compete in ChinaThu Feb 18, 2016
The chief executive of Uber Technologies Inc said the company is burning through more than a billion dollars a year in China, where it is locked in a fierce battle with larger local rival Didi Kuaidi to lure consumers with cut-price deals.
Uber's China unit boosted its valuation last month to more than $8 billion after it raised over $1 billion in its latest funding round, although the U.S. ride-hailing app is not yet profitable in the mainland due to intense competition.
"We're profitable in the USA, but we're losing over $1 billion a year in China," Uber's CEO Travis Kalanick told Canadian technology platform Betakit. Uber officials in China confirmed the comments in an email to Reuters on Thursday.
"We have a fierce competitor that's unprofitable in every city they exist in, but they're buying up market share. I wish the world wasn't that way."
Uber and China's Didi Kuaidi, backed by Chinese technology giants Tencent Holdings Ltd and Alibaba Group Holding Ltd, have both spent heavily to subsidize rides to gain market share, betting on China's Internet-linked transport market becoming the world's biggest.
Uber China said in an emailed statement that Didi Kuaidi was having to spend "many multiples" more than the U.S. firm to increase its share of the market, adding that Uber's China operation was backed up by profitable ones outside the region.
A spokesman for Didi Kuaidi, which has the biggest market share of China's car-hailing app market, did not provide an immediate comment when contacted by email.
In January, Kalanick said spending on subsidies is "how you win" in China, adding that Uber aimed to beat Didi Kuaidi by spending subsidies more efficiently. Uber currently operates in over 40 Chinese cities and plans to be in 100 by the end of the year.
"I prefer building rather than fundraising," Kalanick added in the interview with Betakit. "But if I don't participate in the fundraising bonanza, I'll get squeezed out by others buying market share."
(Reporting by Adam Jourdan and John Ruwitch; Editing by Miral Fahmy)
Paul Mozur @paulmozur
Uber also implies Didi Kuaidi losing money in every city it operates in. The subsidies battle continues to rage.
19-02-2016, 04:06 #4
The supply & demand economics behind the current VC boom and crunch
February 18, 2016
Overnight it seems the venture industry has ground to a standstill. The ‘unicorn’ term now means overly inflated valuation in the process of negotiating a down round. The daily news is now full of departing CEOs, layoffs, zombie unicorns and who’s next punditry. How did this all happen and with such speed? Is there an economic model that can explain the boom and bust of this complex market?
Well, it turns out its pretty simple—a shift in the demand curve for venture capital followed by two shifts in the supply of venture capital led to a market way out of its long run equilibrium range. This led to a fragile situation where the recent market correction caused a dramatic short-term shift in supply of venture capital, taking us to where we are now.
Supply & Demand of Venture Capital
In the venture market, Demand for venture capital is essentially the number of companies looking for venture funding. The Supply is the amount of venture capital investors are willing to invest in companies given a rate of return (inverse of price at which they will invest). The supply is fairly elastic (capital flows easily in today's environment) and the demand inelastic (due to power law of venture outcomes), leading to a chart that looks like the one below.
The Unicorn Era Demand Shift
At some point around 2012 it seems that a shift in the Demand for venture capital occurred. This pushed up the demand curve line to Du, creating a larger number of higher performing companies/investments, resulting in the corresponding movement along the supply curve to a higher level of funding (Qu). There are several drivers of this shift, including smartphone proliferation, software eating the world and biotech boom, among others, that led to the sudden increase in innovation and disruption opportunities over the last couple of years.
With this shift the long run rate of return expectation for venture (Rl) was below the new unicorn era returns (Ru). This led to a shift in the supply of venture capital as limited partners and venture firms identified the beginning of another venture boom and rushed to supply more capital to meet this demand. The result is our unicorn era supply shift (Su).
The Bernanke/Yellen Supply Shift
We have a joke at PitchBook that we should thank Bernanke for Uber. What we mean by that is that as a result of the zero interest rate environment, a large group of investors (mutual funds, hedge funds, private equity, multinational corporations, etc.) starved for returns plowed money into the unicorn era extremely attractive venture market. Looking at the data, this begins to have a significant impact starting in 2014. It was this movement of non-traditional investors (aka venture tourists) into the venture market that caused what we call the Bernanke supply shift (SB).
This pushed the equilibrium return rate way below the long run rate and dramatically increased the quantity of capital invested from Qlto QB. Worth noting the RB was perceived at the time to still be a good return considering other asset returns at the time. Looking at the actual data, this is seen in the increase from $44 billion in U.S. venture investments in 2013 to $77 billion in 2015. The result of all the new capital flowing into venture was that a lot of companies that wouldn’t traditionally have made the investment cut did, and were able to raise more capital at higher valuations than ever before. This will likely show in the data over the next few years but anecdotally it has been an undercurrent from VC ‘old-timers’ for the last 18 months or so.
PANIC… errr 2016 Supply Shock
This takes us up to basically last fall. In September the market wobbled, public tech took a bit of a hit and everyone grabbed the table like you do when you think you might have just felt an earthquake. This primed the venture market and had people on edge, so when the public markets correction hit tech and biotech over the last few weeks investors slammed on the brakes. This is known as a supply shock in economics and though it has been only a matter of days since this started, we are looking at this currently as a short-term supply shock.
The effects of a supply shock are that our supply of capital suddenly moves very far left (SS16) as investors suddenly and dramatically raise the return rate threshold (RS16) for making a new investment. Basically we enter into an environment where only the best of the best get funded. Everyone else gets coached on burn rates, unit economics and what a ratchet means.
So what does the future hold?
With the multiple supply and demand shifts, the venture market retrospectively clearly moved to a fragile spot where at the first sign of a wobble everyone was headed for the exit doors. However, if you look back at the root drivers of the shifts they likely still exist (rapid innovation, new technologies, low interest rates, etc.). Did investors maybe misperceive the demand shift and think it had moved further than it did? Probably. Did non-traditional investors think their venture investments were going to generate a higher rate of return with less risk then they will? Probably.
We expect over the short term for the supply curve to stay left and the demand curve to also likely shift down. Looking further out (12 to 18 months), we still believe a lot of positive tailwinds will exist and that a new level of investment will get set beyond the previous long-term equilibrium closer to our unicorn era equilibrium as the aforementioned forces support more demand and supply of venture investment.
So there you have it according to a macro economic supply and demand model—it's simply a short-term supply shock following a shift in demand and two shifts in supply.
22-02-2016, 07:31 #5
Tech faces hour of reckoning as fundraising drops, layoffs rise
The wild ride may be over for tech startups. Venture capitalists, the ones who invest billions into promising ideas for companies, have cut back on spending. A new report from Price Waterhouse Coopers and the National Venture Capital Association say USA TODAY.
Is tech in for a rude awakening this year after a magic carpet ride the past few years?
The numbers, and recent actions by once-highflying start-ups, would seem to suggest so.
Consider: Mega-rounds, defined as funding of more than $100 million for venture capitalist-backed companies, are in free fall. The rate of private start-ups attaining unicorn status — a valuation of at least $1 billion — are grinding to a crawl. Friday layoffs at tech start-ups, deemed Black Fridays, are increasing. Bellwether tech stocks such as Apple, Google, Facebook and Amazon have been taking it on the chin.
"It's a time to re-calibrate — so many companies can't burn extraordinary amounts of money forever," says Sunil Paul, co-founder of Sidecar, a pioneer in the crowded ride-sharing space that shuttered operations on Dec. 31.
Last year, Silicon Valley projected unbridled swagger. Today, "there is definitely an era of reckoning," says Chris Sacca, a venture investor with stakes in Uber and Twitter. "Reality is setting in."
A report from PricewaterhouseCoopers and National Venture Capital Association underscores the chasm: While last year was the second-best in two decades for venture capital investments, at $58.8 billion, the fourth-quarter figures marked the smallest amount
Tom Ciccolella, PwC's U.S. venture capital lead, says the decline in mega-deals is the first clear sign of a tamped-down market for funding. The slowdown began late last year, according to several market researchers.
The number of mega-deals of at least $100 million — 38 in the fourth quarter of 2015 — was roughly half the 72 in the previous quarter, according to the KPMG International & CB Insights 2015 Venture Pulse Report. Mega-rounds in the just-completed quarter raised $11.4 billion — down 44% from Q3 2015 —the lowest level recorded since the first three months of 2013.
More than anything, 2016 marks a "shift to entrepreneurs valuing quality investors over optimized evaluations," says Joe Horowitz, managing general partner at Icon Ventures.
The rise of "unicorns," the industry term for privately funded start-ups with valuations of more than $1 billion, slumped to just nine in the fourth quarter of 2015, compared with 23 in the previous quarter, according to the report. There are more than 140 private start-ups valued at $1 billion or more, attaining unicorn status.
Unicorns "is not a term we focus on," says Josh Reeves, CEO of Gusto, a 300-person company that provides Web-based payroll and human resources services for small businesses. Gusto, formerly ZenPayroll, was one of the nine new unicorns in Q4. "We started a company to solve a problem. That's our focus."
A NEW, MORE SOBER, CLIMATE
The shift in mood is illustrated in a spate of layoffs, closures, CEO changes and reduced market value for several start-ups.
Last year, outsized confidence, and valuations, in start-ups such as Uber and Airbnb was the overriding storyline in high-tech.
But the pressure to cash in on sky-high valuations for mostly unprofitable companies — with intensifying murmurs of another dot-com meltdown on the horizon — has upended things.
"It's a reversion to the norm," says Charles Moldow, general partner at Foundation Capital. "Things are cooling off."
How cold? Fewer venture capital investments are echoed in lower pools raised by the VC firms themselves. The $3.3 billion venture capital firms raised in the third quarter of 2015 was 33% less than what they raised in the same quarter a year earlier, according to Thomson Reuters and the National Venture Capital Association’s Fundraising Report.
"Companies will still raise funding, but at lower valuations," says Arianna Simpson, a Silicon Valley-based investor.
Tech start-ups are increasingly aware of:
• Layoffs. If 2015 was about expansion, some companies are ushering in 2016 with cost-cutting and operational efficiency.
GoPro trimmed 7% of its workforce last week because of a weak sales outlook.
Data-analytics firm Mixpanel, valued at $865 million, sliced nearly 20 jobs in early January. That same week, do-it-yourself service Maker Media cut 17. Wearables start-up Jawbone, a unicorn, late last year slashed 15% of its staff, or 60 people, and closed its New York office in a move to streamline operations. Living Social cut 20% of its staff, 200 people, in October. Note-taking app Evernote, once pegged at $2 billion, eliminated 47 jobs and closed three offices in September.
Those who aren't firing are doing less hiring. Instacart, which tripled its workforce to 308 in 2015, laid off five of its nine recruiters and plans to scale back its hiring push. "We're still growing, but not at the same pace," says Mat Caldwell, vice president of people at Instacart.
"Unless you're (an elite) unicorn, you will be forced to focus on fundamentals for spending, profitability and burn rate," says Jeff Fagnan, a partner at Accomplice. "There is more introspection, and that's a healthy thing for the (tech) ecosystem."
• Reduced valuations. Roiling markets and tightened investments on big-funding rounds has caused early-stage investors to reassess the value of several start-ups.
Former $1 billion unicorn Gilt Groupe was acquired this month by Hudson's Bay for $250 million — less than the $280 million it raised in funding during its eight-year existence. In a valuation prior to the sale, Gilt's worth was pegged at $600 million.
Foursquare, one of New York's most heralded tech success stories a few years ago, last week secured $45 million in funding that Re/code says values Foursquare at $250 million, less than half the $650 million value it was assigned in a 2013 funding round. (Foursquare has disputed the report.) Foursquare CEO Dennis Crowley relinquished his title the day of the funding announcement.
Fidelity Investments, the Boston-based mutual fund firm, in November marked down the estimated value of its stake in several start-ups: Dropbox and Snapchat . Fidelity values Dropbox at 17% less than what it was at the end of June.
• Scuffling IPO prices. Box and Hortonworks laid the shaky foundation for tech IPOs last year, and two start-ups that initially impressed — Fitbit and Shopify — now have stock prices at or below their opening-day public debuts. Twitter, which went public in late 2013, is trading near an all-time low.