Tech Activism

As you may of heard, there was a proposition in Austin that had an impact on ride sharing, specifically on tech companies/startups Uber and Lyft.  See this article if you are not familiar with the situation or want a refresher.

A lot of people in the tech community are upset about this decision, as they feel Austin is being anti-tech/startup.

The part that is disappointing is that people are being very vocal about this proposition AFTER the vote has already taken place.  One thing I have witnessed in living in the Bay Area and NYC, is that the startup community, broadly speaking, aren’t very involved in local politics.

If you look at the results of the proposition, it shows you that a very small percentage of the population ultimately made the decision.

Austin has a population of almost 900K people and as you can see below, 10K people were the difference in opposing the measure that has impacted Uber/Lyft.  The article that I reference above indicated that only 17% of REGISTERED voters participated in this specific proposition.

We, being the collective tech community, need to do a much better job of not only making our voices heard but connecting with those in non-tech community to influence their decisions.  Sending out tweets isn’t enough, their needs to be people in the street communicating the message directly to local citizens and also calling/mailing/emailing the local/state/federal politicians.

I’m using this specific Austin situation as a recent example, so this isn’t meant to only call them out.  Similar situations have happened in other cities.

 

Voting Results:

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Austin Population:

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2016, an opportunity for VCs

2016 is off to a very rocky start.  I don’t know if we are headed into the recession but the private market will be impacted with what is currently happening in Chinese stock markets, oil prices and US stock markets.

I expect 2016 to be similar to 2009 in terms of how the private market (venture world) will be impacted.  I suspect that many VCs are going to pull back this year, mainly to focus on existing portfolio companies in order to get them another round of equity/debt financing (aka oxygen) and/or help them get to an acquisition (or soft landing).

That being said, some VCs are going to be opportunistic and make MORE investments in 2016 vs 2015.  In down markets, VCs can get more ownership in companies since valuations drop due to supply/demand dynamics.  Many VCs will tell you that in order to generate 3x+ fund returns, entry valuation price / ownership % is critical.

I utilized CB Insights to research which VCs increased their Seed/Series A investment pace in 2009 vs 2008.  The top six firms that increased their pace were Founders Fund, First Round Capital, True Ventures, Accel Partners , Venrock and Bessemer (listed by most # of early stage deals in 2009).

It will be interesting to revisit 2016 and do a similar query to see which VCs increased their pace in 2016 vs 2015.

 

 

Private Market Bubble

Semil Shah sent out this tweet with this image below that was put together by Tomasz Tunguz.  There are a few things causing this meteoritic rise of growth rounds from my perspective.

  1. There is a lot (and too much) private capital available for startups (private companies) right now.  This creates an opportunity to raise large rounds.
  2. Due to cross-over investors participating in the private markets, some of these startups don’t have to go public to raise money.  IPOs are partially used to create liquidity for investors (and employees) who participated in private rounds.  Many of these large rounds are now providing the same liquidity that IPOs used to create.
  3. Some might argue that the public markets are partly broken, which is driving the large market rounds.  Not sure I agree with this perspective though.

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Tech Education in NYC

If you have been following the activity in NYC, you have a sense of the grassroots movement of fixing the problem of the lack of tech talent in the city but also globally.

The NYC community continues to impress me on how it has taken challenges head on and does its best to address them.  Similar to other active startup communities, there is a lack of quality engineering talent in NYC.

The following NYC based organizations are DOING something to fix this problem, many of them are focused globally, not just NYC.

General Assembly – a global network of campuses for technology, business and design.

Girls Who Code – a new organization working to educate, inspire and equip 13- to 17-year-old girls with the skills and resources to pursue opportunities in technology and engineering.

Codecademy – the easiest way to learn to code. It’s interactive, fun, and you can do it with your friends.

Flatiron School – school for passionate people who want to love what they do.  Students learn how to build awesome things with code.

SkillShare – a community marketplace for classes

Turing Fellows – matches top computer science students with outstanding summer internships at leading NYC Startups

hackNY – aims to federate the next generation of hackers for the New York innovation economy

Cornell / Technion Campus – educate the next generation of leaders who will advance technology, generate cutting-edge research that addresses critical issues

Academy For Software Education – a high school that provides innovative software engineering and computer science skills and knowledge

Enstitute – 2 year apprenticeship program for people who want to get into the startup sector

Startup Institue – an eight week program to train and place professionals in the startup sector

I genuinely believe that within the next five years, NYC can leapfrog both the Bay Area and Boston when it comes to having the best software engineers.

Bubble?

The blog post dejour for those in the startup community (including several VCs) is to discuss an upcoming bubble.  These folks who are mentioning the bubble are those in the software sector, which includes consumer, enterprise and infrastructure.  The cleantech, hardware, and life science sectors are not part of this conversation.

There have been two bubbles in past 10 years, both which I was a witness of.  I’m not going to go into great length describing the two bubbles as there have been plenty of articles written on the topic, but here is a quick summary.

2000-2001 : many VC backed companies did not have the proper financial basis to go IPO, research Pets.com and Webvan for details.  Essentially too much speculation.  This bubble was mainly driven by the valley, VCs, startups and I-bankers.  Rightly or wrongly, a lot of money was invested into enterprise/infrastructure for the potential Y2K bug.  This downturn was exacerbated by 9/11.  Over $100B was invested by VCs in 2000.  NASDAQ dropped from ~5,000 in March 2000 to ~1,500 in September 2001.

2007-2008:  a lot of VC backed companies were raising large Series A rounds of $6M, with not much to show in terms of customer/revenue traction.  Follow on rounds were being done at inflated valuations, $50M+. The stock market tanked, primarily driven by inflated residential real estate prices, which was enabled by loose underwriting guidelines and poorly collateralized investment vehicles.  The difference is that the 2007 market crash was not the fault of tech companies, as it was in 2000-2001.  $32B was invested by VCs in 2007 (compare that to $100B in 2000).  NASDAQ dropped from ~2,800 in October 2007 to ~1,300 in November 2008.

2011?: Folks are saying there will be crash, the problem is that they are not providing specific data points as to why they believe this is going to happen.  What I hear from VCs is “it feels like a bubble is going to happen”.  I also hear, “valuations are too high for Series A deals”.  In 2010, we are on pace for $22B to be invested by VCs (compare that to $32B in 2007 and $100B in 2000).

We are not in a bubble, here is why:

  • Stock market is already depressed, so it will not pop as it did in 2000/2001 and 2007/2008
  • Overall economy continues to be very poor (except for tech) and unemployment is very high (except for tech)
  • There is a lot less supply of VC money.  In 2000 and 2007, there was too much supply of VC dollars.  In 2007, there was roughly $35B invested and 2010 it will likely be $22B.  Many VC firms are going out of business and follow on funds are typically much smaller (ie DFJ $650M to $350M, Menlo $1.2B to $400M, and many more)
  • Angels/Micro-VCs/Super Angels in aggregate equal ~$600M, that is roughly the size of one VC fund
  • Series A/Seed rounds or initial rounds of financing are much smaller.  In 2007, there were ~$6M, now they are ~$1.5M
  • Valuation of Series A/Seed rounds are much lower, In 2007, they were $6M Pre on a $6M raise, so $12M Post.  Now they are $4M Pre on a $1.5M raise, so a $5.5M Post
  • There is a lot of money sitting on the sidelines by startup acquires such as: Apple, Google, Oracle, Amazon, Cisco, Microsoft, HP, etc.  This cash will continue to be used to acquire startup companies 2011 as these large public companies need revenue/product growth, which is what acquired startups provide.

A point of emphasis, some VCs are saying there is going to be Angel/MicroVC/Super Angel bubble.  As I mentioned previously, if you add all these dollars, it is likely to be $600M, which is less than one VC fund.  Lets do that math Floodgate ($75M), SV Angel ($20M), 500 Hats ($30M), OATV ($51M), Lowercase ($8.5M), K9 Ventures ($6M), SofttechVC ($12M), Felicis Ventures ($40M), Harrison Metal (?), Baseline (?),Y Combinator ($8.25M), TechStars ($2.5M), Founder Collective ($40M), IA Ventures ($25M), etc.  The majority of the firms I mentioned have funds, of which many were raised in the past 12 months, so they still have another 12 to 24 months of runway, as most funds are deployed within three years.  In addition to the $500M, lets add another $100M for individual angels, some of who are active on AngelList, so in total $500M + $100M = $600M in the seed/angel category.  The seed rounds also include traditional VCs (funds larger that $100M) such as Sequoia, CRV, Trinity, Redpoint, Polaris, True, Greylock, First Round, Union Square,  etc.   It is difficult to know how much money from these funds are allocated for seed rounds, but it total, I would guess it it close to an additional $500M.  In total we there is $1.1B available for seed rounds ($500M + $100M + $500M).  In the big scheme of things these seed rounds make up a very small part of total VC dollars invested, which will likely be $22B this year. 

There is certainly an argument to be made about the challenges of finding great engineering talent, but that will not result in a bubble occurring.  Yes, there are a lot of incubators that are popping up, if those fail, that will not create bubble, they would be collateral damage.

There are a lot of companies that received seed funding this year who will not be successful, but that is not a definition of a bubble.  These companies are raising much smaller rounds ($1M compared to $6M) and they are lot more capital efficient.  Only a small percentage of startups become successful, this is true now and was true 10, 20 and 30 years ago.  Yes, many of the seed funded startups will not raise a follow on round of financing.  Seed rounds are meant to allow the startup to make a go of their business and if they fail to execute, they will not get additional funding, the next round of funding is never promised in this business.  In addition, there is a great emphasis for startups to get to cash flow positive and that a revenue model must be proven.

In summary, 2011 will be a good year for startups who are raising seed rounds, there is sufficient cash available, so go get it!

Sites that provided some of the data I used for this post:

http://www.chubbybrain.com/blog/a-guide-to-super-angel-investors-who-are-they-what-do-they-invest-in/

https://www.pwcmoneytree.com

http://www.businessinsider.com/who-are-the-super-angels-a-comprehensive-guide-2010-10?slop=1

Upward Momentum

This week was likely the best for the venture/tech industry in 2009.   I believe this week  (and month) will be marked as a turnaround point as there have been a number of very positive events, which I hope will create some much needed momentum in the industry.

1) Amazon acquired venture backed company, Zappos, for ~$900M.  A great win for their investors, most noteably Sequoia Capital.  Large companies, such as Amazon, typically wait till the market is at the bottom, before acquiring companies, as they are targeting the lowest possible valuation; this signals an important inflection point in the market.

2) 3.5% increase in the stock market in a single week, DOW above 9,093 (high since Nov ’08) and NASDAQ at 1,664 (high since Nov’ 08).  Part of the increase in the stock market, was the positive earnings announcement from Apple; their iPhone product line is growing very rapidly, which is  also helping fuel the companies (some of which are VC backed) who sell their applications in the iTunes AppStore.

3) Several growth stage venture backed companies received follow on rounds of financings, which were led by new investors.  The point that these financings are being led by new investors is critical, as most follow on financings in 2009 have been done by existing investors (aka “inside rounds”).   I can’t recall a week this year with as many new follow on financings as this past week.  The fact that new investors are putting money in to venture backed companies is a sign that things are changing for the better.  Below is a partial list of existing venture backed companies that raised money this week from new investors:

  • eMeter – raised$32M, led by Sequoia Capital
  • Ning – raised $15M from Lightspeed Venture Partners, rumors are the valuation was $750M!!!
  • Kontera – raised $15.5M, led by Sequoia Capital
  • iControl, raised $23M, led by ADT Security Services, Cisco, Comcast Interactive Capital and GE Security
  • 5min – raised $5M, led by Globespan Capital Partners
  • SlideRocket, raised $5M, led by Azure Capital

4) Several reports, such as VentureSource and MoneyTree, have released data this week on the level of venture investments in Q2.  All the data points are indicating that Q1 investments have been surpassed by Q2 investments.  Based on conversations I’m having with the VCs and the volume/pace of VC financings I’m observing, I project that Q3 venture investments will be larger that Q2

5) Lastly, several VC firms have raised new funds this week.  This is significant, as there have been many articles and conversations indicating that the VC business is at risk.  The fact that these firms, specifically, Matrix and Khosla, is a sign the Limited Partners (LPs, those that invested VC funds) continue to believe in the VC business model.

  • Matrix Partners, $600M for two funds, $450M main fund and $150M special opportunity fund
  • Kholsa Ventures, $1B for two funds, $250M early stage and $750M late stage
  • DFJ, closed on $196M of a targeted $400M fund

Note: the data in this post in all publicly available and was mainly sourced via:  Silicontap.com, Techcrunch.com, Venturebeat.com, Yahoo.com

The Gold Rush

It is 1849 again, only this time the movement of caravans are not traveling West, but are headed East to Washington D.C.   I’m referring to the passing of the $787B stimulus package aka American Recovery and Reinvestment
Act of 2009 that was recently signed by President Obama.

The NVCA had a conference call last week, on Tuesday 2/17/09, to describe what the effect of the stimulus package is for the VC industry and the call was certainly a positive one.  The good news for startups and VCs is that roughly 8% of the $787B is going to support initiates in the cleantech and life science sectors.  According to the NVCA, the breakdown of the allocated funding is as follows; $37B for cleantech related programs/projects, $19B for healthcare IT, and $5B for science related programs/projects.  To put these figures into perspective, according to the recent PWC/NVCA MoneyTree report, VCs invested $28B in 2008 and of that $4.6B went to energy related companies.   Another figure that put things into perspective, since 2002, VCs have invested a total of $13B in energy related companies, so the stimulus package provides the industry roughly 3X this total amount.

The stimulus package is a huge boost to both startups and VCs in the cleantech sector.  Lets focus on the $37B available for cleantech companies; those that will fair the best are ones that are currently generating revenue and/or are close to production.  In addition, the folks at the NVCA indicated that the companies that have the strongest ties to D.C/DOE will likely move to the front of the line.  Lastly, those that have the most postive impact on job creation will do well, so I suspect that companies in the solar, wind, biofuel, battery/auto, and smartgrid sectors will get most of the allocated funding.  With that in mind, a partial list of privately held venture backed companies that are heading East for some cash and will likely strike gold are (in no particular order):

Solar: BrightSource Energy, Solyndra, Solar City, NanoSolar, SolFocus, Miasole, Fat Spaniel, AVA Solar, CaliSolar, eSolar, Konarka

Battery/Auto: Better Place, A123 Systems, Tesla, Boston Power, Fisker, Deeya

Biofuels: Range Fuels, Mascoma, Amyris, Altra Biofuels, Qteros

Smartgrid: Silver Spring Networks,  Gridpoint

Wind: Northern Power, Southwest Windpower, Wasatch Wind,

Discolsure – I put together this list based on information that has already been made public and is readily available online.