27/1/18: VCs Funding Bonanza. Missing Central Coast

Based on data compiled by Bloomberg, 2017 was a bumper year for VC-funded startups across the U.S., with significant increase in the geographic diversification of funds flows across many states.

You can see the full analysis here: https://www.bloomberg.com/graphics/2018-venture-capital-deals/.

From our local, Monterey, perspective, here is the kicker: in 2017, Monterey County (with population around 415,000) was ranked below its neighbor, Santa Cruz County (with population of around 262,000) in terms of total VC-funded deals volumes. And by a significant margin lower.

You can see this from the chart for 2017

Of course, every cloud has a silver lining, of sorts. The one this year is that at least Monterey County managed to register on the VCs' radar. Back in 2015 it was just a blank void for start ups investment.

10/8/17: 2Q Start Ups Funding Data: Big Lessons Coming

2Q 2017 figures for seed funding and startups capital rounds is in, and the slow bleeding of the Silicon Dreams appears to be entering a new, accelerated stage. 

Seed funding posted continuous declines over the last two years, falling some 40 percent on 3Q 2015 peak in terms of number of transactions and down 24 percent in volume. 

Source: PitchBook Inc

Combined seed and angel investment deals numbered just 900 on 2Q 2017, down 200 on same period in 2016 and well below ca 1,500 deals completed in 2Q 2015. In volume terms, 2Q 2017 came in with total investment of $1.65 billion, down on $1.75 billion in 2Q 2016 and $2.19 billion in 2Q 2015. Masking these falls somewhat, terms of investments have tightened significantly over the last two years, meaning that actual in-hand capital allocations have fallen more than the headline volume figures suggest.

There are some reasons for this decline. Firstly, recent tech IPOs signal Wall Street’s growing scepticism over unicorns valuations of tech companies. Secondly, the quality of new deals coming into the market is slipping: if two years ago everyone was chasing mushrooming sector of ‘Uber-for-X’ companies, today the ‘disruption’ pitch is getting old and the focus might be shifting on later stage financing of already existent companies.Thirdly, investment funds are facing internal problems - the classical allocation dilemmas. As funds under management rise in the angel and VC investment outfits, it becomes harder and harder for them to meaningfully allocate small investments to smaller start ups. They become more dependent on ‘finding the next Uber’. As a result, the funds are shifting their cash to already existent early stage companies, away from angel and seed finance. 

To see the latter two points, consider the median seed deal size. Two years ago, that stood at around $500,000. Today, it is at around $1.5 million. 

There is also the issue of timing. Boom in seed funding in tech sector is now good decade long. And it is time to count the proverbial chickens. As the industry pursued the investment model of ’spray the cash around and pray for a return somewhere’, a range of seed finance funds are closing down and posting poor returns. This, in turn, makes new investors more cautious.

Why this is significant? Because many tech start ups generate no meaningful revenues and, even at later stages of development, once revenues ramp up, they tend to run huge losses. The reason behind this is that many tech start ups (especially the larger ones) pursue business models based on aggressive expansion of market share in markets (e.g. taxis and food deliveries) where traditional business margins are already thin. In other words, by pursuing volume, not profit, the start ups must use increasing injections of capital and large capital allocations up front to stay afloat. 

This, of course, is not a sustainable model for business development. But tell that to the politicians and business leaders and investors, all of whom tend to chase size before understanding that business needs to make profits before it can raise employment and build brand dominance.

So for the future, folks: stop chasing pre-revenue, business plan (or tech platform)-based funding. Focus on generating your first sales and showing these to have margin potential. Remember, corporate finance matters not so much on the capital budgeting side, but on the cash flow spreadsheet. 

28/6/17: Tech Financing and NASDAQ: Divorce Proceedings Afoot?

Based on the recent data from Kleiner Perkins,  there has been a substantial inflection point in the relationship between NASDAQ index valuations and tech IPOs around 2015 that continued into 2016-2017 period.

Over the period 2009-2014, the positive correlation between NASDAQ and global technology IPOs and PE/VC funding was largely a matter of regularity. Starting with 2015, this relationship turned negative. Which means one pesky thing when it comes to the real economy: the great engine of enterprise innovation (smaller, earlier stage companies gaining sunlight) as opposed to behemoths patenting (larger legacy corporations blocking off the sunlight with marginal R&D) is not exactly in a rude health.

4/1/17: In 2016, U.S. IPOs Fell off the Cliff. VCs Barely Hanging on...

The golden VC model of finance is getting hammered by the lack of IPOs. Let’s take it from the top. majority of VCs fund companies on the basis of a visible exit (at least strategic visibility), which in the vast majority of cases implies either a sale (M&A by a bigger fish) or an IPO. Rarely do they explicitly factor into company valuations a possibility of a buy-out (for if they did, their models of funding would involve debt, rather than equity) or even less frequently, a possibility of earning a return through organic growth (for if they did, their models will set RRR closer to 5-10 percent pa over a longer time horizon, not quintuple that over a short run). So VC ‘industry’ by and large depends on IPOs. And these IPOs are now exceedingly rare on the ground and their valuations are exceedingly shallower.

Here’s data from FactSet:

Per FactSet:

1) “The number of companies going public on United States exchanges amounted to 33 in the fourth quarter, which represented a 6.5% uptick from the year-ago quarter (31 IPOs), but a 5.7% decline from Q3 (35 IPOs).” Aha, you say, a silver lining! Not quite so. “Despite the increase, this number was still well-below the average fourth quarter IPO count going back to 2000 (47 IPOs).“ And worse: “On an annual basis, there were 106 companies that went public on U.S. exchanges in 2016, which was a 35.4% downtick from 2015 (164 IPOs). The number of initial public offerings in 2016 marked the lowest annual count since 2009, when the number was 64.” 2009?! Wasn’t that the year when the world was crumbling to bits around us? Yes. And 2016? wasn’t this the year when Obamanomics celebrated miracles of labour markets recovery and stock markets indices heading for all time highs? Yes. So something is rotten somewhere, right?

2) Yes, things are rotten. “Gross proceeds (including over-allotment) amounted to $7.1 billion in the fourth quarter, which was a 7.3% decrease year-over-year. On an annual basis, gross proceeds in 2016 represented the smallest total since 2003.” 2003? Was that not the year after the dot.com crash when the investors were still shying away from tech and general start ups? Yes. Which means something is really rotten.

3) Scratch deeper: “During 2016, there were only 13 VC-backed initial public offerings in the Technology Services and Electronic Technology sectors. This marked the lowest annual number since 2009 (4 IPOs).” Of the above 13, only one was in electronic technology and 12 were in technology services. Overall, technology services IPOs count in 2016 was the third lowest on record (since 2007). Technology Services IPOs total proceeds in 2016 were USD2.77 billion, down from USD6.6 billion in 2015 and the lowest reading since 2010

4) And for some more rotten tomatoes: “In Q4, the average first day performance of initial public offerings was 6.7%. This marked a decline from the average first day pop of 8.8% in Q4 2015 and a significant drop from the 18.8% in Q3… On an annual basis, the average first day performance of IPOs in 2016 was 11.7%, which represented the smallest price pop since 2011 (9.8%).”


5) Like it or not, VCs are now being forced to wait longer for IPO exits:

So things are looking pretty barren for traditional VCs. Which might be a matter of a cyclical swing or a structural trend. Either way, the glamor of Series A-Z unicorns is not exactly shining on the proverbial hill.