What is the capital markets environment for startup tech companies?
I think these two charts tell most of the story:
Seed and Series A is more or less healthy. Series B is getting overheated. Series C and beyond has gone crazy.
Public markets are rational. Tech stock performance has been strong but is driven by strong revenue growth and good business fundamentals generally speaking.
The disconnect is entirely between the late stage private markets and the public markets. That’s where things are unstable.
Those are great charts Fred. Basically companies which get to Series C and above and are $100 million plus are taking care of extra money in the ecosystem to stay private another 2-4 years in hopes to get super big without the watchful eye of wall street. Not actually a bad move in many cases. The difficulty is many of these will not be able to exit into the public markets, and if they wait 2-4 years att that point they can sell less of the “vision” and instead have to sell “the reality of the numbers”. Will be a lot of down exits I think in terms of M&A at lower rounds their valuation of some Series C & D Really fascinating article that backs this up. Top quote in my opinion. There are 588 “IPO” track companies, defined as real / rumored valuation over 100 million. Considering I saw elsewhere ususally around 30-50 tech based IPO there is a big mismatch, and I am not sure that public markets will change that much, so … http://www.geekwire.com/201…
Have to disagree with one of the statements in this post “Public markets are rational”… this is just not true. Public markets are as schizophrenic as the market we see in the technology sector. At the least the technology sector or VC Series B thru E funding has a potential of coming true. I am not saying the valuations are rational, I am saying that if we believe in the Power Law, it does not seem that crazy but again what do I know. We just don’t understand compounding or exponential systems, this is another example of that.
I’d offer an opposite viewpoint on that. Public markets price in all information immediately. They are rational. We might think that a price is out of line-but there are no risk free arbitration opportunities in public markets-unless you have an information advantage or some other sort of advantage (speed etc). Fama is right about EMH, and the data backs his theory up.
not going to get sucked into this debate. Everyone has opinions and views, just like we all have body parts.
Yes but individual small investors in markets are almost certainly not rational.
It doesn’t matter if some small investors aren’t rational. In the continuum that makes up supply and demand for markets, there are not enough +3 std deviation investors in the market to affect the rationality of efficient markets.However, the big gains are made by investors that you might consider irrational-or contrarian. Contrarian is a better description because all investors in the market are looking to maximize gains, even the ones that others perceive as irrational.To Fred’s point in the charts-might we consider the later stage investors “rational”, and the seed ones that make bets on startups irrational since most of the time seed stage startups fail? However, where are the big gains?
100% defer to you on anything related to markets as I don’t put money into anything that I don’t have an edge, or fully understand, or can improve, or control.  My Dad did well in the markets as a small investor. I remember in 1987 that he was being interviewed on TV after the crash (“man on the street”) showing up at the local broker office “looking for bargains”. By then he was retired and it was a full time job for him which he enjoyed to keep on top of the market. He died when the market was at about 17k. I remember thinking and telling my sisters and my mom “we have to sell everything”. The way estates are we couldn’t do that of course. By the time we could sell, the market was at about 18k. Lucky break I guess.  I remember when the market was 16k I was talking to an old time investment adviser who was going to rent a property that I owned. Old salty guy and he said “yes now is the time to sell”. I bought stock 1 time in the last 10 years when I dated a girl whose brother ran a small hedge fund. They were betting on Yahoo getting bought. He was asking me all sorts of questions (since he knew little about the Internet). I bought about 35k of Yahoo stock and lost money. That was good since it confirmed what I already knew that I didn’t know and also reinforced that I should keep away from anything like that. I wouldn’t have regretted selling at 17k at all because I felt that there was more of a chance of going down and price correction than in going up.
The average investor that works for a living cannot beat the market. They are better off buying a no load mutual fund that replicates the S&P-putting in the same amount of money every month.Your father was a student of the market-and if he were alive and we spoke with him, I am sure he’d say something like “I am assuming more alpha-feel confident based on all the research I have done to buy this individual stock.”But, the way to make a bunch of money is assume a calculated risk and put all your eggs in that basket.
Statistical outlier. No way repeatable. Point to Peter Lynch, etc. For the gross majority of people, they cannot beat the market. http://www.forbes.com/sites… BTW, most of AQR’s assets are in funds that replicate an index. They allocate a % of capital to riskier trades to get outsize return.
Is it possible that public markets factor-in a certain worldly reality that private markets just miss as they extrapolate to infinity (being perhaps blinkered towards tech. and diverse cultural adoption risks)Take Uber – public markets understand that in France Germany and UK for example an Uber ride is low quality vs a typical courteous licensed “knowledgeable” ride. (There are exceptions)Private markets are a bit blinkered and live “before the chasm” and may assume that what works at home or in the Valley can be exported and no-one will notice,This has certainly been the case amongst some of our very well-funded competitors where they have had to retreat from well intentioned but ultimately naive business modelsExample – Do any AVC readers really feel “engaged” when they log onto their energy utility web portal – Do you? I mean *really* ?
“Take Uber – public markets understand that in France “I don’t know about Germany nor UK. But if the recent violent protests proved anything, the French taxi system is bleeding.
Yes but it is the Uber managers who have been arrestedWas that in their pitch deck ?
Yes but it is the Uber managers who have been arrestedAll the negative events that surround Uber is bad for the people on the front line that are experiencing them (get arrested) but they are great for Uber. All free super valuable publicity. The value can’t be underestimated.All startups should be so “lucky”. You can’t buy advertising like that.
Very fair point.However – I would go back to the idea that regulatory freedom / cultural attitudes etc in one context cannot necessarily be extrapolated over borders (Uber are simply an in your face example).Same could be said for assuming you can run an app behind a Great Wall rather than a Garden Wall eg in China (were censorship ! = publicity)
Maybe. But Uber’s only real asset is their brand. Dramatic public controversy can turn unknowns into knowns. But once they are known, I think that stuff slowly erodes brand value. Here in SF, Uber once had a very positive brand, but the drumbeat of negative stories has turned a lot of people against them.A company like Comcast can survive a strong negative brand because they have an enormous amount of infrastructure that is hard to replace. But the switching cost for an Uber customer or driver is pretty low.
Uber is a brand but more importantly it provides a valuable and compelling service. So they definitely have the ability to be a “bad boy” more than another brand which is more fluff than reality. (Let’s say Coach handbags..)An example of this might be the way that in the past (not currently) Apple could do some pretty screwy things (cancel products for example) and people still stuck by them. Because they provided value to those that perceived them that way. And of course people think google sucks in many ways but you can’t get beyond the value the search engine provides.I happen to like Porsche as a brand. As a result I am willing to put up with a great deal of negative before abandoning it for another brand always giving them the benefit of the doubt. The desire is that strong.I am not saying that Uber is Porsche or Apple. However I get the impression that they are way better and more available than the alternatives and also I don’t think that everyone who has heard of them has used even them. So each additional point of PR gets them one step closer to making someone stop taking a taxi cab.You could be right of course these are just my thoughts.
UBER protests and court proceedings are happening in many cities around the world, but UBER is bulldozing through them.
You think they will be successful with the Cal 1099 challenge? In essence all of the drivers are employees by the letter of the law. The law will need to change for them to continue the model.
I think “taxi” in Europe and in the US means different things. I was amazed that US taxis are rickety cars, with a driver who spoke worse English than I do, and knew about as much about the town (= nothing).French taxis are courteous, reliable, knowledgeable, nice… Overpriced too for sure (costs me 1/4th to go to the airport of what it costs me to fly to Canada), but you’d never confuse a French taxi for a New York one. I think they’re more like your limos.
Fitbit pushed the right buttons. They were able to maintain their IPO surge without giving it all back and then some. Is it just that they are making money or did they avoid others mistakes in valuation? What did they do right?Valuaioni is an art form not an exact science and it’s tough to turn down insane ones.
Fitbit lists with a $4.1b val, then the sp doubled. Is a company that made $132m in profits worth c $9b?
Well, can be said for most tech cos
Two words for these two charts:Speed Kills.Speed is what started the previous crash. Everybody wanted to accelerate everything, – investments, returns, hype, etc.
Back in 2009, a finance industry pal told me about one bank, I think in Southern California, that avoided much trouble in the crash. When the CEO was asked what his secret was, he said, “If it grows too fast, it’s a weed.” That’s always stuck with me.
When I first looked at your surname, I thought it read Petri. That made me LOL.Great line.
Warnings everywhere in the industry. Did you see Josh Kopelman’s LP letter?”We don’t have a crystal ball — and we can’t forecast the future — but we do have a calculator.”www.scribd.com/mobile/doc/2…
What a great line “but we do have a calculator”
what’s a calculator?
I hear the abacus may be more helpful? …
put that thing away. I offer you the philosopher’s stone. And it may even account for the missing zero on your abacus.
School children in my neighbourhood still learn how to use a suanpan as an aid to mental arithmetic — essentially they visualise the the suanpan. The speed at which these kids can mentally divide large numbers has to be witnessed to be believed.
Ring courtesy of the Chinese circa 1644.Bracelet = here’s at ya, Pebble / Samsung Gear / Fitbit / Apple Watch!Haha.
It’s this new app that raised a $50M seed from a16z.
It’s the next best thing to a crystal ball.
The “disconnect” between the charts can easily be explained with a simple sentence:The highest quality private companies are avoiding public markets due to regulation and the resulting emergence of late-stage pseudo-IPO alternatives is taking the action.I’m not saying your conclusion is wrong, but I don’t think the two charts necessarily prove it.
You don’t think that greed and irrational thinking have something to do with it?
Impatience more than greed is the issue.
Yup. Speed kills.Greed and speed are a recipe for disaster.
I think times are so strange with the liquidity that markets are awash in that traditional assumptions of the horse race between greed and fear may be out the window.This sounds counter-intuitive, but fear can be driving this just as much as greed….FOMO. Add in the ability to structure terms/preference that provide recovery of investment even after lower valuation exit event happens.Sometimes you buy out of greed AND fear. Not Greed Vs Fear.Irrationality….like Keynes said – “Markets can remain irrational longer than you can remain solvent”. So, there’s that…
Hey, @pointsnfigures, naive question related to “fear”: could there be there a VIX equivalent for private markets? Would it be interesting/useful?
I don’t think there are enough data points. Look at the drop in 2012 for series D vs. the rest. The explanation would be sample size is not large enough the way I see it. (I could be wrong but that is my take.)
Thanks! It was a half formed thought…(mine, not yours!!!)
Welcome to be proved wrong, but my understanding is the VIX is based off of option pricing (not sure if puts or calls), and thus the higher the VIX roughly or through some formula / index corresponds to it being more expensive to own options. Without publicly traded stocks I can’t think of any conceivable way to have options on those stocks but logistically and within the SEC / regulatory framework
Thanks Matt. And I was only thinking — before fully loading coffee — of VIX as the “fear index,” (to @girishmehta:disqus’s point about fear) and wondering if one could impute/derive/calculate a fear index for non-public companies.
I do like the idea of a private market fear index. something along the lines of number / amount of LP funding to firms, number of new ones vs. old ones, follow-on % of fundings for firms by stage. That would give a good idea of how all the major players (LPs, new and old investors, and how venture funded companies are doing). Also, maybe an even better metric would be amount of funding and number of new and existing angels. I mean, VCs are always going to spend LPs money (never heard of a firm shutting up shop and stopping taking the carry 🙂 ), but when angels whose net worth is on the line tighten that at least should give sentiment. Now actually calculating that would be harder than the financial value it would provide I think, but would be cool nonetheless
I can tell you with certainty that neither of those are limited to private markets.
True. But the nature of private price discovery will exacerbate those tendencies relative to public markets.Its the Winner’s Curse.
True, but the scope and potential negative impacts are way higher in those late stage private market situations.
These are still small investments (as a percentage of the notional value of a large institutional endowment et al.)
agree. They barely matter at all in the grand scheme.
Plus fear of missing out.And jealousy.The other thing is this. In any buying bubble there are times when people view the market as being overheated and decide not to buy and not to invest thinking that they are smarter because a fall is imminent and they will dodge a bullet.Then they see the market go higher and they think the same thing and still stay out. Then it happens again. And again. At some point they think maybe they are wrong or being to cautious, become jealous, and fear that they will miss out. They still think there is a bubble, but they feel that they can and will be able to time the market. On one or two occurrences they might actually be able to even do that. However, over the course of time, just like with gambling, they will probably lose. But short run anything is possible.I actually experienced a bubble recently among the chinese buying what I have to sell. Made a boatload of money (and I do mean a boatload you would plotz). It was amazing to watch the bubble run over the course of about 3 months.  From a sellers perspective it’s great especially when you have about 20 years experience recognizing what is actually happening. There were many buyers but one person in particular who bought the most product was in his early 20’s. The more experienced buyers bought but they for sure operated differently. Was an amazing experience.. 3 months represented about 4 years of typical business.
Another difference between VC and public markets: if you run a hedge fund and hold shares of Facebook, that doesn’t impress anyone. But if you run a VC fund and hold a stake in Uber, it does. So maybe some VCs are paying up to get into late rounds of hot startups for the signaling value.
Even in seed, some people are trying to get into deals to put the company logo on their website.
Of course…but again this isn’t limited to private markets. Window dressing has been around for decades.
But if you run a VC fund and hold a stake in UberAgree that the tombstone value may be worth the “vig” for sure.Having marquee clients or even legitimate associations in any business can be extremely important in attracting other fish that can be hooked. It is of course hard to say at what point that value isn’t worth the money that you are paying … it’s a fuzzy line.
Do you think that it could be the cost to go public and the easier path to raise money? Opportunity cost to go public versus staying private-along with the pressure on public companies to hit quarterly profit targets also keep em private.
Yes. Regulation = cost
Another partial explanation for the disconnect is the ratchets that the late stage private valuations have vs. public companies. Options have value (although I don’t think enough value to explain everything)
That’s all very true. But the valuations aren’t comparable. My bet is Zenefits gets $500mm valuation as a public company but does the round privately and gets something like $2bn or $3bn. Maybe it grows into that valuation. That’s certainly the expectation
The valuations aren’t comparable because the stock classes aren’t comparable. I’d pay $1T valuation for $AAPL if I was first in line to get any dividends/liquidation until I got my $$ back…
Yeah, have made this point repeatedly on this issue. You can’t compare (or shouldn’t) an investment with a 1x or more liquidation preference with common shares. The preference itself is worth 20-30% and you can argue that the preference is worth a lot more the higher the valuation. ie. if a stock would be worth $500MM in public markets, and an investor invests at 1B vs. $600M then the investor at $1 billion really owns a very “deep in the money” put option in the downside. Would actually be interesting to try and apply black and scholes model to get rough estimate of how much that liquiduation preference is worth
You have to ask yourself, at this point, if Uber’s losses exceeding revenue makes it an attractive IPO candidate.They are the best brand in mobile, but do they need to revolutionize all aspects of local transportation before they make any money as being cab hailers?I always understood that Amazon could prove they were profitable if they would just stop pouring the $$$ into new stuff.
The higher up the investment chain, the further away investors are from using the product and knowing the team which affects the erratic gaps.
I wish I could upvote this 100 times to get you to the top of the page.Very, very true.
How much of this can be explained by terms? In private markets, late stage investors with a one time preference might require a company lose ~90% of its value before they start to lose money. And that is before dividends and other types of conversions that happen on some of the more complex transactions.I don’t believe this happens in public markets.
Yup. But, even seed valuations are creeping up. First Round put out a letter to their LP’s that stated “seed valuations are up 20% YoY over the last ten years”. I think a resetting of expectations would be good for the entire market.The stock market is awash in cash. Central bankers have really created a big mess. We will see how the market sorts it out.
The market pounds these guys when they go public with huge valuations.
Yup, agreed and it takes a special management team to avoid thinking quarterly. But, since a lot of the unicorns haven’t gotten a path to profits yet, it’s hard to buy em. Are you selling puts in Box, Twitter to get long? Or selling calls to collect premium that is virtually guaranteed since they act so piggish?
Which market?Does having a secondary market means that they may never IPO?
I meant the Public Markets and IPOs. Staying private longer with excessive valuations gives you other problems when you go public. Being public still has has the benefit of expanding who owns your stock.
20% over 10 years is 1.8% CAGR, hardly a bubble.
It says 20% YoY, Einstein
Einstein and Gauss discussing math right here in the AVC comments?? WTF
What is driving this? Desire of later stage vc own as much as possible? Lack of capital efficiency? Secondary? Large fund sizes needing to deploy capital? What is the explanation?
Bil Gurley from Benchmark has a great post about the late stage (Pre-IPO) rounds that explains part of the disconnect with the public markets:Investors Beware: Today’s $100M+ Late-stage Private Rounds Are Very Different from an IPOhttp://abovethecrowd.com/20…
Great summary. And this? “Consider the case of Fab.com. In a February 6th article in Business Insider, Allyson Shontell discovered that a mere four months after adding $150 million to a total of $330 million in invested capital, the founder and CEO disclosed to its employees that “we have spent $200 million and we have not proven out our business model.” I thought that was what Series A was for? How do “sophisticated investors” miss this on every round?
At late rounds, It’s not like main st money is at risk. The risk for institutional investors seems in line with potential rewards.The people at risk are underperforming VCs more than than institutional money managers?
Is it fair to say that this makes it undesirable to go public?In other words, most startups going public are more likely to fall flat entering public markets.
Check out your man Ben Evan’s review of this data https://soundcloud.com/a16z…
These charts exemplify inherent problems with our equity markets. These later stagecompanies should be public. They should be appreciating in the retirement accounts of the investing public and not in the hands of a few VCs. The chart comparing Intel’s 1971 IPO toAlibaba’s 2014 IPO contained in the post found at http://wp.me/p4mVBT-Qspeaks volumes. In conjunction with vibrant venture markets, Reg A+ couldbridge the small cap IPO gap benefiting both VCs as well as the investingpublic. Not many people realize this but Reg A+ also expands well beyond equitymarkets and can and will be utilized to engineer a number of financial productsbringing both yield and growth back to retail investors’ portfolios. You canlearn more at http://wp.me/p5VVAz-68
We have short memories, 20 years ago, it would have cost 100 million just to get Uber started.Returns will be lower in late rounds because there is less risk not more.
Really interesting data. It’s amazing that Nasdaq is up 7x, even though TEV/Rev is pretty constant. Late stage companies are only up 60% higher ($130 in 2014 vs $80 in 2006).Are late stage valuations is actually lagging the increases of public tech companies?
Poker vs. Craps. Caveat Emptor. Greater accountability yields greater comfort.
I’d love to see a similar chart that looks at risk adjusted valuations based on the preferences and downside protections being baked into a lot of the late stage deals. I suspect it would still be way out of whack but probably much closer to where the B rounds are falling. The T.Rowe Prices of the world aren’t really confident that Air BnB is worth $25BN, they just need a place to park capital and are confident that with their downside protections they will have a shot at upside and almost no downside risk.
I’m curious if there’s any similar info to the first graph but showing the median rate of return between rounds. I doubt it’s the case but the changes in the first graph could be explained by companies taking longer between funding rounds while having the same growth rate.Info about the number of companies going through each round would also be useful to correctly interpret the first chart. By itself it’s impossible to distinguish if there is an increase in the total money being invested in later rounds (increased supply) or if investors have changed their behaviour and are making fewer, larger bets in these rounds.
One of the many benefits of being a serial founder/operator is that your entry point is always down there on that lovely $0 line – the only valuation line on your graph where bubble risk is zero!
What’s the expected return on equity for late-stage private investments vs public markets vs debt financing costs? As an entrepreneur, that’s what I am curious to know. My perception is that late-stage private equity financing has always been much more expensive than the other two options. What has changed now?
I’m confused. Public market valuations have increased from 2x to 7x since 2009 in your chart (250%) and private late stage valuations from $50 to $130 (160%). Public multiples have even increased more than 160% in your chart. I’m not seeing how these charts justify the argument. In fact, I feel the downside on Uber, Pinterest, Airbnb, etc. is far less than the downside on the Series A investments as well. I’m disssenting a wee bit on this argument. Investors are plowing their money into the 18th on demand local organic dinner startup (good luck with most of those), and I’d bet my money on most of the frothy later stage companies over most of the new Series A companies… especially risk adjusted.
I’d love to the averages broken out by sector or business type. Social media and content businesses vs. hardware and heavily regulated verticals (edu, health, energy).
One thing that I would point out about the first chart. The relative change since ’06 is similar across the series and worst in Series A. Just eyeballing the data and converting it to “Percentage of ’06 levels” it looks like the attached chart. It’s actually Series A that has moved the most.When you say “Seed and Series A is more or less healthy. Series B is getting overheated. Series C and beyond has gone crazy.” – is it just because of the absolute deltas? By JoshK’s math (only 2 numbers matter: entry and exit) seeing these move in concert would be “expected behavior”?
Terrific insight Tim.Its a bit like PubCo stock splits, no? Designed to have an absolute number that keeps folks from freaking out?
Yeah, agree. Love this chart.Mind sharing the absolute numbers you used? Or did you pull this directly from some source?
I just eyeballed the numbers from the original chart provided. I’ve attached the values I came up with from that.Obviously the smaller values are likely off by some random factor – where I saw 8, the actual value might have been 9.5 … but the values should be directionally consistent.
Thanks!I actually went and got the numbers for 2009 on, so I can share them if interested. Haven’t gone back to get the ones earlier though.
Do you have the same graph for private financings where the pre-money is <$1BB over the same time period? My gut tells me the trend will persist, but will be even more exacerbated.It’s amazing how later-stage companies, like Uber, can continue inflating to ~$50BB simply by finding product-market fit and expanding rapidly, while very real, external risk factors such as regulatory risk (i.e. France) and geo-political risk (i.e. China) are often dismissed.IMO, this is where the current “bubble” gets bubblicious. These aren’t Seed or even growth stage companies being over valued by $10MM-$100MM. These are “unicorns”, rapidly maturing companies who have not been in-market that long, and are not exempt from meaningful uncertainty when it comes to external risk factors which position them to lose BILLIONS in market cap in just a few short weeks.
https://soundcloud.com/a16z… interesting discussion on the topic between Andreessen and Fortune reporter
Why do you say seed and series A look more or less healthy? We are not going to judge the jump up in absolute amounts, right? We gotta look at the %increases?It seems like:series A graph went from $7M to $19Million—> 271%series B graph went from $22M to $39Million —> 177%series D+ graph went from $80M to $130Million –> 162%If anything, this data suggest series A is crazier and definitely more frothy than later stages.
Public markets are rational. Tech stock performance has been strong but is driven by strong revenue growth and good business fundamentals generally speaking.The disconnect is entirely between the late stage private markets and the public markets. That’s where things are unstable.————————-It really depends on the company. Of the largest, most successful web 2.0 firms (Uber, Snapchat, Dropbox, Pinterest, Air B&B) the fundamentals look good, The smaller companies are much more sketchy & speculative, as you would expect.
What is the compensation structure for the VCs (or institutional investors) involved in these huge private rounds? If it’s 2 and 20, does that mean they’re getting 2% off of an asset base that’s inflated by artificial valuations? Even more pertinent, are they paid out on the 20% side only after a gain is actually realized or is it just mark-to-market?Basically, how much money are investors actually taking home right now from these insane valuations? If it’s all paper money, wouldn’t those early stage investors be pushing for an IPO / some realization of gains?
Usually 2/20 or some variation thereof. The 2% is only of the deployed capital, so valuation does not really matter unless the fund’s check sizes increase too. The 20% is only distributed after a liquidation event and thus the valuation increases in the private markets do not matter (unless the VC sells shares in a secondary transaction but I’d guess this is extremely rare).
I’m interested to know if the “multiples” for the various stages of VC funding have changed dramatically. Valuations when looked at in a vacuum mean very little for an outsider with no insight in to the data from these companies. Are the seed stage companies that seek higher valuations now more developed than the same companies 8 years ago? Do they have higher revenues and/or more traction?First Round’s argument is hard to follow for outsiders without any data. If the seed-stage companies now are truly comparable (e.g. same revenue and traction, I’m surely missing other factors) to the ones in 2007 and valuations have simply soared 3X, that’s truly alarming, especially considering 2007 was at the peak of the previous bull market. This seems quite hard to believe.I don’t think there’s any quantitative data on this (and even if it most likely wouldn’t make sense) but what is the general sense among insiders? Are seed stage companies raising money in 2015 more developed than seed stage companies in 2007?
Couldn’t it be partially because late stage rounds aren’t equilibrium market prices? Basically whoever has the most “demand” sets the price in a private round? That’s the problem with Private-IPOs: they don’t establish a market clearing price, but instead merely represent the highest “nose bleed” valuation the company and/or their agents can find. Whereas in a classic IPO there is always “tail demand” that would gladly pay much higher, but the market clears lower and that particular investor just feels like they got a good deal.