Venutre Capital Industry: at the dawn of a new era

Venture Capital Industry: At the Dawn of a New Era

2015 has been a banner year for BootstrapLabs. During the past 12 months, we led our first Series A round in an exciting FinTech company, all our portfolio companies raised follow-on funding at higher valuation and we continued to expand our Expert in Residence team to support our portfolio companies.

We believe that technology is a driving force for positive change in the global economy, in society in general, and our daily lives in particular. We continue to be impressed by the talent and passion our founders demonstrate every day and look forward to continuing investing in disruptive technology companies that can transform the way we live, the way we work, and the way we connect with the world around us.

Many believe private companies are overvalued, while others think the next tech bubble is coming. At the same time we see that seed stage investments, where BootstrapLabs focuses, are more vibrant and exciting than ever (e.g., a $25K seed stage investment in Uber would be worth ~ $125M at the $40B valuation mark; even if you assume that Uber is worth $1B, it would still be an investment worth ~ $3M, or 125x the invested amount).

BootstrapLabs is “deep in the stack” alongside its founders day after day, driving the venture market momentum forward. Our global innovation discovery network, combined with our Silicon Valley investment and execution model, provides us with a unique vantage point on what is happening in every corner of the world. Here is what we are observing:

The HOT tech industry is attracting new, mostly late stage, institutional investors that need to invest tens of millions per deal to move the needle.

In 2015, over 566 deals were financed by investment banks, mutual funds, hedge funds, asset managers, and others, while 78% of the deals over $1 Billion have been lead (read priced) by non-VC investors.

Rounds into Tech Companies

Rounds into Tech Companies

Late stage deals are becoming more competitive and less price sensitive due to a combination of i) pent-up demand driven by lower public market returns and the relative rarity of such high growth private technology companies and ii) more financial engineering and deal structuring that aims at lowering the risk for investors, independent of valuation paid (e.g. preferences, ratchets, dividends, etc.) Arguably, these higher valuations are behaving more like “out-of-the-money strike prices” of call options rather than rational valuations driven by operational and technological performance. The chart below outline the dramatic increase in valuation in the later stage as well as the larger amount of money invested by these non-VC investors.

late stage private company median valuation

late stage private company median valuation

Median round size for mid & late stage startup rounds by investor type

Median round size for mid & late stage startup rounds by investor type

There are also NEW sources of capital targeting the Tech Industry via Equity Crowdfunding and platforms that are driving retail investors into the venture market.

Global Equity crowdfunding amount

Global Equity crowdfunding amount

As these platform emerge and private companies can do “public offering of private equity”, secondary market for private equity trading/exchange will gain momentum and importance. One big signal of such trend was the recent acquisition of SecondMarket, the leader in the space by Nasdaq.

Why are non-VCs investing in the tech space?

Startups are staying private longer prior to IPOs today, which means that private investors are making the most of the value from their investment during the pre-IPO period. Traditional public investors, like hedge funds and mutual funds, are starting to realize that in order to capture more value they have to move earlier in the game and start investing in pre-IPO rounds (Private IPOs). See this prior post from Ben Levy, Co-Founder of BootstrapLabs on How to Milk a Unicorn…

Also, traditional VCs have realized that they have to invest earlier in the cycle in order to maximize their investments and not become irrelevant themselves in a world that is changing fast.

Value is Captured Earlier

Because it takes a lot less capital and people to build a proven and scalable product/model, early stage investment has become the most important and possibly the most lucrative part of the value creation chain in our opinion.

late stage valuation

late stage valuation

Later, Access is King

Late stage investors will only succeed if i) they can identify outliers early and ii) they can win a seat at the table during the next fundraising round (hint: money is not enough)

These structural changes, combined with deregulation, have created a once in a lifetime opportunity to form and scale new ventures, as well as new VC firms to finance them. As shown by this recent research report published by Cambridge Associate, more than ever before in the history of the Venture Capital industry, newly formed VC firms have been able to invest and capture some of the top performing startups.

Yet, the opportunities for individual investors remains limited as the industry is shifting to a new model/structure. Similar to the situation with established VCs and hot startups, an individual investor better gain access to future hot new VC funds/managers now, because the best performing funds will have limited access for existing LPs and possibly no access for non-existing LPs in their future funds.

Quality vs Quantity

The number of startups created each year has exploded and will continue to grow quickly as the cost of building technology companies has decreased by at least 10x in the last 20 years, and success stories continue to be blasted across the media as a source of inspiration and validation. The problem will be to identify the good startups as the noise level continues to rise.

Early stage growth no longer signals long term success and the ability to iterate, build and improve your product has become one of the most valuable success skills in the tech space. At BootstrapLabs we excel at finding top talent, bringing them to the best ecosystem (Silicon Valley) and supporting them in their full-cycle “build-measure-learn” iterations.

Innovation is a constant requirement for corporations to remain relevant and it is a pillar of subsistence for our society. Tech innovation will continue to grow and generate outlier returns for the best VCs (and their investors) in the industry. As someone recently mentioned to us “VC is at a dawn of a new era”. Just look at these numbers:

  • 3.6 Billion unique mobile subscribers in 2014
  • 2+ Billion people connected on major social media networks (1.4B FB, 250M TW, 300M LNKD, 300M Instagram)
  • 120x faster online speed (6.7 Mbps US average today)
  • 243 million machine-to-machine connections
  • 50 Billion connected devices by 2020
  • $1.7 Trillion e-commerce spend

The total of all the Unicorn valuations today is worth about half the value of Apple. Some of them will go public, some will be acquired. Apple could actually acquire most of the Unicorns and still have billions in its bank account to spare.

The slow growth in the number of IPOs is a consequence of a historical switch and the growing importance of innovation. Companies need to invest most of their cash flow in innovation, while public market investors expect short term revenue first. Many startups are building for long term success, and if they go public too early they will be unable to maximize their innovation or opportunity. As Marc Andreessen said during a recent interview: “It’s not a tech bubble, it`s a tech bust”… many of the innovation and technology companies are still undervalued and we are strongly optimistic about the great future in front of us”. So is BootstrapLabs!

Venture Capital Disrupts Itself- Breaking the Concentration Curse

Venture Capital Disrupts Itself: Breaking the Concentration Curse

Please note this is a short version of the Venture Capital Disrupts Itself: Breaking the Concentration Curse report published by the Cambridge Associates. At the end of this blog post you can find the link to access to the original file.


 

Venture Capital Disrupts Itself: Breaking the Concentration Curse

The Old Wives Tale … Conventional investor wisdom holds that a concentrated number of certain venture firms invest in a concentrated number of companies that then account for a majority of venture capital value creation in any given year. Therefore, LPs seeking compelling venture capital returns should only commit to a handful of franchise managers. And those are precisely the managers that do not offer access. Thus, LPs are “cursed” and will never experience the differentiated return pattern offered by venture capital exposure.

Is Flawed. As the venture capital industry and technology markets have evolved and matured, however, more managers are creating significant investment value for LPs, with value increasingly created through companies located outside the United States and across a range of subsectors. Specifically, our analysis of the top 100 venture investments as measured by value creation (i.e., total gains) per year from 1995 through 2012, an 18-year period, demonstrated:

  • an average of 83 companies each year account for value creation in the top 100 investments in the asset class for each year;
  • in the post-1999 (i.e., post-bubble) period, the majority of the value creation in the top 100 each year has, on average, been generated by deals outside the top 10 deals;
  • an average of 61 firms account for value creation in the top 100 investments in venture capital per year; and
  • the composition of the firms participating in this level of value creation has changed, with new and emerging firms consistently accounting for 40%–70% of the value creation in the top 100 over the past 10 years.

In short, the widely held belief that 90% of venture industry performance is generated by just the top 10 firms (which our analysis shows was somewhat relevant pre-2000) is a catchy but unsupported claim that may lead investors to miss attractive opportunities with managers that can provide exposure to substantial value creation.

You can access the full Cambridge Associates report here.

Oracle and BootstrapLabs Insider

Oracle Inspiration Tour 2015: a morning with BootstrapLabs

As part of Oracle OpenWorld 2015 this week, Oracle France organized a 5 day “inspiration” tour of San Francisco/Silicon Valley for about 30 French corporate executives. After visiting some of our friends at LinkedIn, Lending Club, and Uber, the group spent Tuesday morning with BootstrapLabs at our San Francisco offices.

Ben_Oracle_InspSettled in with coffee and pastries, the group met with Ben Levy, BootstrapLabs co-founder, who spoke of his journey as an entrepreneur, our work at BootstrapLabs, and the economic impact of venture capital, and the unique role that Silicon Valley plays in terms of innovation, disruption and growth.

Ben2_Oracle_Insp

 

 

 

 

 

 

Oracle_inspThe executives from Alcatel-Lucent, Kering, Lafarge, Ubisoft, Société General, and other top French firms, had plenty of questions about how the changes we see here in Silicon Valley will affect the large corporations they run, with concerns about mobile apps, SaaS, financial systems and customer relations leading the way. Ben shared some facts and figures, as well as concrete examples of why collaborating, innovating and adapting to the changes that we see firsthand here in Silicon Valley are crucial to global companies.

 

As the event concluded with presentations from five startups that are working in the areas of transit, retail, collaboration, marketing, and sales, our visitors left to continue their tour and gather more inspiration.

Oworld2015

nicolai_lund

BootstrapLabs at Innovation Skåne – Advice for Swedish entrepreneurs

nicolai_lund

Lund, Sweden | Wednesday 21 October 2015

In a room full of entrepreneurs, BootstrapLabs founder Nicolai Wadström shared his thoughts on Silicon Valley unicorns, and the speculation of tech bubbles and overvalued startups. He reminded his audience to focus on value, and the fundamentals of the companies being touted as Unicorns.

Read more

bulldog-on-ice

M&A pace down in 2013, is Venture Capital cooling down?

bulldog-on-iceVenture capitalists sold only 388 companies via mergers or acquisitions last year, according to data from the National Venture Capital Association, Thomson Reuters (our own BootstrapRadar is showing similar stats). It is the lowest such total since 2009, and nearly a 23% decline from 2012.

Does that mean that the VC industry is cooling down? Most likely not…

The IPO market was very strong in 2013 and VC’s really try to maximize the return multiple vs quicker exits, and the mindset across Silicon Valley is pretty optimistic and many of the top companies either went public during 2013, filed to go public or is expecting to go public within the next year or two (this includes well-known names such as AirBNB, Box, Dropbox, Square or less know Enterprise companies that are performing really well, but more under the radar of the Startup blogs, Palantir etc).

What we are seeing right now might actually mean that the top performing VCs are selling fewer companies than in the past few years but they may actually be generating higher returns (multiples).