Post COVID-19 World: The Bullish Case for (early stage) VCs & Founders [Part 3]

RETURN TO PART 2 HERE

Applied AI Investment Thesis

The case for rapid adoption of Applied Artificial Intelligence across every sector remains valid, and if anything, the roadmap for adoption is being shortened considerably.

AI is part of the solution to fight COVID-19

Every day, we read about ways AI is helping fight COVID-19:

  • World’s Fastest Supercomputer Used To Stop COVID-19 (link here)
  • Autonomous robots use light beams to zap hospital viruses (link here)
  • A neural network that can detect coughing (link here)
  • Researchers use machine learning to discover coronavirus treatments (link here)

The Case for AI and Healthcare is Huge

Global venture capital funding in the digital health sector reached $8.9B in 2019, fuelled by the needs of an aging population, outdated infrastructure, and unsustainable business models and cost structures. According to Mercom Capital Group, $58B has been invested in the sector since 2010.

AI is driving major advances in diagnostics, drug discovery, trial efficiencies, mental health & wellness, quantified self, preventive medicine, continuous remote patient monitoring, intelligent prioritization. AI is also creating new models that will help redesign our healthcare systems of tomorrow, bringing instant diagnosis/testing at home or the nearest point of care, remote consultations, delivery of drugs, compliance, and providing doctors and drug companies with real time feedback loops. Last year, $4B was invested into AI and Healthcare companies, up from $2.7B the year before. We expect this number to stay flat or increase in the next 12-18 months as investors see the opportunity to benefit from an acceleration of digital health technology adoption as the world tries to better prepare for future health care crises like the one we are now experiencing.

Swift Legislative & Privacy Protection Changes

Governments are taking swift action to authorize or channel the delivery of new technologies and services to the people and organizations that need them the most. These changes in policies should help shorten the path to market for startups and their innovations. (e.g., EU Privacy Guidance for COVID-19 Data Processing, FDA Guidance on COVID-19 drug trials, etc.) 

Governments, like every corporation,  will need to digitalize their services and adopt new technology much faster in order to streamline their services and make them more efficient, scalable, and resilient. According to McKinsey research, this is a $1T annual market opportunity worldwide.

At the same time, western governments will need to find their (and their citizens’) own comfort levels with respect to monitoring policies and privacy protection. As Yuval Noah Harari said in his recent article in The Financial Times, “this storm will pass, but the choices we make now could change our lives for years to come. […] we face two particularly important choices. The first is between totalitarian surveillance and citizen empowerment. The second is between nationalist isolation and global solidarity.”

Several Other Sectors are Set to Thrive

Other sectors benefiting from Applied AI technologies are also expected to see an accelerated adoption curve, including industrial automation/autonomy, autonomous vehicles, cybersecurity/privacy protection, enterprise software collaboration/productivity, education, entertainment, foods, etc. With global experiments such as “Working from Home” and “Remote Tutoring/Schooling” involving millions of people, along with manufacturing site closures, transportation disruption, and people seeking new and interactive entertainment from home, it is hard not to be bullish on early stage venture investment leveraging Applied AI in any of these sectors.

The Digital Transformation can no longer wait

According to Wilshire Associates, $7.3 trillion in value has been removed from the total stock market since the February 19, 2020 high (which includes small and mid-sized companies). Corporations around the world moved from DEFCON 5 to DEFCON 1 levels in a matter of weeks. Boards around the world are asking their CEOs to implement immediate and far reaching digital transformation measures TODAY, and commit capital against it NOW, to ensure their survival. This transformation is no longer a “nice to have”, and “innovation theater” is no longer acceptable – time has run out.

On the bright side, 10 years of bull markets have provided significant cash reserves to corporations in the US and abroad. As of November 2019, the US cash reserves of US Corporations, excluding financial institutions, was expected to reach $1.5T by year end 2019, according to Moody’s

We expect corporations to use this accelerated capex/refresh cycle to “leapfrog” the traditional software vendors and adopt (and in some cases, acquire) startup developing AI-software/solutions.

A 2019 CIO survey from Sapphire Ventures stated that over 80% of CIOs are investing in AI and ML innovation today:

And that nearly 70% of them would rather trust a startup with AI/ML technology than an established player/vendor:

This will not only fuel revenue growth for AI startups, including those in BootstrapLabs’ portfolio, but it will accelerate the “build, partner, or buy” decision framework used by corporations as they rush to accelerate the digitalization of their day-to-day operations and seek to acquire talent and new products via strategic M&A deals.

Conclusion

Overall, I remain bullish on venture capital as an asset class, and especially early stage venture investing.

I am concerned about the failure risk of certain early stage companies that have strong long term value-creation potential, but may have gotten caught at the wrong time in their fundraising cycles, or have simply been overwhelmed by the sheer scale and speed at which this Pandemic has shut down the world economy.

Being an optimist though, I remind myself that most startup founders are used to operating under high levels of uncertainty, are capable of making quick decisions, are able to listen and adapt to the world around them, can manage remote teams in their sleep, and therefore, are much better prepared to survive this crisis than large corporations.

The worst stock market corrections may be behind us (since stock markets tend to already anticipate the future based on all known information today), but the health care crisis has not yet peaked.

The impact of this pandemic will be felt for months post contamination peak, and will likely act as a drag to any economic recovery until we find a cure or vaccine (which hopefully will take months, instead of years). The world is likely to plunge into a recession, but I trust the US will be able to recover faster than other economies, and bounce back first, as it often did in the past.

If you are the leader of a large corporation seeking to accelerate your digital transformation and believe that the adoption of AI technologies will be a key driver of your future success, or if you are an asset allocator seeking exposure to early stage Venture Capital returns in the Applied AI space, contact us, and we will be happy to discuss our views in greater depth.

Post COVID-19 World: The Bullish Case for (early stage) VCs & Founders [Part 2]

RETURN TO PART 1 HERE

Exits: IPOs and M&A Landscape

Initial Public Offerings – IPOs

According to the Renaissance Capital research note of March 27, 2020, “The 2020 IPO market began with optimism and ended with the worst crash since the global financial crisis. 24 IPOs raised $6.8 billion, with as many as 20 companies forced to shelve offerings when the IPO window slammed shut in early March, as the focus of investors and policy-makers shifted to a post-coronavirus paradigm….Healthcare was both the most active and best-performing sector, accounting for half of all IPOs and averaging a 24% return, with drug development platform Schrödinger and health clinic One Medical performing well.”

Overall, Q1-2020 was a strong quarter, with half of the deals being Healthcare related, and biotechs driving activity and outperformance. It was significantly higher than Q1-2019, but lower than expected due to the Coronavius affecting the second half of March. As a result of the window shutdown, as many as 20 IPOs are delayed and await re-opening.

We can certainly expect the IPO window to remain shut until after the summer, which will exacerbate the issues for late stage private companies burning a lot of cash. They may need to seek another late stage private round, with significant downward valuation pressure. The window will eventually re-open, as it always does, with high quality companies leading the way, while others may seek an M&A alternative.

We can expect healthcare companies to continue leading the way in the IPO segment over the next few quarters, as the world starts to massively invest in healthcare solutions and infrastructure (see more below on the case for AI and Healthcare). Additionally, we can expect Enterprise Software to do well as corporations around the world seek to increase productivity by empowering their employees, irrespective of their locations (office or home), or reduce their dependence on employees all together. As Aaron Levie, the CEO of Box, said in a tweet on March 28, 2020:

As is always the case after a major market crisis, the bar will be raised and further scrutiny will be applied to companies going public. Investors will likely take a much closer look at supply chain resilience/risks and the capabilities of these businesses to cope with future pandemic-like disruption, remote working capacity, etc.

If the bar gets too high, it will further delay high growth companies from going public, and if Wall Street short-term investor views do not fit the companies focus on customer lifetime value (LTV) and acquisition costs (CAC), then it is likely that innovative, VC-backed, high-growth companies may seek alternative listing on Silicon Valley’s Long Term Stock Exchange.

Mergers and Acquisitions – M&As

Like the IPO market, we can expect M&A to pause as buyers start to look inward and evaluate the immediate and longer term implications of COVID-19 on their business. Deals in progress may also be delayed, as transaction value gets renegotiated, and synergies get re-evaluated.

Speaking with a former head of Global M&A deal at Google during the 2007-2008 Global Financial Crisis, he said “the company, despite being one most active acquirers at the time, did a complete halt of its M&A activity for a period of 6-9 months, but that was immediately followed by one of the most active M&A periods in the history of the company, with more than a deal per week for a sustained period of 12 months”.

We can probably expect a similar “wait and see” period from most corporations, but the smart one should start acquiring smaller tech companies and their teams that will be seeking safe-harbor. Beside the digital leaders of today (most of which were born-digital), most corporations from the prior industrial era have been failing to “digitalize” fast enough, or at all. These companies will be facing significant pressure from their boards and shareholders to “aggressively” invest in their digital transformation, and M&A will become a very valuable tool for them to acquire valuable technology and talent they have not been able to develop and nurture in-house.

With $1.5T on the balance sheet of US Corporations at the end of 2019, I fully expect an acceleration of Tech M&A deals, especially in the $50-500M range.

Additionally, buy-out funds were sitting on $760B of dry powder at the end of 2019 (a historic high) and debt financing rates are likely to go down as well.

Historically PE firms have shied-away from what they consider the highly priced technology (and mostly venture-backed) sector. But as technology (and especially AI/ML) companies start to  be perceived as potential proprietary margin enablers to transform their portfolio companies, PE firms may reconsider how they measure the ROI of such acquisition. What if such an acquisition could lift each of their portfolio company’s profitability by 10-40% – in addition to their financial engineering and management strategies? This would be a total game changer for the fund that could master this strategy.

However, buy-out firms will first need to manage the fact that many of their portfolio companies are burdened with debt, a model that significantly reduces a company’s operational margin of error. Many PE-backed companies could soon default on their debt covenants, sending most PE firms scrambling and slowing down their ability to engage in new investments or acquisitions for months to come.

According to research firm The 415 Group, 2019 saw more tech M&A deals than 2018 (3,640 vs. 3,617), but the total transaction volume fell by 20% to $461B as historical key acquirers such Oracle, Microsoft, IBM and SAP did not ink a single deals over $1Bn. These acquirers could come back with a vengeance in 2020, or new tech firms born in the past two decades could continue to take over as leading acquirers and displace older, more-established buyers.

The US should continue to attract the majority of M&A deals, as per the chart below, and it bodes well for the  Venture Capitalists that are backing these companies.

Not all M&A themes are created equal, and when it come to AI and ML technology, which is BootstrapLabs’ core investment focus, that theme has been ranking #1 in terms of priority for acquirers, and the volume has been growing exponentially (see charts below).

CONTINUE READING PART 3 HERE

Post COVID-19 World: The Bullish Case for (early stage) VCs & Founders [Part 1]

Early-stage venture capitalists are in the business of hitting targets most people cannot see. Our focal point is usually set 3 to 5 years into the future. We often discover a future that is already available today but is not yet evenly distributed.

This is why founders, like early-stage VCs, need to be visionaries and look beyond the horizon. Many people are struggling to think past tomorrow, especially when the present is uncertain, and the specter of recession looms with skyrocketing unemployment claims as shown in The New York Times recently.

Being born in the mid 70’s during the first oil price shock, I am old enough to remember working my way through several major crises including the Asian Financial Crisis (1997), the Dot-Com Bubble Burst (2000), 9/11 (2001), the Global Financial Crisis (2007), and now, the COVID-19 Pandemic. Today, I find myself managing and investing venture capital on behalf of financial institutions, corporations, and wealthy families (most of whom became wealthy as a result of entrepreneurial endeavors). Below is a chart that puts these crises, and their impact on the S&P 500 in perspective.

And here is a close-up of the 10+ year bull market we experienced, and the recent drop caused by the COVID-19 pandemic: 

While things always seem worse when you are in the midst of it and the lives of you and your loved ones get impacted, you need to remember  that humanity, and our economies, are more resilient than we tend to believe. Through innovation, solidarity, and leadership, things do get better, and often even better than they were before the crisis hit. These crises tend to reveal quickly and dramatically everything that is wrong, broken, or plain backwards in our society, and give us the opportunity to learn, and spring forward to rebuild a better world.

The scale and speed of this pandemic is unprecedented in modern history, but we also have the technology and knowledge to solve for it in unprecedented ways.

Impact on the Venture Funding Environment

Limited Partners

I recently spoke with the head of venture investment of a large public pension fund and the conversation went something like this: “Putting public markets and other asset classes aside, we are pretty comfortable with our seed fund allocations and believe they are in a strong position to take advantage of this market turn-around. This is something we saw in 2000-2001, and again in 2007-2008…we are more concerned with our later stage/growth fund allocations, as recent years have seen very high valuations, the IPO window is likely to remain shut for a prolonged period of time, and some companies have considerable operational loses, which they justified with fast growth…but that may no longer be sustainable.”

As illustrated by the chart below, the US seed stage market will remain the most attractive risk/return segment of the market.

This white paper  from Invesco explains why limited partners should consistently invest in the venture capital asset class, in up and down cycles, while this blog post does a pretty good job of explaining  that we are not in a recession following a global financial meltdown like the one we witnessed in 2007-08, nor are we in a recession caused by a war triggered by a shocking act of terrorism like 9/11, but that we are in a sudden global economic recession due to the consequences of a global health crisis.

While some of the indicators may have pointed to the end of the bull market for the past few months, the economy, job market, and other key indicators were not in the red before this health crisis. Once uncertainty (and fear-driven, irrational exuberance) are removed from the market, people will regain confidence in our ability to get this virus under control, and the path to a recovery will emerge.

I will focus my thoughts on the Seed and Series A stage in this post, since this is where we invest.

Seed Stage

Early stage funding is likely to suffer most in the short term as high-net-worth individuals and angel investors who flooded the market in boom years will retract from the market. Because of the level of noise pre-COVID 19, and the lack of traditional metrics to assess opportunities at that stage, we expect many companies that were funded (and probably should not have been) will not be able to secure additional capital and will fail (or find safe harbor in the hands of a strategic, or negotiate an acquihire), effectively purging the market. After the initial shock, we may see angel investors returning to the market like we saw in 2007-2008 as valuations get lower and they see a “good deal” for their money. Experienced investors, able to perform institutional level due diligence at velocity, will be able to secure great deals/value. A similar flight to quality will happen, and institutional seed fund managers like BootstrapLabs are well positioned to benefit from this “buy-side” driven environment.

Series A Stage

Several Series A stage venture firms raised a lot of “dry powder” in the last 18 months (e.g, Sequoia, Andressen Horowitz, Lightspeed, NEA, etc.), resulting in over $276B available for the best startups reaching that stage and beyond. We expect a similar flight to quality and only top teams and companies with demonstrated traction will receive follow-on funding. But this is not much different from pre-COVID-19 criteria (and BootstrapLabs’ portfolio companies have fared better than most in that area, as demonstrated by our current 48% conversion rate from Seed to Series A within a short 3 year period).

Here is a chart of the venture capital industry since the last Global Financial Crisis. The market has grown significantly since 2008, mostly driven by a bull market, lower returns in the public sector, delayed IPOs, and late-stage mega-rounds, which really  should be considered “Growth Financing” rather than Venture Capital as Mark Suster said in his presentation here.

Back in 2015-2016, BootstrapLabs was among the first seed VC firms to recognize the opportunity to invest in Applied AI technology startups that were solving large and valuable problems by leveraging recent advances in computing power, broadband, and the data explosion. 3-4 years later, Applied AI adoption is still in its infancy and continues to attract a growing portion of the venture capital deals, especially around enterprise/industrial automation, cybersecurity, healthcare, mobility, etc.

What about Corporate Venture Capital (CVC)?

CVCs have been increasingly active over the past decade of bull markets, and last year were involved in approximately 30% of all venture financing rounds.

During the Dot-Com Bubble Burst, CVC seriously retracted from venture investments, and most did not return until after the Global Financial Crisis. Since a large number of CVC still invest from their balance sheet, one of the first things corporations may do to preserve cash is to reduce their CVC budget or allocation. I would not be surprised to see a 25-30% pull back in the market, but the wiser corporations will learn from the past and stay active in this coming market.

Corporations  that did not have CVC programs in place before this crisis will likely need to jumpstart their efforts by setting up shop sooner rather than later, partnering with groups like Silicon Foundry, or finding (earlier stage focused) VC funds to work with via Limited Partnership Investments (usually a much faster – and often more successful – way to tap into specific sector of the startup innovation ecosystem).

CVC arms are a key component to accelerate knowledge and access to outside innovation, and will need to go hand in hand with M&A to accelerate a corporation’s transformation. For more information on how and why to set up a CVC, I would recommend my friend Evangelos Simoundis’ blog posts here

As a VC firm focused on Applied AI, we are working closely with our Corporate Limited Partners, as well as families that own large corporations, to ensure they stay at the forefront of the 4th Industrial Revolution.

CONTINUE READING PART 2 HERE

Collection of COVID-19 resources for founders / entrepreneurs

BootstrapLabs has been in touch with our portfolio company CEOs on a nearly daily basis and are fully committed to supporting them in every way possible. Here is a collection of advice and resources we are sharing with them, and other founders and entrepreneurs. We will continue to update this blog post as we find useful information. (Last update: 2020 May 18, 12:54pm PDT)

  1. Coronavirus: The Black Swan of 2020 – Sequoia
  2. World Health Organization – Coronavirus-2019
  3. COVID-19 Relief Resources for SMBs – Gusto
  4. Coronavirus Information and Resources for VCs and Startups – NVCA
  5. SBA to Provide Disaster Assistance Loans for Small Businesses Impacted by Coronavirus (COVID-19)
  6. A Coronavirus Update with Leading Health Experts and Business Leaders (3-20-20) – Goldman Sachs Podcast   – Slide Deck here
  7. What I’m hearing about venture right now – by Samir Kaji, VC/tech advisor, venture blogger, active angel investor, banker & friend of BootstrapLabs
  8. SBA Crisis loans may work for startups – plus alternative funding sources – Kruze Consulting
  9. COVID-19: Business Resiliency & Preparedness Center – TriNet
  10. STIMULUS PACKAGE: DISSECTING EXPECTED KEY PROVISIONS FOR FINANCIALS AND HOUSING – Cowen
  11. Startups and SBA Loans – Fred Wilson
  12. Database of Government, Public & Private Startup Assistance for Impact of Covid19
  13. Differential Ventures Announces a COVID-19 Grant Program ($10,000 to $25,000)
  14. CARES / SBA loans for funded startups – Kruze
  15. PPP Loan Program – Additional Interim Final Rules – Cooley
  16. Digital strategy in a time of crisis – McKinsey
  17. SBA Paycheck Protection Program (PPP): SBA Publishes Loan Forgiveness Application and Instructions for Borrowers – Wilson Sonsini
  18. Wilson Sonsini’s COVID-19 Client Advisory Resource

Geopolitical Implications of Coronavirus: Preliminary Insights

BootstrapLabs Special Advisor and Founder & CEO of FutureGrasp, Tom Campbell, Ph.D. and his team have published an article titled “Geopolitical Implications of Coronavirus: Preliminary Insights” that we thought was important to share with our community.

Executive Summary

Coronavirus will have major global impacts throughout 2020, scrambling geopolitical calculations and trajectories in multiple and unanticipated ways. However, at this early stage some preliminary guideposts and indicators are coming into focus that will enable a better assessment of possible impacts and likely future considerations. Economic disruptions caused by the virus are already underway and likely to grow worse. Political impacts are likely to follow with key implications for international security and the outlook for continued globalization. Coronavirus could affect every country, but key countries will initially stand out in terms of impact and possible responses due to their global role or the degree to which their population is infected. Certain international issues such as trade, migration, conflict, surveillance and climate change will also face a disproportionate impact from the spread of the virus and consequential responses. FutureGrasp is dedicating significant resources for clients to provide further insights and key recommendations as the crisis continues to unfold.

You can read the full report HERE.

BootstrapLabs at The World’s Largest Entrepreneurship Conference

EVENT:  TiEcon 2019 May 10th and 11th,  Santa Clara Convention Center

Nicolai Wadstrom, Founder and CEO of BootstrapLabs, will be interviewed live on stage at TiEcon 2019. Nicolai will share his story and explain how BootstrapLabs has become a leading Venture Capital firm in Applied Artificial Intelligence.

TiEcon is the largest technology anchored conference dedicated to fostering entrepreneurship. It has attracted over 60,000 entrepreneurs and professionals from over 50 countries in the past. Last year alone, there were over 5,000 participants from 19 countries.

TiEcon 2019 will focus on the hottest areas of innovation including AI/machine learning, security, FinTech, and digital health, in addition to hosting its flagship tracks on “entrepreneurship how-tos”, youth, and women.

Nicolai will be interviewed during a FIRESIDE CHAT on Friday, May 10th, from 3:00 to 3:30 pm. Join him and learn how BootstrapLabs selects, invests and supports the best Applied AI entrepreneurs.

This year, along with Nicolai, many other industry leaders will join the conference including Eric S. Yuan,  CEO of Zoom, Ashish Bansal, AI Leader, ML Engineering at Twitter, and many C-level executives from companies such as Adobe, NVIDIA, Salesforce, McKinsey, FedEX, Oracle, IBM, and many others.

To sign up for our mailing list, click here.

What most people don’t know about being a startup CEO/founder

Techblogs tend to paint a glamorous picture of how easy it is to raise a billion dollars in funding and build a startup. Reality is very different – it is hard work, a long journey and compared to a job, you are never really off the job.

quote-as-a-startup-ceo-i-slept-like-a-baby-i-woke-up-every-2-hours-and-cried-ben-horowitz-60-88-18

As a startup founder for 20+ years and counting, 10 years as an angel investor, and lately  a Venture Capital investor through BootstrapLabs, I have seen a number of interesting patterns in startup founder’s/CEO’s behavior.

One thing I think a fair bit about is the ‘obsessive’ behavior of successful founders that I advised and invested in for the past 10 years (and I see this trait in myself as well…).

Startup CEOs are working super hard, and not always at the office. They always seem to be preoccupied, which drives spouses and family members crazy sometimes.

It’s not that they are literally working 90+ hours a week in an office, doing work tasks such as coding, recruiting, selling, etc. Once they start to grow their team and begin getting traction, to be successful they need to shift into how to really drive the business. And they always need to be thinking about the next big thing, and how to get the company to the next level or stage of growth.

The reason for this is that startups are not really executing a business model, they are in search of a hyper scalable business model. And that search continues until they get escape velocity, die, or divest for other reasons.

So on the journey of a startup CEO you don’t have a quiet moment in your head most days, you are constantly thinking about your ‘baby’, and trying to figure out how to solve problems 24/7 around the clock 365 days a week (or sorry, I mean per year).

As I tell many founders that pitch us at BootstrapLabs, you need to surround yourself early on with a team that shares this ‘obsessive’ behavior to drive your startup forward. And your most important job is to find those people and make them excited about the being part of the journey.

So even when having dinner with friends, or taking care of the kids, or in the morning shower, the founder/CEO is thinking that to hit that $5 million annual run rate to raise the “A” round, you need to ramp up hiring of the sales force and marketing teams. And you need somebody that has experience in X and skills in Y. Or that a particular piece of the product is inhibiting the growth, or is not good enough to drive Product Market Fit, etc.

When launching a new startup: You usually start in a search & discovery mode – that seems to be all over the place for many of the people around you. But once you start to get data points and validation of what you do, you need to quickly shift into a very different approach that is laser focused. At the same time you need to stop every 2 weeks or so and question just about everything and make sure that your assumptions are still valid.

From early assumptions to Laser Focus: Once you have found what to zoom in on, your most scarce resource is actually neither money or time, but personal attention span – which is why most startup CEO’s go into a reductionist mode to create a clear focus on the most important things that need to happen to bring the company to the next level. If you focus on the right things at the wrong time, your company dies.

This is why there are a few key things you need to learn early on as a founder/CEO of a startup:

  • You need to recruit co-founders and team members that give you leverage (execute things independently better than you) – this will increase your attention to other things you do better.
  • Early on and for the core team, you need to find people that share your obsession & passion.
  • You need deep domain skills for the core things you are trying to do within the team, for everything else you need great advisors that can give you sharp insights a few times a month.

Because of the shift from discovery to reductionist mode, the early team is extra hard to build, as very few people are capable of shifting successfully between these two operating modes. In part, this is why it is so hard to find co-founders, since this prerequisite skill is so scarce.

After you have found a focus it becomes a tad easier, but you still need to build a core team with an almost obsessive drive to take things to the next level, and then work really really hard to become a Unicorn.

“No sleep for the wicked”

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

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.