Are we witnessing a major VC pullback? Is it temporary? What does that mean for startups? Certainly the topic du jour in startup circles.
Here’s what I’m seeing.
IS THE PULLBACK REAL?
Yes. The market is a bit all over the place, not everyone fully agrees on what’s happening, and certainly a number of financings are still taking place. But the pullback is real and already starting to show in the data (CB Insights Q1’22 report).
My sense is that the current reality of the market is a lot worse, because deal data is a trailing indicator – financings are often announced months after they closed.
We’ve rapidly, perhaps brutally, transitioned from a hyper frothy VC environment to a world where many deals are not getting done.
Our most recent VC guest at Data Driven NYC, Mike Volpi of Index, has had a pretty amazing last couple of years, with three of his venture investments going public: Zuora, Sonos and Elastic.
Before becoming a VC, Mike ran Cisco’s routing business where he managed a P&L in excess of $10 billion in revenues, and acquired over 70 companies (note: probably a pretty good way to make a lot of friends in Silicon Valley).
A partner at Index Ventures in San Francisco, Mike invests primarily in infrastructure, open-source and artificial intelligence companies, so he was a perfect guest to have at the event. In particular, he invested in two prior presenting companies: Confluent and Cockroach Labs (in which FirstMark is also an investor).
We had a really interesting conversation about open source, AI and venture capital. Here’s the video below, and l have jotted down a few notes as well, below the fold.
Last year, Sarah Guo made news by becoming the youngest General Partner at Menlo Park firm Greylock Partners, and we were delighted to host her at our most recent Data Driven NYC.
Greylock is one of the oldest firms in venture capital, notable in particular for its investments in Facebook, LinkedIn and AirBnB. Greylock has also actively invested in the data ecosystem, including in a number of companies that presented at Data Driven NYC over the years: Cloudera, Sumo Logic, Trifacta, Instabase, etc.
Sarah is mostly focused on enterprise, SaaS and security investments, and we got into a bunch of interesting topics during this conversation.
Perhaps this is slightly strange for an early stage venture VC, but I’m fascinated by entrepreneurs who bootstrap their tech startup and build them into very large, industry-leading companies.
The odds of building a massive company are low enough for the lucky few that manage to raise tens (or hundreds) of millions of venture capital money but, now, doing it with no outside investment? That is a really hard way to do it.
It can be a really long journey, as well. In fact, for all the obvious advantages of bootstrapping (less/no dilution, more control, etc.), the main trade-off involved in bootstrapping seems to be… time. It just takes longer to build a product and get to early scale simply based on cash-flow (or a small amount of debt or founder money).
I tweeted this a couple of days ago, and it led to an interesting thread:
I spend a lot of time thinking about hype cycles, across industries (Big Data/AI, IoT) and ecosystems (New York).
Whether you use the Carlota Perez surge cycle (see this great Fred Wilson post) or the Gartner version, hype cycles convey the fundamental idea that technology markets don’t develop linearly, but instead go through phases of boom and bust before they reach wide adoption.
Hype cycles are a great framework for investors (and founders), because entering the market at the right time is both crucial and very hard.
For proponents of the Internet of Things, the last 12-18 months have been often frustrating. The Internet of Things (IoT) was supposed to be huge by now. Instead, the industry news has been dominated by a string of startup failures, as well as alarming security issues. Cisco estimated in a (controversial) study that almost 75% of IoT projects fail. And the Internet of Things certainly lost a part of its luster as a buzzword, easily supplanted in 2017 by AI and bitcoin.
Interestingly, however, the Internet of Things continues its inexorable march towards massive scale. 2017 was most likely the year when the total number of IoT devices (wearables, connected cars, machines, etc.) surpassed mobile phones.Global spending in the space continues to accelerate – IDC was forecasting it to hit $800 billion in 2017, a 16.7% increase over the previous year’s number.
Over the last few months, the usual debate around unicorns and bubbles seems to have been put on hold a bit, as fears of a major crash have thankfully not materialized, at least for now.
Instead another discussion has emerged, one that’s actually probably more fundamental. What’s next in tech? Which areas will produce the Googles and Facebooks of the next decade?
What’s prompting the discussion is a general feeling that we’re on the tail end of the most recent big wave of innovation, one that was propelled by social, mobile and cloud. A lot of great companies emerged from that wave, and the concern is whether there’s room for a lot more “category-defining” startups to appear. Does the world need another Snapchat? (see Josh Elman’s great thoughts here). Or another marketplace, on-demand company, food startup, peer to peer lending platform? Isn’t there a SaaS company in just about every segment now? And so on and so forth.
One alternative seems to be “frontier tech”: a seemingly heterogeneous group that includes artificial intelligence, the Internet of Things, augmented reality, virtual reality, drones, robotics, autonomous vehicles, space, genomics, neuroscience, and perhaps the blockchain, depending on who you ask.
Method 1: Start a tech company, drive it a multi-billion dollar success. Drop a few bon mots on Twitter to your robust group of followers, make visionary statements during your TechCrunch Disrupt fireside chat, and build a reputation as a helpful mentor to entrepreneurs. Then wait by your phone as major firms call you with General Partner offers. Or start your own firm.
Method 2: Welcome to the long hard slog. And read on.
Among all the excitement for the Internet of Things and the resurgence of hardware as an investable category, venture capitalists, many of whom new to the space, have been re-discovering the opportunities and challenges of working alongside entrepreneurs to build hardware companies. Below are the slides that David Rogg and I prepared for the recent Connected Conference, a great global event held in Paris. They’re a good snapshot of how someone like me thinks about the hardware space, mid-2015.
The venture financing path has evolved incredibly fast over the last 18 months. In this very busy financing market, what used to be a reasonably well understood progression from a seed round to a Series A to a Series B, etc. has now morphed into a more complex nomenclature of pre-seeds ($500k or less), crowdfunding rounds (especially for hardware), seeds ($1M-$2M, 6-9 months after the pre-seed), seed primes (an extra $1M or so, 12-18 months after the seed), Series A (now routinely $10-$12M in size, occasionally up to $15M), Series A-1, Series B, C, D, E, F etc. (as companies remain private longer).
The latest entrant in this rapidly evolving nomenclature seems to be what I’d call the “Straight to A” round, where the founders skip the seed stage altogether and raise directly a $5M-$10M Series A, often before building anything, sometimes even before incorporating a company. I had seen it here and there in the past, but it now seems to have become an accelerating trend. Continue reading “The “Straight to A” Round”
A few days ago, I was invited to speak at a Yale Entrepreneurship Breakfast about about one of my favorite areas of interest, Artificial Intelligence. Here are the slides from the talk — a primer on how AI rose from of the ashes to become a fascinating category for startup founders and venture capitalists. Very much a companion to my earliest post about our investment in x.ai. Many thanks to my colleague Jim Hao, who worked with me on this presentation.
I joined FirstMark as a partner a little over 18 months ago now, and it’s been a thrilling ride. It’s also felt like a steep learning curve: lots of nuances, and lots of institutional memory to absorb. Below is a glimpse into what I’ve seen happening “behind the scenes” on the VC’s side to the table – stuff that was not obvious to me in my former roles as entrepreneur, angel investor or corporate incubator/strategic.
1. A real commitment. Like for many new VCs operating at the Series A level, the biggest shock to the system was the realization that one gets to make very, very few investments – basically two or three a year. You quickly find yourself having to choose between a number of opportunities you really like. Making a new investment is a big deal, and a decision that one has to live with for years to come. You also get to work with an entrepreneur very closely, and live up to their level of trust and expectations. In a way, it feels like a marriage, except one where divorce is not really an option. There’s an occasionally brutal asymmetry between the fundraising process (which can be quick and intense, especially if it is competitive) and what happens afterwards, which is a lot of hard work over a long period of time. Both the entrepreneur and the VC would be well advised to get to know who they’re about to work with for the next few years of their lives. You don’t need to be friends with your VC (although friendships develop over years of working together), but you do need a core of mutual respect and commitment to hard work and excellence, as well as a shared vision of the future.
I know, when thinking about hotbeds of startup innovation, France doesn’t exactly jump to mind. Sure, there are interesting things happening in European tech – in London, or Berlin (which I covered here). Or Finland. But France? Ask U.S investors and entrepreneurs, and you’ll hear more or less the same thing: high taxes. Impossible to fire people. Government intervention. Language barrier. Fear of failure. Strikes. The country of the the 35 hour law, where people are prohibited by law to answer email past 6pm.
Yet things have started to accelerate meaningfully in French early stage tech, particularly in the last two or three years. I was fortunate to be recently invited as part of a delegation of US VCs and media guests to spend a few days in Paris to meet with local entrepreneurs and VCs, as well as President Hollande and other senior members of the French government. As a Frenchman who has spent his entire professional career in the US, I’m perhaps more cynical than most about those matters, but I came back from my trip genuinely intrigued by the potential of the French tech scene.
For anyone who cares to look, the fairly obvious conclusion is that there’s a huge gap between perception and reality, when it comes to the French startup ecosystem. Very significant progress has been made on all fronts – more interesting startups, more funding, lots more talent rushing into the sector, improved legistation, etc. – yet the word has not caught on.
I recently got a chance to participate in a panel focused on opportunities in hyperlocal at the 2013 StreetFight Summit, along with Ben Siscovick. Since they recorded it, here it is, along with a couple of pics.
Today I’m very excited to announce that I’m joining FirstMark Capital as Managing Director. My main investment focus will be on areas that correspond to my professional background (B2B, enterprise, Big Data, fintech, education, etc.), but I will also happily be open to any big idea involving technology.
As anyone who follows the venture capital industry knows, opportunities of this nature and quality don’t come by very often, and I’m incredibly grateful and honored by the trust that the FirstMark team has placed in me.
At a time when venture capital has been facing substantial challenges and transformation, FirstMark is in my opinion a perfect example of “VC done right”, resulting in much deserved early success:
Results: Probably in large part because FirstMark’s philosophy has been to focus the light entirely on their entrepreneurs, I don’t think people have quite caught on to just how impressive a firm FirstMark has become in the short span of five years since its creation. In many ways, FirstMark is one of the industry’s best-kept secrets: their first fund ($200 million) is one of the very best of its vintage, and the follow up fund ($225 million) has already had some real breakouts.
Disruption & Innovation: A quick perusal through the FirstMark’s portfolio immediately tells a story of thoughtful but gutsy bets in a number of highly disruptive plays. Beyond the more visible runaway hits (first VC money in Pinterest), FirstMark has invested in companies reinventing education (Knewton), finance (SecondMarket), television (Aereo), news distribution (NewsCred), gaming (Riot Games) and… your brain (Lumosity).
Founder/CEO Support: Perhaps the ultimate testament to FirstMark’s approach in my opinion is that the CEOs of its portfolio companies simply rave about the firm. The FirstMark team brings a tremendous amount of intelligence, hard work, experience and connections to the table, as well as a fair amount of New York-style hustle.
Community and Portfolio Services: The venture capital model has been gradually evolving over the last few years from a capital-centric model (where VCs provide mostly funding and oversight) to a service-centric model (where money is increasingly commoditized and VCs add value by providing a suite of operational services that enable entrepreneurs and their startups to fully realize their success potential). FirstMark is one of the few funds, typically part of a new generation of VCs, that have made a true commitment to providing operational services to their portfolio companies, whether in terms of recruiting, research or knowledge sharing. In my own community-building endeavor (the monthly Big Data event I run, see below), I have experienced firsthand both the level of effort required to pull this off and the tremendous benefits one gets in return, and I was extremely impressed with the current programming and roadmap for community that FirstMark has put in place, with apparently a lot more coming.
Beyond the intrinsic qualities of the firm, perhaps the most important factor that drew me to FirstMark is the effortless personal fit I have with its partners and team. Venture capital can be a tough business, with its fair share of ego and difficult types, so it’s an extraordinary privilege to get to work with a team of highly intelligent, humble, focused, talented and overall great group of individuals.
I will certainly miss my friends at Bloomberg, a company for which I have developed a profound admiration over the years, but I couldn’t be more happy and excited about the future. I look forward to being even more active in the startup community and interacting with many of you.
For those of you in NYC who are wondering, I will still very much continue to run my Big Data meetup (the NYC Data Business Meetup) and in fact I will use the opportunity to take it to the next level over the next few months – stay tuned.