Whistler, B.C. — “It’s never been easier to raise $1M for a startup in the Valley.”
Tomas Tunguz, a venture capitalist with RedPoint Ventures in Silicon Valley shared fundraising insights to a packed breakout session at Grow 2015 in Whistler today. Of note, Tunguz writes a great daily, data-driven post for startups that is well worth subscription.
On Unicorns and exits
There are over 100 unicorns right now, companies like Uber, Snapchat and Stripe driven by “inputs” – investments by angels and VCs and funds. These startups are tangible proof that money is looking for a home in Silicon Valley. A “unicorn” is a techie startup worth $1 billion or more, entirely driven by fundraising and venture capital.
However, there are currently only 20 “outputs” – e.g. M&A exits or IPOs each year. Is this a recipe for the bubble to burst?
Are we in a tech bubble?
Tunguz addressed the question of whether we are in a tech bubble given these sky-high valuations. He compared the current fundraising environment/bubble to the one in 2000 and advised that we are only at two-thirds of those 2000 levels today. He points out that a key difference is that in 2000 the investors were retail, today they are institutional and employees. Startup revenues are also much stronger, 400 per cent more than they were 10 years ago.
What is Redpoint’s model?
Tunguz indicated that the well is not likely to go dry anytime soon. The VCs are showing “great paper returns” so there is lots of demand from the Limited Partners (LPs) that back their funds. Redpoint has a portfolio of 40 companies with a focus on software and consumer products. The funds are structured with a 10-year timeframe with three to four years to invest and the balance to look for harvest opportunities.
What is hot?
Tunguz pointed to vertical SaaS ventures as a target right now, but only if they were in a position to dominate a segment. He described it as “a winner take all mentality.” He pointed to the example of VIVA in the Pharma vertical. On the other hand, horizontal SaaS is not as attractive as there are too many incumbents to displace.
Where are valuations?
Redpoint’s focus is no Series A investments and he is currently seeing most valuations in the $8-$12 million range pre-revenue. There are some exceptions at $20 million plus, but they are rare. The valuation is a byproduct of the VC’s confidence in the venture’s ability to execute and manage their cash.
He pointed to a Series B crunch as valuations have skyrocketed making the investments much riskier. Valuations range from $30 million to $50 million today vs. a Series B range of only $6 million to $8 million back in 2008. VCs investing in that scenario have to bet in almost perfect execution over the next few years to see a return.
His advice was to consider tranched Series As as a means to help drive up valuation.
Do you need to relocate to the Valley?
“Silicon Valley is a version of the future that most people will never live,” Tunguz says.
No. They recognize the challenge with the costs of operations and talent in that market. The key is not to lack a presence there. A key point for CEOs is not to only visit and do VC rounds when fundraising. They want to build relationships and see a track record of exceeding metrics. So, quarterly visits should be the goal of tech CEOs in Canada or other markets.
Post-investment, Redpoint looks at how they can create networking benefits for their portfolio and that requires time on the ground there.
Where does crowdfunding fit in?
Tunguz stated that they love to see it for hardware and gaming ventures. A successful raise shows market interest whether via pre-orders or an equity crowdfunding round. For consumer products, he is less bullish pointing out the challenge ventures have of shipping and increased concern by regulators on the misrepresentation that may be taking place.
He sees Angelist being used for filling the last 20 per cent of rounds and that the syndication feature is creating efficiencies. He doesn’t foresee that the LPs that back funds like his will be investing on crowdfunding platforms directly in the near future.