series-a-crunch

Series A Recruiting

Recruiting has been almost impossibly hard over the past three years. It seems like I’ve seen at least an article a month about some sort of talent war. Many of these articles have erroneously focused on the talent war between big companies: Facebook poaching from Google; Google poaching from Linkedin; everyone poaching from VMware, etc. In addition to the general movement of talent, there were well publicized articles about ridiculous retention bonus as well. If you were a young company without unlimited means, these articles and the trends that they represented were depressing to say the least. The trends themselves have made recruiting and retaining talent even more important than in the past.

I call the focus of the articles “erroneous” because the real action and real talent war was not between big companies but between big companies and seed stage startups. With the the distinct rise in early stage over-capitalized startups, talented and entrepreneurial engineers had the choice to stay at (or go to) a large company and earn a great income or start their own company, earn a great income and own something substantial. The math here has been pretty simple:

  • Starting a company = cofounder equity, salary, perks
  • Joining an early seed company = early employee equity, nice salary, perks
  • Joining an incumbent = nice salary, perks

I’m not a genius, but the first two options seem particularly nice, especially if exits are decently high. The influx of seed stage capital had shifted the power dynamics between established and new companies essentially leaving growth stage startups out in the cold.

The largest players, the Googles, Apples, Linkedins, etc continue to grow like mad and will always be growing and hiring like mad (if not those names, new names). The typical value proposition for companies like that has been stability. They provide great income and amazing perks. After a few years of experience and specialization, you could always choose to leave to join or start a startup. This notion is changing as well. Entrepreneurs without practical experience have received substantial funding (particularly in the consumer space) and the risk of starting a company and failing is further mitigated by silicon valley’s general acceptance of failure and the rash of aqui-hires. We’ll ignore that fact that many of these ideas, particularly the consumer and social ideas, have been really subpar.

I don’t pretend to know exactly what caused the rush in seed stage investing. I would imagine that like every trend, that a few astute investors (Dixon, Sacca, etc) started and eventually the hoards followed. I am excited (in a selfish way) to see the decline of many of these early stage companies. Like any darwinian process, many of these companies won’t make it past this impending bottle neck, it will be survival of the fittest and they’re simply of a weaker stock. Here’s what I think will happen in the coming months:

  • I think we’ll see a correction in the number of early stage companies that get substantial funding. It’s dirt cheap to prove a simple hypothesis, investors know this and should push for small rounds.
  • An ideological regression towards the mean. Even with recent successes there is still a limited number of billion dollar companies formed each year. Venture math relies on this and investors will eventually come back to these principles.
  • Startups will fail. The best (or best connected) will experience soft landings at large companies. I think we’ll see these landings getting less soft as time goes on and the market adjusts to the number of failing companies.
  • The failures will present a recruiting opportunity for medium/large companies with traction. There are a bunch of medium size companies with real business models and real growth potential who should benefit significantly from these failing companies.
  • I don’t think salaries will be depressed but I think the growth in salaries will return towards more historical averages.

If you’re a recruiter or founder building your company you should start to position yourself to take advantage of these impending failures. You’d be silly not to.

A look into 2013 from a fundraising perspective

Today we reached the half of this year and I wanted to have a quick look back. As well I had a lot of discussions about fundraising until now with startups and fellow VCs. I put my thoughts into a presentation I gave over the course of last months at several occasions.

Recently Fred Wilson from USV stated he will never do a deal with a Corporate Venture Capitalist again in the future. I understand where he is coming from however I hope one day we can actually do a deal together. So Fred, whenever you see an opportunity for a syndicated deal with Deutsche Telekom’s VC firm - give me a call or drop a message. I am happy to answer it without any delay. We might be not as dark as you think we are. 

Investment options for startups in 2013 and how to address investors from Thomas Grota

 

The Other Side of the Series A Crunch and Imminent Startup Failures

Much has been written recently about the Series A crunch. Seed funded startups are finding it difficult to raise a Series A and will have to either find an acquihiror or simply shut down. 

http://pandodaily.com/2012/11/28/the-series-a-crunch-is-hitting-now-have-we-even-noticed/

This is neither “good” nor “bad” in any broad sense, but just a reality of capitalism.

But one thing that I think has been missing from the conversation is how good the explosion of startups in the last few years (which has precipitated this Series A crunch) has been for the average consumer of tech and internet based products.

Part of the reason that many of these companies will have to fail is that they cannot weather the difficult fund-raising environment with revenue. Many have gone the route of scale before revenue, and have just not been able to either sufficiently scale or sufficiently monetize.

These startups are creating tremendous value, and capturing very little. And for that reason, they are not sustainable businesses, and is part of the reason for pretty subpar VC returns in the last 10 years. 

But lets think about what that means for the person consuming these services. Every dollar of value not captured by the business is a dollar of value “captured” by the consumer.

Its an amazing time to be a consumer of web services and tech products. Much of the internet is free or really cheap. Even paid services like Netflix and Spotify are incredibly cheap when you think about the value to a consumer. These companies may struggle financially (along with all of the other smaller startups that are now failing facing the Series A crunch), but they are tremendously value creating for those who consume them.

In the spectrum of value creators vs. value capturers (see Chris Dixons post on Builders vs. Extractors here: http://cdixon.org/2010/06/19/builders-and-extractors/), entrepreneurs are way on the side of creating more value than they capture (Wall St. being substantially more on the other side).

So if you have a friend at a startup thats not going to make it, at least thank them for putting themselves out there for creating something that has, even in a small way, added a whole lot of value to humanity, and required very little back in return.

The Screams of Crushed Startups Echo Across Silicon Valley

Venture capitalist Ben Horowitz says that startups are facing a new funding “crunch.” Photo: Kenneth Yeung –www.snapfoc.us/Flickr

A reckoning is sweeping through Silicon Valley, and the cries of pain have grown too loud to ignore.

Many startups fattened by plum valuations and hefty bankrolls in their infancy are finding nowhere to turn when the money runs out, according to various Silicon Valley venture capital firms. These startups have no choice but to swallow their pride and reverse their sunny financial projections.

The problem is particularly pronounced among companies trying to graduate beyond funding raised from less sophisticated, increasingly generous angel investors and into the world of venture capital funds. The growing difficulty of that leap, known as the “Series A crunch,” has been a hot topic in Silicon Valley formonths now, but many financiers hoped the problem would self-correct as more early-stage starups failed — and more angel investors got burned. But that self correction hasn’t happened yet.

Indeed, the problem only seems to be growing. Ben Horowitz, founding partner at Valley VC shop Andreessen Horowitz, addressed the issue on Fortune’s website yesterday, comparing startup founders to the captain of the Titanic, warning them that the funding environment could change “radically,” and advising those burning through cash — i.e., most startups — to “swallow your pride, face reality, and raise money even if it hurts.” That means raising money at a lower valuation in a “down round.”

“If you run a startup and are currently raising money,” Horowitz wrote, “you probably thought that valuations would be roughly the same as they were the last time you raised money. But they most certainly are not.”

Startup investors concur that prospects for early stage startups seem to have dimmed.

Part of the reason for this is that startup founders became more savvy at the very moment they became more sought after. Over the past few years, the seed funding market professionalized, with startups getting advice and grooming from incubators like YCombinator, Tech Stars, and scads of others, which teach founders to better present themselves to investors. That led valuations to spiral steadily — and perhaps unsustainably — upward.

“You saw where seed rounds would have valuations of $10 million or more … for really raw startups,” says Josh Stein, managing director of venture capital firm Draper Fisher Jurvetson. “If you weren’t paying double-digit [millions] for an idea, they thought you were being stingy.”

At least one firm, Freestyle Capital, is setting up a bridge program to help early stage startups reach their next investment round, with the bridge investing up to $1 million into sufficiently promising companies so they have more time to find new investors. The nail-biting period before venture capital funding can be good for startups because it pushes them to prove their worth, says Freestyle co-founder Josh Felser. Angel investors often don’t make founders run such a gauntlet.

“The supply of seed capital has soared,” Felser says, which means demand for series A venture capital rounds has soared in tandem even as supply remains the same. “It’s may not always be pleasant but its healthy.”

Although early stage companies tend to be reluctant to discuss fundraising headaches publicly, some have gone so far as to reveal their fundraising worries to the press in recent months, including conference calling startup Speel and social bookmarking company Clipboard,

Some late stage companies seem to be struggling to preserve their valuations too. Check-in service Foursquare, for example, recently raised money in a way that allowed it to avoid a down round.
But no one is saying that a bubble has burst. Rich investments and high-priced acquisitions continue apace. Dave McClure, who runs the accelerator 500 Startups, says that while valuations are down from last summer, they seem to have stabilized and that his own dealflow has grown. “People like to throw up their hands and say we’re heading for a down cycle,” says Stein, but “there is as much innovation and incredible company building going on right now as I’ve ever seen.”

What is a VC Firm Anyway?

Last week First Round Capital announced that they are starting First Round Review, a publication aiming to be the Harvard Business Review for startups and venture capital. Producing and stewarding content is not a prerequisite for investing in startups and this move got me thinking about the state of the modern venture capital firm. 

I should preface the rest of this post by saying I’ve yet to work in a venture capital firm. I’ve never written a term sheet, sat in a board meeting, or put my money on the line—believing in someone else’s potential. With that said, I’ve gotten to know the industry from the outside over the last few months. I’ve talked with VC’s, been to their offices, and researched firms as potential places of employment. All that to say I do know the major players and some of their recent movement. 

Much has been written about the Series A crunch and that is the backdrop for recent innovations in VC. In an investment climate that is a buyer’s market (at the Series A level), firms feel the need to differentiate and inflate their value proposition to entrepreneurs. An entrepreneur who meets/exceeds key performance indicators has options. There is a dearth of companies who make it to that point and one that does is able to choose their investors more carefully. Given the selectivity in this process and the amount of available funding, venture capital firms are starting to feel the pressure to differentiate themselves. 

First Round Capital’s move with First Round Review is designed to differentiate them from other firms and establish their firm as a preemenent voice on startups and early stage investing. Harvard would still be an elite university without the Harvard Business Review, but the HBR is an extension of their brand and a differentiator from other colleges. Similarly, the First Round Review will give First Round a platform to grow their brand, extend their reach, and position themselves as an almost-academic authority on the startup ecosystem. A company taking an investment from them (assuming FRC develops and follows through with the Review) will inherently align the startup and founders with a lasting level of respectability that is exacerbated by First Round’s publication of the review. 

Andreessen Horowitz (a16z) is taking a different approach and becoming a full service firm. They’ve been hoarding talent in all sorts of areas (marketing, content, engineering, etc.) for some time and taking money from them means access and contribution from these folks. I’ve never heard Marc Andreessen or Ben Horowitz pitch their firm to an entrepreneur but after their long list of past successes, they’ve got to mention how valuable their in-house talent can be. They have partners that have specialized in all kinds of career areas and recently hired former Wired Senior Editor Michael Copeland, perhaps to compete with First Round on a similar project to their First Round Review. 

These innovations make me wonder what the future venture capital firm looks like. Will they be journalists first that become informed investors? Or investors that grow their profile through journalism? In an already slimming field of viable Series A Round options, how thin can a firm spread itself with talent and projects outside of full-time investing? These questions will be addressed in the coming months amid a constantly-evolving Series A environment. a16z General Partner Jeff Jordan (not MJ’s kid) recognizes that the Series A round is the new Series B and makes a bunch of great suggestions to entrepreneurs about ways to combat a changing investment climate. 

First Round and a16z are just two recent examples but I would not be surprised to see more firms try to differentiate themselves. Just last week the firm formerly known as GRP Partners rebranded as Upfront Ventures after 17 years under their previous name! Firms could continue “hacking VC” by replicating some of these existing models or by pioneering a new tactic. I’ll be especially interested to see if a lesser known or smaller firm is able to catapult themselves into big time competitive Series A rounds based on their additional value from their differentiation—whatever it may be. 

If I’m forgetting a firm you know of that does something wild like this do differentiate themselves, say so in the comments!

Frente a la fragmentación del talento... [en San Francisco]

Esta es una traducción al español de un articulo publicado por Semil Shah en TechCrunch. Link en la fuente de esta nota.

El pedido #1 que se escucha al hablar con fundadores de startups en San Francisco es: “Estamos contratando ingenieros. ¿Conoces alguno?”. Todos sabemos que este problema empeora día a día, y también lo saben la mayoría de los inversores. Pero la pregunta resuena tan frecuentemente que comienza a preocupar el hecho de que las tácticas convencionales no funcionan. Aquellos startups en sus comienzos que no empiezan a experimentar con nuevas ideas para obtener, reclutar y acercar a ingenieros y otros perfiles técnicos pueden acabar sin dinero o sin lograr la tracción suficiente con su producto para pasar al siguiente nivel. Quizá esto suceda porque el talento técnico se halla tan fragmentado hoy en día que todas las opciones deben ser reexaminadas y puestas en la mesa.

En el afán de investigar todas las opciones disponibles, a continuación se exponen 10 tácticas que tu startup puede considerar, dadas las condiciones de hoy.

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Make or break - what we have seen so far.

At the beginning of the year, I explained why the rules of the VC game are changing in 2013 and that founders need to “Adapt or leave” the ecosystem. I explained the structure of the funding pyramid in Europe upon which the financing of startups in Europe will be based.

The first quarter of 2013 has passed and it is time to have a first review on those metrics:

Series A crunch landed in Europe

We haven’t seen a remarkable deal flow in the first quarter in recent years. When returning to my desk in January, my inbox quickly filled with requests from fellow VCs introducing their seed funded companies for a series A round. In parallel, we hear the news about seed funded companies merging as a last resource with competitors, as well as about some asset deals or even insolvencies. There wasn’t a particular vertical sector which was hit hardest - it was across board. Also we hear about loans given by some institutions to startups on reasonable interest rates to give more runway – the time a startup has enough money to operate from - for those still in fundraising. We will hear more of those stories in the course of the year. This development is in particular more focused on Berlin as predicted by me in January because Berlin had the most Seed Deals which are mainly affected by this metric.

Deep pockets right from the start

recent report by CBS Insights revealed an interesting fact for the US: Seed companies which received funding from VCs with deeper pockets have higher chances to receive follow on funding - aka surviving the Crunch - than those companies reaching to follow on rounds without significant backing from current investors  - most seed investors are only planning for the next round with a new, additional investor. It is too early to tell for Germany if this is true as well. However, we see at our fund even more stable conditions and interests for investments than in recent years. Fellow VCs seem to trust our pockets to discuss syndication for the next rounds. On the other hand, we didn’t see any victims of the Crunch in the portfolio of other VC funds managing similar sizes of funds as we have in the market. In the first quarter, we invested in several early stage companies in Germany as well in the USA. Some have been announced, some will be revealed in the coming weeks.

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The new Greece of Alexis Tsipras will run out of money by early March. It will then face a series of escalating crunch points that will end in default and a return to the drachma unless it can reach a deal with EU creditors.

Greece must repay €3.4bn to the International Monetary Fund in February and March. Tax revenues have collapsed as Greeks preempt what they hope will be a repeal of austerity taxes. “There is only €1.9bn left in the cash kitty, and the government has spending costs of $2.5bn coming up. Somebody needs to lend the country money soon,” said Megan Greene, from Manulife Asset Management.

The Greek media reports that capital flight last week reached €10bn as it became the clear that the amalgam of Maoists, ex-Leninists and radical socialists known as Syriza would win the election. Barclays estimates the outflow at €20bn since early December, roughly 12pc of GDP.

Article by Ambrose Evans-Pritchard in The Telegraph

Maybe there is no “Series A Crunch”. But it still ain’t easy.

Maybe there is no “Series A Crunch”. But it still ain’t easy.

For the last few years, the venture capital and start-up community have exhaustively explored the idea that there is a “Series A crunch”. Opinions differ – sometimes sharply – on the topic.

As Inc. magazine described it:

It goes like this: After slogging through six months to a year of frenzied product development and user testing, seed-funded tech start-ups are fatally hitting a wall — the…

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“I tried to put a good game plan together. I wasn't sure how healthy you were.”

We read a lot of Series A crunch and Not a Series A crunch and No crunch at all. The experts talked about tailwinds and headwinds. For 2013 this is not of the essence anymore. Change is imminent and the players will be the investors this time. After four years of a Startup Scene where founders lead the negotiations the coming year will change the rules of the game. Here is how and why:

More money will be injected

First indications of new deals at the end of last year showed massive injection of new cash in successful startup stories. There will be more of this. Why? because investors will select their targets from a whole bunch of startups in a certain trend area. After selecting their target they will go for “All In”. Investors have understood that the bloodbath is around the corner and they need to make winners not just survivors. To win, those companies need cash - a big pile of it. They need the money for hiring the top talents, they will need the cash to drive market making by features and advertising and they will need the options to take over the weaker ones who will not be able to raise big funds. Investors of those survivors will look out for mergers and takeovers rather than going into the fate of a long lasting death and a cheap asset deal. Those investors who will come to their senses early in the year 2013 and push for those deals will be winners at the holiday season this year. Investors injecting those massive rounds will also be winners in their sector.

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Greek coalition braces for debt showdown as Germany rattles sabre

Greek coalition braces for debt showdown as Germany rattles sabre

The new Greece of Alexis Tsipras will run out of money by early March. It will then face a series of escalating crunch points that will end in default and a return to the drachma unless it can reach a deal with EU creditors.

Greece must repay €3.4bn to the International Monetary Fund in February and March. Tax revenues have collapsed as Greeks preempt what they hope will be a repeal of austerity…

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The Serie A ambitions of Roma and Milan face the acid test as the second half of the season begins with champions and leaders Juventus looking unstoppable in their quest for a fourth consecutive…



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