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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.
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
A 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.
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.
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.
“I tried to put a good game plan together. I wasn't sure how healthy you were.”
The new year began with a surprising turnaround of traditional NFL team Washington Redskins coming back from 3-6 and going into the postseason with 10-6. We don’t know how far the Redskins will go but this turn around in this year NFL season was something we could learn from. Young rookie quarterback Robert Griffin III lead the team and was promoted captain of the team. An he did lead the team to success. He crashed the news conference of his coach Shanahan after the last game:
“What did you do for New Year’s?” Griffin asked.
“I tried to put a good game plan together. I wasn’t sure how healthy you were, so it was hard without you calling me,” answered Shanahan
It will be similar for startups and investors this year. Everybody will try to put a game plan together but uncertainties are very high to make a fair call. The funding scene as we know it will change and founders need to adapt or leave. Prepare for a different and new way of raising funds. But the real change will be from an investors perspective - so I leave the founders view this time. They will not play the main role in this drive.
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.