Cloud Ave: A "great discussion" on changes in the VC industry

InsightaaS: We generally avoid self-referential posts, and this one, which was written by entrepreneur-turned-VC Mark Suster to describe a "great" conference discussion he was a participant in, would qualify as belonging to that category. However...Suster is not being hyperbolic; the content in the post is genuinely enlightening. Published in Cloud Ave., it includes links to a couple of videos, which I didn't delve into, and a link to a SlideShare presentation by Suster, which I did. The presentation is definitely worthy of careful review. After reviewing broad trends in VC, it provides a view on the decline of mid-sized "traditional" VC funds, which is a key point in the debate outlined in the post. Even more interesting is the section that follows, in which Suster provides data showing that companies are raising larger amounts of capital before going public - that they are raising more late-stage money, delaying IPOs - and that consequently, companies in the "new tech cycle" (LinkedIn Twitter, Facebook, and potentially Alibaba) are "significantly more mature than their 1.0 counterparts" - firms like Cisco, Amazon and Microsoft. Slide 19 has a scale which shows the rise in late-stage valuations, with Series D+ showing 24% CAGR from 2010-2014 (note - the Y axis on this slide is a log scale, so the trend is more extreme than it appears), and stating that this is "the trend to watch carefully," since - as Suster says in the post - "Late stage valuations are in a mini bubble. It doesn’t mean that these won’t produce great companies but the prices people are paying for today’s value exceeds what the underlying value of the business is worth and does not account for the risks the investor is assuming."

I recently attended and presented at Dave McClure’s PreMoney conference in San Francisco. I go every year because I love events hosted & moderated by insiders involving discussions by insiders because it maximizes the amount of real discussions people have. What you’ll see if you watch the video is an unscripted and unfiltered look into how Scott Kupor & I see some of the changes and challenges of the venture industry.

tl;dr version

  • Scott and I agree on nearly everything: The VC structure is changing and there appears to be a bifurcation into small & large VCs with an impact on "traditionally sized" VCs...
  • We both agree that the later-stage valuations are being driven up to a point that feels irrationally priced [he uses b-round SaaS valuations as an example and I am willing to be even more broad based]
  • We both are concerned about non-traditional capital entering the late stages and the impact that may have in the next downturn in the economy to the startups who merely trying to optimize for short-term valuation maximization

The only point we didn’t seem totally aligned on was what we happening to the "middle of the VC market." I believe Scott’s argument is that the market is following many other services markets where you have small, expert, boutique small firms and a handful of mega players as we see in banking, law, accounting, entertainment agencies, et. I don’t totally agree with that view. Most of those industries are fee-based and are competing on revenue growth. Venture is a returns based and I believe has different characteristics.

I believe the middle isn’t being "gutted" but rather is being supplemented by "opportunity funds" and "growth funds" that sit side-by-side "core funds" allowing the firms to stay small and nimble while still being able to grab prorata rights of their best early-stage investments...

Read the entire post (with video and SlideShare links): Link

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