VC Confessions from 2015
So I’ve done my 2016 New Year’ resolutions (yes — I know it’s naff but I love doing them), I’ve set the team’s goals for 2016, and I’m pumped about what this year has in store. But before I go charging off in pursuit, I wanted to look back on the year just passed.
Investing pace was slow
As a VC, I’m obsessed about deal flow: not just volume, but also quality. In 2015 I personally reviewed approximately 700 startups and listened to roughly 240 one-on-one pitches. Excluding my own angel investing, I invested in two new portfolio companies (Quaero and Cielo24) through my fund, I have a signed term sheet out on another, and I approved one follow-on investment (RetailNext). It was, admittedly, a bit of a slow year: but, there were a couple of good reasons.
Firstly, and most importantly, I had a baby. There’s no way to deny it, the delicious (and now 11-month-old) Siena, definitely constrained my ability to see more companies or to do the necessary travel around the US. That said, Siena’s trained me well for 2016: I can now operate on almost no sleep, I make decisions a lot faster, and I am remarkably effective now at saying “no” clearly and almost always with kindness.
The second reason for the slower deal flow, particularly in the number of face to face pitches I took, was due to the “Escape to Fairyland” embraced by a number of entrepreneurs and investors with particular glee in 2015. Their proud announcement of being purveyors of Unicorns (valued at over $1bn), Dragons (raised over $1bn) and other equally delusional constructs, caused a period of — well let’s face it — insanity. In early-stage startup land, we saw valuation expectations jump on pre-revenue companies with little sustainable differentiation or supporting tech. Our own pipeline analysis suggests that by Q3 of 2015, valuations and round sizes were on average, more than double what they were in 2014. So like many of my colleagues in the industry, I declined meetings with entrepreneurs who had insane valuations, weeded out the unrealistic and invested at a slower rate. Although there were definitely signs of a correction in valuations and round sizes in Q4 2015, the insanity is far from over, and I believe the correction will continue in 2016.
So if you are an entrepreneur, it’s essential this year that you approach the market with realistic valuations, coupled with robust commercial models that can potentially keep you running if the investment dollars dry up. If you are an entrepreneur that created a very steep hurdle in your last round, think about how you are going to handle a potential flat, or worse, down-round — there are some creative ways you can ensure your last round investors remain supportive. And if you are an early stage investor, or alternatively a fund investor (limited partner) this should be a great year to invest.