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Jim Connor

Why More VC Money is going to Fewer Startups

Quarterly Number of Deals placed and Venture Capital Deployed

Change in Strategy, High Valuations or Time Away — Raising New Investor Capital

It was bound to happen, there had to be pause, maybe even an inflection point in the Venture Capital world, could the valuations for the unicorns continue to scale, while M&A exits continue to outpace IPO exits. Note: Unicorns are high growth companies with a valuation greater that 1 billion.

A noticeable drop in Venture investing and the number of deals funded during Q1 2016 results raised concerns about three divergent factors:

  • Q1 2016 Venture activity recorded a 27% drop in activity from the highpoint in 2015 (source: PWC MoneyTree Report)
  • Q1 2016 also represented a big step in raising new money from LP’s ( Limited Partners — VC Fund Investors)
  • The Q2 2016 results show a 20% increase from Q1 in funding by VC firms but a 12.7% drop in the number of deals completed. (source: PWC MoneyTree Report).

The trend is more VC money going to fewer deals.

We had a chance to sit down with two Managing Directors of well established, early stage venture funds, Cindy Padnos of Illuminate Ventures and Ephraim Lindenbaum of Advance Ventures. Click on the image below for a 90 second overview of their perspectives on VC activity.

https://youtu.be/wbhPkHcKEYI

The comments encompass issues that contribute a sharper focus and strategy in their early stage strategy, necessary to create successful companies and above average returns for their investors.

Their comments frame many of the issues that have contributed to a sharper and narrower strategy in the early stage cycle.

The conversation defined two perspectives :

  • The Venture Capital activity slowdown during the past 2 quarters does reflect a retrenchment in the valuations and a more cautious attitude in the deployment of their capital.
  • Regardless of the drop in Q1-Q2 2016 reported activity from 2015. there is a broad stack of early stage opportunities for companies and entrepreneurs to be funded in Silicon Valley.

Six issues emerged as the drivers of their investment strategy for funding early stage companies:

  1. During recent years, the VC industry invested in SAAS ( software as a service), mobile technologies, cloud services, and network technologies. Today, these technologies are viewed more as “enabling technologies” that can be leveraged in many of the vertical markets to build disruptive, scalable and profitable businesses.
  2. Early stage companies require less capital to deliver a minimum viable product ( MVP), due in part to the cost efficiencies of the “enabling technologies” and software tools that deploy apps within the user’s internet browser.
  3. New Markets continue to develop and emerge, such as the Virtual Reality (VR) and Augmented Reality (AR) that represent tremendous opportunities for large, scalable businesses. We have not even seen the real beginning of the VR and AR market opportunity.
  4. While IOT ( Internet of Things) is well known, the IIOT ( industrial Internet of things) represents a broad growth opportunity across the many industrial and enterprise sectors of our economy.
  5. A key strategy for early stage venture capital funds is to leverage their domain expertise to build value within their portfolio companies.
  6. Pure technology companies have their place, however, the importance of having relationships with customers as part of creating the optimal solution is preferable and contributes to a competitive advantage.

The comments from Cindy Padnos and Ephraim Lindenbaum encompass issues that contribute a sharper focus and strategy in their early stage strategy, necessary to create successful companies and above average returns for their investors.

Summary: Reading the Tea Leaves

Interpreting VC activity can be difficult in the short-term. But several trends were identified that are contributing to an evolution in the strategies of early stage venture capital.

  • There’s been a fairly significant repricing a valuation among companies, especially among companies in the unicorn class. However, within the Seed and Series A class, .
  • Some segments of venture capital are focusing on untapped vertical markets, using the enabling technologies of mobile, SAAS, cloud and network services to provide solutions and services to specific markets, configured as IIOT ( industrial Internet of thinks), FoodTech, AgTech and Consumer Packaged Goods, ( CPG) solutions.
  • Domain expertise within a venture capital team is an essential value add component to portfolio companies.
  • Early stage venture capital is about leveraging the enabling technologies of SAAS, cloud, mobile and network technologies to bring scalable products and solutions to the enterprise and large vertical markets.
  • The trend of more money for fewer deals from mid and late-stage VC firms is likely to could continue. The valuations attributed to unicorns will continue to monitored and may lead to more exits, assuming the business models and last-round valuations are acceptable to acquirers.
  • The early stage will continue to be selective but robust and may show an increase in activity.

For more information on this interview, or about Game Changers Silicon Valley, click on these links:

This Interview: More VC Money for Fewer Deals

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