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Enter the "Samaccalacanis": Three early stage VCs dissect the overheated seed market

By Michael Carney , written on March 23, 2015

From The News Desk

Have you had your semi-annual dose of valuation hysteria lately? If not, three of the most highly visible, most active early stage investors in the game have got you covered in the form of a three-way tweetstorm battle royale yesterday. 

Loopt founder and Y Combinator President Sam Altman, early Twitter and Uber backer Chris Sacca (Lowercase Capital), and Launch festival creator and Uber investor Jason Calacanis spent Sunday afternoon taking Twitter audiences down the familiar rabbit hole of “startups are overpriced” but "for the good ones it's worth it,” and “lots of companies will die and investors will lose money” but "that’s the game we’re playing.” 

Of course there was more nuance to it than this – but there always is. All seemed to agree that the industry can’t (and won’t) sustain current prices forever, meaning that some sort of correction is imminent. When that fallout will happen and what the market will look like on the other side was less clear. 

The trio also delved into the age old question of whether demo days actually help or hurt their two main constituencies of accelerated startups and early stage investors. The consensus @Samaccalacanis seemed to be that, yes, demo days create artificial demand and high prices. Who’s to blame and what to do about it, however, is less simple to pinpoint.

The big takeaway is that three individuals who are extremely plugged into our ecosystem, and who see as many data points as anyone, believe there’s a problem. The fact that they’re discussing this so publicly today means these conversations and concerns have existed in more private settings for some time. That’s as clear a signal as any that the issues are not going away. 

Of course, as any self-aware and transparent investor will tell you, any time a VC or founder speaks publicly they’re “marketing.” In this vein, it should be pointed out that all investors have an incentive to see valuations drop, at least at the stage in which they’re investing – downstream valuations can and should go to the moon from the perspective of early stage checkwriters. But, as the cliche goes, the startup ecosystem is small and careers are long. The best investors want to see, above all else, a healthy ecosystem in which great companies achieve great outcomes. Personal agendas aside, it seems like the above discussion stemmed from such a place of genuine concern. Make of that what you will. 

The back and forth across “Valley Twitter” around this discussion was extensive, but below are the high points from our three protagonists:

Shortly after the dust settled, everyone’s favorite pseudonymous startup soothsayer @StartupJackson weighed in on the conversation and offered his (or her) analysis of the conversation and some sage advice:
...there’s a perennial problem that is worth discussing, which is how founders should go about raising their seed rounds in a feeding frenzy environment, which YC Demo Days clearly are. This is some free advice for YC founders. You’re about to raise the most important money your company will ever take. It has the more potential than any other financing to kill your company if done poorly. And done well, will give you the resources and support you need to grow your business. ...

Take your budget and pad it by 50%. Shit happens, particularly in startups. ...

Broadly speaking, the biggest mistake investors make is overemphasizing valuation in hypergrowth investments. 100x vs 500x are all the same. The biggest mistake founders make is optimizing for dilution. ...

Money is easy today and valuations are high. It may not always be this way. Raise enough that your business is “real” by the time you have six months or less of cash. What that means will depend on your business, but you will never again be able to raise on a dream. The worst possible thing you can do to your business is raise just enough money to throw up mediocre metrics right around the next round, especially with a high valuation you can’t back off of. So whether or not you think we’re in a bubble – whatever that means – know that many of the smartest people in the room are flashing giant red warning signs about unsustainability.

The startup ecosystem has been on a particularly positive and prolific run over the last half-decade. You never know when the music will stop, but it always stops eventually. Will you have a chair to sit in when it does?

(h/t @WillPao for the correction.)

[Image via Mironishin]

[Disclosure: Michael Carney has accepted a position as an associate at Upfront Ventures that begins in April. To the best of Pando’s knowledge, the companies in this post and their competitors have no affiliation with Upfront. This post went through Pando’s usual editorial process.]