Pando

The “everyone but me” correction

By Sarah Lacy , written on December 2, 2015

From The Venture Capital Desk

Another month of startup data = another month of mixed signals as to the ecosystem’s health.

For the last month or so the rhetoric around startup valuations, mega rounds, Fidelity mark downs, and the lack of anything dramatic happening in one way or another at the time of Square’s IPO has lead to one of two narratives:

  • A correction is coming
  • A correction is already here… haven’t you seen the IPO market?

A third one is starting to emerge: We’re just living in a world of extreme haves and have nots.

Pitchbook’s November data, released today, showed $9.73 billion in funding going to 832 startups-- an increase of some $2 billion, buoyed up-- once again-- by a handful mega deals. And once again they were in the on demand/ecommerce sector. And once again, global hype played a big role. The two biggest recipients were Jet at $350 million and OlaCab’s $500 million round. Nine of the rounds completed were unicorn rounds.

Meantime-- as reported elsewhere-- exits have been horrible. In November, Pitchbook reports that 96 companies exited, versus 135 the previous month. Over the third quarter as a whole, CB Insights noted that there was not a single exit worth $1 billion.

Entrepreneurs whined that recent “write downs” of their valuation by Fidelity and Blackrock were tantamount to them being public without going public. Hardly. That was a news story for about a week, not close to the constant stress of everyone looking at a stock price trading down minute to minute. (Ask Yahoo or Twitter.) More to the point, it seems to have done little to produce a chilling effect on other company’s private valuations.

And yet, as we continue to see mixed data in the funding world, FirstRound published a report today detailing how entrepreneurs feel. No surprise, it backs up what journalists have been writing and VCs have been Tweeting for much of the year: Things have to start getting harder, right?

From the study:

  • 95% of seed stage founders, 97% of series A stage founders and 99% of late stage founders believe it’ll stay the same or get harder to raise capital. Virtually no one thinks funding will be easier next year. Not surprisingly, founders also expect the balance of power to shift from entrepreneurs to investors next year.
  • 73% of entrepreneurs believe we are in a bubble.
  • It was a total split vote on whether IPOs will be any better next year: Roughly one-third said better, one-third said same, one-third said worse.
  • The older a company gets, the further it thinks it has to wait to go public.
  • While hiring is the top concern, startups seemed roughly equally concerned about acquiring customers and revenues-- implying high burn rates will continue. Meaningful market correction, raising follow on capital ranked far lower.

The picture from all of this is clear: People are worried about the macro but seemingly not their own actions, playbook or future. And to me, that explains the disconnect over words and data in the last year.

I’m starting to wonder if the correction so far could be called an “everyone but me” correction. It seems everyone in the ecosystem believes in aggregate things need to change. Burn rates need to reduce. It’s crazy to have this many companies valued at north of $1 billion. Some of the globally driven mega rounds-- either in global “copy cat” companies or driven by foreign capital-- are destined to fail.

But as long as no catalyst convinces them the world has actually changed, the playbook won’t change.

So far everyone is just pointing the finger at everyone else, while the same activity continues. I believe-- like many-- we’ve passed the peak. The question remains whether anything dramatic is going to happen, or individual companies will simply go under, merge with others, or remain disappointing IPOs like Square--  where early stage VCs make money, late stage investors make money because of the terms and employees are only ones punished.

I have no doubt we’ll discuss this odd phenomena at length at our last ever PandoMonthly tomorrow night with Sequoia’s Alfred Lin and Doordash’s Tony Xu-- reportedly, closing a unicorn round backed by Sequoia now. There are still a few tickets available.