Pando

Don’t let the macro numbers fool you: Seed investing is in an absolute funk. And with good reason

By Sarah Lacy , written on May 8, 2017

From The Venture Capital Desk

While I’m not yet done “snorkeling in the swamp” -- Paul’s term for what covering the tech industry has become-- I can certainly think of more fun times to be a tech reporter.

I started covering tech in the dot com bubble when the possibilities seemed limitless. Even the downturn was at least fascinating to cover-- watching the winners and losers get sorted out, and all those MBA grads leave town. The best time to cover this industry was the rise of Web 2.0. On a macro level, few people believed the consumer Web was a viable strategy, and even fewer would invest in it. So the entrepreneurs in that era built things they felt should exist. It was as pure as this multi-billion dollar machine for creating companies has ever felt.

Then came the unicorn era, which was at least interesting because it was unlike anything in Valley history.

And now, we are in the toxic swamp. A glut of foreign capital and low interest rates have kept any sort of mass correction from happening, on a financial level. But on a cultural level, we need one. The cult of the founder and bro behavior have dominated the largest companies, no one more so than Uber. This is a company mired in constant scandals, currently being sued for major intellectual property theft, and currently being investigated by the Department of Justice, whose CEO is still firmly and smugly in charge. It’s also the highest valued company in Silicon Valley history.

As the dog with the coffee would say, “This is fine.”

Meantime, companies like Facebook are broadcasting murders, and Google and Facebook have helped extremists rise to power, by destroying any sense of “facts” and “truth.” Everything about a mobile-first culture has turned the early “you-centric” wave of user generated content and social media into a “me-centric” wave of everything.

The most alarming recent example: India dominates the world in selfie related deaths. According to this chilling story in FactorDaily, there were 127 selfie-related reported deaths in the world from 2014-2016. A whopping 76 were in India, compared to eight in the US and one in China.

This amazing story tries to break down the disparity. A lot of it has to do with the poor infrastructure in India, but a lot of it has to do with the newness, rapid adoption, and absorption of mobile phones.

I’ve written before that Silicon Valley is losing its once all-powerful soft power, as all that rhetoric of making the world a better place starts to look grotesque in an age of broadcast suicides, fake news, and now, selfie deaths.

The idealism that made me fall in love with covering startups nearly two decades ago, the idealism that launched a wave of tech blogs, the idealism that brought so many people West Coast again… it’s hard to find right now.

I’ve spoken to a handful of founders in recent weeks, who managed to have break even exits after a decade of work and ones who are still slogging along. They’ve all said if they do this again, they won’t raise venture capital. I’ve spoken to seed and even pre-seed investors who’ve said they’ve had to lower the amount of checks they can write, because those entrepreneurs who are starting companies again, want to avoid the pitfalls they fell into before-- raising too much money, at too steep a price and the long hangover that ensues. I fear we are only at the beginning of that trend.

It’s remarkable to hear so many entrepreneurs complain about the “evils” of raising venture capital, when we’re still in a phase of relatively easy money at relatively high valuations with founder control increasingly becoming the norm. VCs have been giving companies what they want. But if you are a parent, you know that doesn’t end well.

I wondered if this was anecdotal, but the recent Pitchbook-NVCA first quarter report backs this early stage malaise up. While 2017 overall looks to be a great year for the “venture” industry, what’s bolstering the amount raised and the deals is late stage investing. Most of that isn’t coming from traditional venture investors. It’s heavily coming from international investors. If you isolate the classic venture capital industry, early stage invested has plateaued. And angel and seed investing has plummeted.

Classic entrepreneurship in Silicon Valley seems to have lost its way. It’s not just the hangover from the unicorn era, and founders and executives coming out of disappointing exits feeling burned and exhausted. It’s also a quandary over what to fund.

Consumer Internet has been the home run generator for most of the last two decades, but Valley early adopters no longer pick the winners in that category. Jeremy Liew, who had a huge home run in Snap, has long argued that the Internet is now about mass-market youth and teen culture, and it’s LA and New York that have the pulse on that, not Silicon Valley.

Smart VCs and companies have started hiring teen consultants. That isn’t a bad idea, but think of how different that is from Silicon Valley’s consumer history. Steve Jobs famously said he didn’t design products by asking users what they wanted, but by showing them. And almost all of the early consumer Internet winners were created by people building something for themselves.

This shows the real cost of Silicon Valley’s bro-monoculture. What bros need has been tapped out, and VCs struggle to invest for consumers who aren’t them. Show me a female entrepreneur building something for a female audience who hasn’t had the awkward encounter of a VC bringing a female assistant in to ask her if she’d use the product. Now they aren’t asking wives, they’re asking their teens. To succeed in finding consumer hits for a different audience, VCs will have to change how they make investing decisions. And some who excelled in a previous era, may simply not be that good anymore.

And even for those who do succeed at the shift, it’s arguably not the same money making opportunity, because you are basically investing in fads. It’s more like video games and movie franchises than the large tech platforms and utilities of the past. Even Snap argued in its S1 that it has to keep rapidly innovating to keep its teen audience-- which is far smaller than any of Facebook’s properties-- interested.

One of the reasons that Silicon Valley is struggling is that it has succeeded so well. We are in a unique time where the young companies are not eating the old. Google, Facebook, Amazon and Apple are simply dominating, and even Microsoft has enjoyed a resurgence.

There is almost no white space with Facebook dominating everything social, Amazon owning logistics and things, Google owning data, and Apple (and Netflix and Amazon) owning digital entertainment. Most companies are being built on Google or Amazon’s servers, and they are paying for user growth on Facebook. Google and Facebook have 85% of all digital advertising just as this transition of dollars away from television is finally occurring. And their share is growing.

Look at the impact on the decacorns, the companies that should have been poised to become super unicorns of the era.

Pinterest: Struggling to get oxygen in a Facebook world, especially now that Facebook has launched a Pinterest-like clone on Instagram

Dropbox: Squeezed by Google and Microsoft

Snap: The joke in the Valley is that more engineers are working on Snap features at Facebook than at Snap. The last F8 showed the body blow of competition coming Snap’s way.

The most dramatic example of course is Uber. While a lot of its pain has been self-inflicted, it is being accused of trying to “hack” this big-tech hegemony by stealing autonomous car technology from Google. And now Google could destroy Uber’s shot to be a leader in self-driving cars, which Uber’s Travis Kalanick has said is “existential” for the company.

Airbnb seems the only US decacorn who has threaded the needle between these four. (One reason, I’ve argued it will be the largest US decacorn at the end of the day.)

It’s no wonder entrepreneurs aren’t anxious to play the heavy-fundraising game again, and no wonder VCs are in a funk about where to invest.

And it’s no wonder that publications and journalism careers that started out covering new launches every day are now mired in a swamp of writing about bad behavior and giants drunk on their own power: Because that is the only thing that’s growing.