In a market slide, a flat 'investment' round is the new up

Steven Loeb · May 13, 2016 · Short URL:

Our panel at Spash weighed in on whether or not there's a market slide, with most of them saying yes

While Vator always brings on some great keynote speakers, entrepreneurs and CEOs, at its Splash events, we are equally as proud of the panels we put together, with some of the best minds in venture.

At Vator Splash Spring on Thurday we had one called, "With the market slide, what’s the outlook for venture?"

Moderated by Jules Walker, Venture Director at KPMG, it featured four panelists, which represented the range of venture investing: Tianxiang Zhuo, Managing Partner at Karlin Ventures, which does seed stage investments; Erik Rannala, Partner at Mucker Capital, which does seed investments and also runs an accelerator called Mucker Lab; Alex Rosen, Partner at IDG Ventures, which focuses on Series A investments; and Jules Maltz, Partner at IVP, which does late-stage investing. (The fact that there were two guys named Jules on the same panel did not go unnoticed, by the way.)

Walker kicked the panel off by asking a simple question: is there actually a market slide? The answer, from all but one of the panelists, was an unqualified: yes. 

"In the late stages there's a huge market slide. It's night and day between what the environment was six months ago and what it is now. The IPO is, effectively, closed. You're not seeing any tech companies go public, and it doesn't seem like it's going to open in the next month or two. You're seeing big companies fail; the Theranos scandal, what happened with Lending Club on the fintech side. Not a failure, but a massive decline in price. Very little liquidity out in the market," said Maltz. 

"There's still some greenshoots. There's still great companies fundamentally doing well, and growing their businesses, but just from a financing environment, valuation environment, opportunity for great companies to raise capital at cheap prices is just not out there. So what we're seeing is a lot of great companies are hunkering down, they're getting to profitability, or they're raising more debt. They're not out there raising more equity capital right now. Because of that I think we're in this weird time, where a lot of the data is historical, but things that happened, or were negotiated in Q4, end up getting reported in Q1.

"So I think we're really in for more of a slide and maybe, potentially, a return to the environment, in the late stage, where the flat round is the new up. That you'll be successful if you can get a flat round."

The same is also true at the early stages, Rannala and Zhuo said. 

"I think there's no question, even at the seed or Series A stage, that things have turned dramatically in the past six to nine months. Now, it's a cyclical business, so I guess we all shouldn't be surprised, but, especially considering that, for the past several years, thing have been going up, up and up, it shouldn't be a surprise that things started going down a little bit," said Rannala.

"We see it valuation-wise, for sure, just the amount of time it's taking companies to raise follow-on rounds. Our portfolio companies are raising Series A, Series B, later rounds are definitely different than they were nine months ago. Having said that, Q1 was a record breaking quarter for venture funds raising capital, so there's a lot of capital out there that needs to get spent, and I think it will get spend, but prices are different, and expectations are different, from what people are looking for."

"There are a couple of indications. One is that Series A investors used to invest based a lot on momentum; I think that has changed back to investing based on metrics. When people think about the Series A round, I think you really have to hit those milestones you set for yourself. For the seed level, and pre-seed rounds, I think these were super hard in 2014 or 2015, where companies used to raise enough revenue for six to nine months, prove a little bit of traction, and expect to raise a Series A round. I think that's going away. So when it comes to looking deals at the seed stage, we're conscious that companies need to raise enough capital for 18 to 24 months these days," said Zhuo.

The only panelist who would not say that the market is currently is in a slide was Rosen, who compared what's happening now to what happened in the heart of the recession in 2009. 

"I'm going to sound like a grumpy old man. I think we haven't begun to see a market slide yet. I think that we human beings have really short memories, so we just remember what happened a year or two ago, in general. We overweight that," he said.

"So 2014, 2015, were off the charts, fucking spectacular years, by any metric. Dollars, valuations and that's what we remember."

While around 11 percent of financings were down rounds in Q1 2016, that number was 55 percent in 2009.

"When that starts to happen, then we'll have a market slide. Until that has happened, we're still in La La Land. I think saying that valuations in Series A have gone from 20 to 18, that's still good prices. An average 55 percent increase, pretty awesome. I think it's great now; it's going to be shitty in a couple of years."

Thanks to our amazing top-tier Splash Spring 2016 sponsors: KPMGJavelin Venture PartnersSAP Startup Focus ProgramBread and ButterKapor Center for Social ImpactLyftAvison YoungTubemogulWendel Rosen and

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