Early stage trends March 2014

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A presentation on the state of early stage startup investing given to the Silicon Valley Innovation Center in March 2014.

Transcript of Early stage trends March 2014

  • Early Stage Internet/Mobile Investing: Trends and Strategies David Shen Launch Capital March 2014
  • TRENDS Internet/Mobile
  • Internet Seed Funding SF Bay Area Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg
  • Seed Deals, All Regions Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013
  • Mobile Seed Funding SF Bay Area Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg
  • Mobile Deals, All Regions Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013
  • Halo Report on Angel Investing Q3 2013 Source: http://www.svb.com/halo-report-q3-2013-infographic/
  • 1H 2013 M&A Dynamics Online/Mobile Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx
  • 1H 2013 M&A Online/Mobile Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx
  • 1H 2013 M&A Online/Mobile Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx
  • Corporate M&A has fallen dramatically in 2013; Deal volume and prices are down to levels seen during recession Source: NVCA 2013; BerkeryNoyes Notes: M&A transactions in 2013 have dropped significantly both in number and value. The mean M&A value in the internet/mobile space was ~$23m in 1H 13 down from ~$35m in 1H 12 & ~$51M in 1H 11 61% of transactions were sub-$20M Continue to see two types of liquidity events in Silicon Valley and NYC (less so in Boston) HR Acquisition: Large companies are purchasing 2 and 3 person start- ups for the engineering talent Later stage VCs providing liquidity to the market via buyout of founder and early investor stock for top 5 venture backed companies $- $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 0 20 40 60 80 100 120 140 M&A Transactions M&A NOT Disclosed M&As Disclosed
  • OTHER TRENDS Internet/Mobile
  • Mobile Rising Aggressively vs. Desktop Source: http://www.kpcb.com/insights/2013-internet-trends
  • China Mobile Internet Access Source: http://www.kpcb.com/insights/2013-internet-trends
  • Rise of Crowdfunding JOBS Act July 10, 2013 SEC Chairperson Shapiro: New offering created called a 506(c) which allows companies to freely advertise fund raising to the general public. More to come
  • Crowdfunding Part II: Kickstarter/Indiegogo/Medstartr
  • Rise of the Accelerator 422 Accelerators in the US Souce: http://www.f6s.com/programs/un ited-states?type=accelerator
  • Explosion of Startups 2009: 472 2010: 770 2011: 1065 2012: 1749 Source: https://www.cbinsights.com/blog/seed-investing-report
  • Series A Crunch 2009: 418 2010: 515 2011: 703 2012: 692 leading to more bridge rounds or death of startups who cant land their A Number of Series A VCs has not increased; if anything it has decreased. Source: https://www.cbinsights.com/blog/seed-investing-report
  • 2013 Estimated Series A Crunch 20 Notes: Entire venture industry is now shifting due to this crunch. Companies raising much larger seed investment rounds to extend runway Seed investors forced to support companies longer Seed investors forced to proactively shut down underperforming cos. Source: CrunchBase Funding Gap 177 113 336 635 1681 799 821 1205 1558 2510 622 708 869 923 829 0 500 1000 1500 2000 2500 3000 2009 2010 2011 2012 2013 YTD Pending Series A Funding Gap Seed + Angel Series A
  • Explosion of (Digital) Seed Investors Groupon, Facebook, LinkedIn, Twitter go public. Secondary markets allow early employees/founders in private companies to exit with $millions in their pocket circa 2011. Acquisitions of startups pay out to founders they become angels. New VCs raise seed funds. Private Equity/Investment Bankers enter the fray with Wall Street money. International investors!
  • Founders and Ideas Smart, energetic founders are a commodity. Seasoned entrepreneurs are not. Great ideas are a commodity. It is too easy to come up with good/great ideas. Awesome ideas that no one else is working on are not.
  • Competition Too easy and cheap to create software. Already leading to the explosion of internet startups The search for no competitors OK with old traditional, offline competitors. Dont want other startups competing with the same or near idea. Battle for attention -> Everyone is your competitor Too many startups chasing after the same customers, B2B or consumer. Battle for attention=too long to get to breakeven or next round.
  • Design/User Experience Great design/UX required, but it is also a commodity and too easily duplicated. Assuming you can find and hire a great designer Advantage is usually short term only.
  • U.S. Early Stage Valuations 2006-2013 2006: $2-3M pre 2007: $3-4.5M pre 2008: $2-2.5M pre (economic crash) 2009: first $5M capped note appears from YC 2010: $6-8M capped notes 2011: $8-12M capped notes 2012: $6-8M capped notes 2013: $5-6M average, upwards to $8M+ capped notes
  • Fueled by New Investors New angel investors replace those who slow down IPOs create new wealth PE and Investment Bankers getting access New seed funds are being raised each year All new investors take what the market gives them they have no history to draw upon
  • Early Stage Bubble Bubble exists in early stage only Risk vs. reward does not match Estimate 1 in 20-40+ for hit, most die Early stage VC doesnt have great incentives with this kind of data Angels can still make some money if valuation is good enough but VERY hard to pick Acquihires are a great way to lose money
  • No matter how much we want to go on and on (and on) about how cheap it is to start a company these days, actually building a sustainable company has never been more expensive. Venture studies show the time and money it takes to get public are longer and higher than ever before. A rare defense of venture capital classic - Sarah Lacy, PandoDaily Source: http://pandodaily.com/2013/08/30/a-rare-defense-of-venture-capital-classic/
  • Funding round $ vs. Runway Too many raising not enough Seed rounds going $1+M, upwards of $2M Acquiring customers take too long Consumers deluged by apps; B2B sales cycles taking longer 12+ months Takes 24-30 months to develop an idea. Get to breakeven or metrics worthy of the next round.
  • Super Sized Seed Rounds Source: http://www.cbinsights.com/blog/trends/seed-venture-capital-super-sized
  • THANKS! David Shen dshen@launch-capital.com