
As Angel Investors Pull Back, Valuations Take a Hit - mgav
http://www.wsj.com/articles/as-angel-investors-pull-back-valuations-take-a-hit-1453337982
======
dsacco
As an angel investor, I can anecdotally confirm that I've become more cautious
recently (in the last year, really). However, I'm not at all concerned about
the stock market. That has never influenced my decision to fund a company. My
belief is that a strong company can weather a bear market.

I'm concerned with the current state of valuations - I enjoy giving
investments to companies on the order of five figures or so each with the hope
that they make something meaningfully impactful. I don't necessarily look for
them to become moonshot successful; a win can be much smaller than that.
Developing incrementally impressive technology that effects change is also a
win.

But valuations are so frothy right now that it's difficult to tell the strong
companies from the ones that won't survive "when the tide goes out." It all
seems very clear in hindsight, but it's hard to know right now, even moreso
than usual. This is always very difficult, but the market for ideas has become
somewhat "congested."

There has been a flood of folks entering the "startup game" who seem to be
planning for their IPO before they've even gotten a product off the ground.
Again, anecdotally, I'm observing a noticeable increase in fraud among
founders who are trying to raise money unscrupulously, especially with novice
investors.

I don't like to use the word bubble because I think it's lazy analysis, but I
do strongly believe valuations are in the beginning of a market correction. At
the very least, I think there will be a higher bar for invested money to
indicate a legitimate valuation instead of a loan.

I do think that there will still be plenty of capital ready to be given to
companies, investors are just going to be more selective (read: cautious)
about it, which may very well change the growth and success potential of
certain more dubious business models in the valley.

~~~
jacquesm
> There has been a flood of folks entering the "startup game" who seem to be
> planning for their IPO before they've even gotten a product off the ground.
> Again, anecdotally, I'm observing a noticeable increase in fraud among
> founders who are trying to raise money unscrupulously, especially with
> novice investors.

FWIW I'll back you up on this, definitely a complicating factor for novice
investors.

Free tip to novice investors: If someone approaches you with a request for
funding, if it is still 'just an idea' and if the idea will surely deliver
billions and if the funding required is < $50K then you're being fed a line of
bull-shit.

Anything that will grow to turnovers that high will surely require a little
bit of traction after implementation before any figures can be projected at
all and anything that hasn't been implemented yet doesn't even qualify to be
discussed in other terms than hypotheticals.

Another free tip for novice investors: pair up with a more experienced
investor to vastly reduce your chances of being ripped off on your first
investment(s).

This is also not a guarantee but it will increase your odds considerably, it
also requires you to convince another, hopefully more skeptical party that
what you've found is really worth an investment.

~~~
bsder
> anything that hasn't been implemented yet doesn't even qualify to be
> discussed in other terms than hypotheticals.

Except that once you implement it, investors start anchoring to how small your
numbers are. Catch 22.

I work with an actual IoT startup. Hardware--implemented. Backend and frontend
--up and running on Azure migration to AWS ongoing. Customers who pay? Yep--
and they love it.

So, investors?

"Ick, haaaardwaaaaare? But ... but ... but ... that's going to take actual
moooooney." (yeah--well, so did Nest, thanks)

"Your numbers are too small to be meaningful" (no duh--does the word "startup"
actually mean anything to you)

"This isn't going to scale." (translation--it takes money and marketing to
acquire customers--welcome to a business with _actual value and customer
lockin_ ).

"Big data is uninteresting to us now." (translation--"actuarials" and
"business process" are only profitable--not wildly profitable and flippable)

To a certain extent, I'm looking forward to these unicorns winding up on the
butcher block and being discovered to have no meat. The lead VC's of these
unicorns are going to give a bunch of the initial investors a huge haircut via
preferences (don't get me started ranting on the stupidity of that). Suddenly,
initial investors are going to have to start looking at "sustainable" rather
than "flippable".

Those of us with actual profit will be waiting.

~~~
api
> Except that once you implement it, investors start anchoring to how small
> your numbers are. Catch 22.

Are investors really that irrational?

~~~
bsder
Now that I stopped laughing, I can give you a reasonable answer.

Yes, they are. But, then, handing someone a couple million dollars in the
_hope_ that it will turn into 50 or 100 million is an irrational act, too. So,
it's hard to get too upset over them being _purely_ irrational.

There are two problems:

1) VCs/Investors are sheep.

This is the infuriating one as it makes most of the VCs/investors you deal
with effectively useless. To the point that when pitching to them the goal is
to _trigger_ that behavior (the term is FOMO-"Fear of Missing Out" aka: acting
like sheep). So, if everybody is investing in something, everybody will invest
in something. Until it blows apart. If you just want funding, try to pitch
something which runs downwind of this tendency.

2) It's really all after the fact rationalization of "I don't like/trust you."

This doesn't make me mad--I just would _rather_ a VC/investor just say this.
But they won't turn you down definitively for lots of social reasons (mostly
hoping they don't turn down the next AirBnB/Uber/etc. and get laughed at at
the country club). I would actually respect someone more who simply said "My
astrologer says the signs aren't right. KTHXBYE." Or, even, flat out "I don't
like you." I'm cool with that--my personality is straightforward--most people
like it, a few call it tactless and arrogant. If you're one of those I rub the
wrong way, fine, we need to find different dance partners.

The problem is that too many investors want you to jump through hoops when
they're looking for reasons to turn you down. Generally, you should simply
read this as "No" and move on. It's like trying to date a pretty girl--when
she gives you some excuse multiple times, she's probably telling you "No" but
trying to keep you in her list of options just in case.

Upshot: raising money is hard work. If you want to sit in the big chair, you
had better be prepared for the slog.

------
gmarx
Whenever I see articles about how easily the investment money flows or had
flowed all I can think of, from a purely self-centered point of view, is "what
kind of loser am I that I have never been able to raise a single round?"
Seriously, my ideas aren't objectively stupider than the ones I see funded.
Even in this article, I mean, home eye exams? Did I read that right? How about
a startup that will come to your house and groom your dog? These can be good
businesses but are they on topic when we're talking about the angel investment
environment? Apparently so. Not that I'm bitter (stop being bitter, dammit!)

~~~
staunch
It took me a long time to figure this out, because no one tells you, but it's
actually very simple. There are two ways people raise money in Silicon Valley:

1\. Traction (rapid week-over-week growth, significant press)

2\. Reputation (elite background, connections)

It's very easy to get some _initial_ traction for these local services
businesses, so investors fall for them easily. They lose money on every
transaction but will make it up in volume ala Kozmo.com, Pink Dot, etc.

Despite the fairytales, no one actually invests in technology startups based
on their products in Silicon Valley. Really, no one.

Oculus VR is a great example of the kind of business that investors had no
interest in. They reluctantly jumped on the bandwagon very late, and only
after it had lots of traction. Very few investors were interested in SpaceX or
Tesla. That's how bad Silicon valley investors are at what they do. It's an
industry ripe for disruption (see: YC).

~~~
gmarx
I like this comment but I'm unsure how to parse the penultimate paragraph.
What counts as "their products in Silicon Valley"?

~~~
staunch
The false narrative told in Silicon Valley is that VCs are in a constant
search to fund new innovative technology products. That they consider it their
job to actively seek out great new products to fund.

In reality, they sit around waiting for winners to emerge and then try to
pounce (traction). Or they back people that have such prestigious credentials
no one will blame them if it fails (reputation).

Palmer Luckey could have gone door-to-door with the Oculus Rift prototype and
not a single investor in Silicon Valley would've been interested (product).
Without reputation or traction, he had nothing they valued.

It's actually a very exciting situation because it means there's huge untapped
potential waiting to be unlocked. YC has tapped into this just a little bit.

~~~
jorgecurio
this has been my suspicion that it's a game of hot potatoes where the goal is
to pass it to the next sucker for profit. Almost like a Ponzi scheme where the
last guy to buy the company bears all the risks, often the public IPO market,
while the train of VC and underwriters have already made their money.

The guys who work for VC has to make number of investments and it's not like
investing in the stock market, it's far far riskier and uncertain (hence the
huge returns). So it makes sense that they would gravitate towards low risk
bets by betting on momentum to piggyback on.

This explains why there's crowding towards 'hot & flashy' startups on
techcrunch and not as much to individuals focused on technological innovation.
This crowding naturally leads to unicorns with unsound valuations that I've
been qustioning.

The comments on HN after some hiatus is starkly different than those of 2014
or 2015. In 2014 I said the bubble will pop and I was ridiculed and downvoted
to hell. In 2015 more people agreed and now majority of the comments are
people ringing alarm bells now.

I think the coming years where unicorns drop left & right, we will also
witness the beginning of the end for Twitter & Facebook and towards a
decentralized, peer to peer, cryptographic replacement.

------
themartorana
Valuations are fake, so who cares? I don't mean to be flip, but valuations are
only important to other VCs. No surprise they created their own bubble.
Valuations for the Uber-of-this or the AirBnB-for-that have been absurd. I'm
not saying there aren't business opportunities there, but sometimes those
opportunities are in the tens of millions of dollars, not billions, and hey,
tens of millions is fantastic by the way.

Edit: I'd like to say I think this is a good thing. I've seen a couple
instances where growth was on the back of VCs and didn't have a foothold in
reality, and friends ended up losing their businesses. I'm a fan of
bootstrapping but I totally get where VC money can help - a lot, in fact. That
said, keeping an eye on revenues and reality instead of funding slide decks
and pie-in-the-sky "potential" revenues can only be good.

~~~
AndrewKemendo
>Valuations are fake, so who cares?

Because they actually aren't fake. I mean I get what you are saying, but the
reality is that real money changes hands based on those valuations, so they
are priced the same way as any other security: Someone says they will pay a
certain price per share.

I think the issue is that investors setting the prices as market makers don't
have a super strong track record of doing valuations with high accuracy.

~~~
fragsworth
No, a valuation is pretty much meaningless without the context of the terms
for the deal.

One of the most important clauses is the liquidation preference. There are
many others.

------
code4tee
People are still willing to invest, but the issue is really that valuations
got out of control and that's really hurting a lot of companies. For too many
companies these days yesterday's glowing press release about being a 'unicorn'
is today's oh $%#&! moment dealing with the ugly reality that sets in when
valuations return to some resemblance of reality (e.g., employee stock options
that become worthless, lots more tough questions about revenue and
profitability and less awe over the hype).

Companies that have a solid product, real revenue (i.e., their revenues aren't
just coming from other companies on life support from VC cash) are profitable
(or close to being so) and have a valuation based on reasonable multiples of
their profit will get through the coming rough waters just fine with only a
few bumps. Startups that can't tick those boxes are in for a really rough ride
ahead.

Somewhat ironically, the downfall of many of these startups will be that they
ever allowed themselves to be valued so highly in the first place. A company
that's reasonably valued at $20 million is going to be in a far better place
than a unicorn once valued at $2 billion that's now valued at $500 million.

------
paulpauper
_On AngelList, a crowdfunding site aimed at such investors, the average
valuation for a company receiving funding reached $4.9 million for two
quarters last year, its highest level in five years. But valuations dropped to
$4.2 million in the fourth quarter, the lowest level since early 2012. Dow
Jones VentureSource data shows that deals involving angel investors fell by
16% last year._

It seems like a big deal until you realize there is a huge variance in prices
and that 2012 isn't very long ago. The biggest and most successful ones seem
to be doing just fine.

~~~
jkaljundi
What makes it even more inaccurate is saying "median valuation" and not taking
into account stages or quite often even geographies at all.

------
iamleppert
Has something actually changed? I mean, appreciably in just a few months time?

Just goes to show angel investors, while an essential component of the startup
ecosystem, can be emotional, illogical, and volatile.

If you're unable to accurately value what you invest in and prone to getting
swept up in hype, you shouldn't be investing in startups (or maybe anything).

The ones who suffer in all this aren't the investors -- they're already rich.
It's the employees who get shitted on, forced to work harder for less, or
loose their jobs because of the whims of the market and other people's faulty
thinking.

------
api
As many have mentioned: the big wildcard here is how economically incestuous
the startup world is. How many smaller startups are dependent on trickle-down
from the unicorns?

If the answer is "not too many" then it will not affect the other 99% of
bootstrapped or less lavishly funded startups. If the answer is "a lot" it
will be rough and have cascading follow-on effects.

A major driver of the 2000 bubble was startups paying startups to advertise,
market, or help build their startups. It was a classic bubble: an
unintentional "emergent" pyramid scheme.

~~~
kokey
That might actually be a problem at the moment, mobile and web content
producers making good money off advertising from other well funded startups in
the B2C space (e.g. mobile), and all of the ad tech industry in between. It
hurt when the property bubble burst and property web development and ad
revenue took a knock.

------
HashThis
I know the Unicorn market is making a massive pull back, and about time. What
is happening to the Valley valuations and number of deals completed?

I'm curious on if this has any effect on seed companies with valuations at $4m
to $6m pre in valuations or number of deals funded?

Is this only impacting unicorns (which I don't care about)?

------
pcmaffey
This is why I'm conceptually attracted to convertible notes. Valuations always
seemed like an illusion...but then caps became status quo as stand-in for
valuation. I understand, buyers want to know the price they're paying...

But it's still an illusion. That said, there seems to be a very functional
solution: discounts.

I don't understand why they are not used more. Why not develop industry models
for expected value increase from seed > A > B, then invest with convertible
notes discounted accordingly? Do this for each round... until there is a
liquidation event.

The notes themselves would have to offer slightly more protections with each
round, but in general, it creates a model of relative value, while that value
scale is still being determined... rather than fixating upon some arbitrary
valuation.

~~~
hkmurakami
A and B round investors need protection / investor rights / board seats, and
you don't get many of these things with a convertible note.

(Since you don't own the shares, you don't actually own the votes)

------
pierotofy
As reality sets in, valuations start to reflect actual business value.

------
biggio
Meanwhile
[http://www.bbc.co.uk/news/business-35339475](http://www.bbc.co.uk/news/business-35339475)

~~~
jkaljundi
A much better take to look at that data is this:
[http://www.vox.com/2015/1/22/7871947/oxfam-wealth-
statistic](http://www.vox.com/2015/1/22/7871947/oxfam-wealth-statistic)

It's the same as to compare someone on absolute salary of $100k in Silicon
Valley vs $50k in Estonia, forgetting that the latter can provide a luxurious
lifestyle with tons of money to spend, while former can mean being barely
break-even.

~~~
aetherson
Median income in San Jose is $80k, so 50% of all households make less than
that. $100k does not mean you're barely capable of breaking even. For any
reasonable amount of income, it is possible to spend in such a way that you're
barely breaking even, of course.

But this whole meme of six figures is hard to keep afloat with is the worst
kind of cringe-worthy "Oh poor well-paid me." My wife works at Habitat for
Humanity in the East Bay. You don't want to consider what the low level
employees there are making (and no, they aren't all living with their families
or have spouses helping out).

~~~
tyingq
>>and no, they aren't all living with their families or have spouses helping
out

Honestly curious...what are they doing then? Isn't the typical rent cost
higher than the entire salary of a low level employee at a charitable org?

~~~
djcapelis
For a luxury condo in downtown SF? Yes.

That's not where the people who work for a living at charitable organizations
live.

HN is a weird bubble.

~~~
tyingq
Heh. No, I looked up the average rent for Oakland, which I assumed would be
less expensive than downtown SF. I saw $3k, which would likely be higher than
the take home pay for a low-level employee.

~~~
potatolicious
Averages aren't really representative - even in SF there is a very, very wide
variance between a crappy run-down studio in an undesirable neighborhood vs. a
luxury condo in the hottest neighborhoods. The average is really just tossing
those two in a blender and hitting the "puree" button.

Likewise, there are still cheap places to live in Oakland, even if the average
is high (and rising). Also, there are places further out of Oakland that are
still relatively inexpensive.

In any case, the "typical rent" on a SF/Oakland apartment already affords a
lifestyle more luxurious than most people in this country ever experience,
which is why IMO aetherson is right in calling it "Oh poor well-paid me". This
meme that 6-figure incomes in the Bay Area is "break even" is a special kind
of myopic: "Oh dearie me, I'm making 6-figures, enjoying quality of life way
higher than is typical for my country, but I'm just breaking even!"

------
dannylandau
I kinda side with Ron Conway on valuations. His take that valuations are not
that important and company's success is mostly binary seems like common sense.
Never understood the haggling that goes on over a few million when the exit
could potentially be counted in the billions.

Here is a link -- [http://blogs.wsj.com/venturecapital/2010/10/18/ron-
conways-b...](http://blogs.wsj.com/venturecapital/2010/10/18/ron-conways-big-
deals-how-he-found-google-and-facebook/)

~~~
api
This is right to _some extent_. A valuation is not money-- it's basically a
fictitious number that the company and its investors come up with to make the
percentages work to everyone's satisfaction for a round.

The problem is that it's also a minimum bar to be cleared later, and if that
minimum bar is not cleared it means you're in down round territory. It also in
many cases sets a bar for a minimum exit for anyone but the preferred
shareholders to get much of anything.

A down round is not necessarily death but it very negatively impacts founders,
employees, and anyone else who holds common stock or options on common stock.
This in turn can kill a company not through cash flow failure but by nuking
morale and causing employees to leave (as well as demoralizing the founders).

I've thought for quite some time that these really high valuations are
actually a trap for founders. A lot of founders have sought them for IMHO ego-
driven reasons, but in the end they'll be the ones getting diluted _badly_ in
a down round.

I mean... I'm not a finance geek but it's always seemed to me that founder
(and employee and also possibly seed investor) interests are maximized by
maintaining a _reasonable_ valuation. With a reasonable valuation the risk of
a down-round is minimized and if there is a sale it's much more likely that
the sale/exit amount will clear the liquidation preference bar and something
will cascade down to the common shareholders. But what do I know. I just work
here. :)

------
jorgecurio
If these large startups with crazy valuations are now in danger of not being
able to raise a bigger round to sustain their burn rate, and the crowd
mentality of VCs sour, how realistic is it to expect any of these companies
built on lack of due diligence in testing out the viability of their ideas to
last? For example: startups delivering food. nobody done it before because
everyone knew it was dumb unless you owned the entire delivery chain, and even
then the margins were razor thin and they convinced bunch of VCs that an
Android app was going to fix the broken business model.

