
Ben Horowitz: Capital market climate change - quant
http://finance.fortune.cnn.com/2013/07/15/capital-market-climate-change/
======
pg
We haven't seen a decrease in the valuations/valuation caps at which YC
companies have raised money after Demo Day.

Valuations are high by historical standards, which means at some point they'll
probably fall, but we're not seeing evidence of a fall yet.

It does seem to be getting harder to raise later rounds. But I think that is a
secular change, not a market fluctuation. VCs seem to be shifting toward a
strategy of spraying money at early stage startups, and then ruthlessly
culling them at the next stage. This may well be the optimal strategy, but
it's tough on the late bloomers.

~~~
fraserharris
There is another aspect to this that is not getting much mention: many more
startups are reaching profitability without VC, but still don't have metrics
to justify going for a home run. Ergo, the "ruthless culling" is not resulting
in the bloodbath that some predicted. In general, great for startup founders &
great for (the remaining) active VCs.

pg - do you have any stats around how many more recent YC co's are profitable
& have not secured/pursued Series A?

~~~
pg
That's a complicated question, because the nature of series A rounds has
changed in the last couple years. A lot of so-called series A rounds now are
de facto series B rounds, huge "seed" rounds having taken the place of series
As (at least financially).

A bunch of the companies we've funded are profitable and haven't raised a
series A round _yet_ , but it looks like there is only one that is way past
the (now much later) series A stage and yet didn't raise a series A: Weebly.

~~~
2pasc
Didn't Weebly raise a Series A with Sequoia? They list them as a portfolio
Company at least!
[http://www.sequoiacap.com/us/home/weebly/info](http://www.sequoiacap.com/us/home/weebly/info)

~~~
drusenko
we skipped what would traditionally be called a series A and series B and went
straight to a growth-staged round with Sequoia

~~~
earbitscom
I learned of Weebly when someone complained on HN about your email
communications. I immediately signed up and (with very few technical bones in
my body) built a totally bad ass website for a friend of mine in 2 hours.
There's a very good reason for your success. Incredible product.

------
gfodor
Two things to nitpick on a macro perspective, both things I would have not
expected the article to go into anyway.

First, corporate earnings are at all time highs. Looking at P/E ratios as a
measure of if we are in a "normal" sentiment environment is kind of a bad
idea, since the P/E ratio captures two cycles at once: the sentiment cycle
(higher P for less E), and the earnings cycle (higher E overall). At P/E of 15
when the earnings cycle is at it's peak (as it is now) may still be reflecting
extremely high (read: irrational) relative sentiment towards equities, even
though the ratio itself sits only slightly above average. And, in fact, there
are many indicators that point to the fact that the public is more bullish on
stocks now than they have been since before the 2008 crisis, even though the
P/E ratio is only 15-16.

Second, the consensus right now is forming that we may have finally turned the
corner in the 30-year bond bull market, and interest rates are on the rise
again. If this is true, it represents an important change for asset managers,
and will trickle all the way down to private equity and startup funding. As
rates rise, particularly if they rise not just due to inflation but due to
tightening monetary policy, investors will need to deploy less capital to
reach for yield to places such as private equity, so you can expect deal terms
to get more "investor friendly." (I am not sure if we are actually at the
beginning of a bond bear market, but many people believe so.)

~~~
RockyMcNuts
isn't sentiment a lagging indicator of earnings?

so sentiment shouldn't really have peaked unless earnings already did too?

wonder if anyone else has seen this, and when he wrote that, if it was during
the Fed scare correction that seems to have been succeeded by the Fed relief
rally.

[http://stockcharts.com/h-sc/ui?s=%24spx&id=p33407302522&def=...](http://stockcharts.com/h-sc/ui?s=%24spx&id=p33407302522&def=Y&listNum=1#)

~~~
gfodor
Arguably the downwards pressure on bond yields due to fed policy has inflated
asset values enough to dislodge sentiment from valuations. Many people are
rotating money into stocks since they can't think of any better place to get a
return, and the bull market is enticing them to overweight.

~~~
pmarca
How are all your hedge funds doing?

~~~
gfodor
[http://www.youtube.com/watch?v=NHWjlCaIrQo](http://www.youtube.com/watch?v=NHWjlCaIrQo)

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mathattack
The conclusion is sound - "Today is different in funding than yesterday"
Similar to other posters, I nitpick how he got there.

Nothing in efficient market theory suggests constant PE ratios over time.
Nothing in efficient market theory suggests that your stock will be higher if
you double your bookings. (If the initial price assumed 3x bookings, you'll
tank even if the market is the same) PE ratios revert over long time horizons
(many years) but even what is considered earnings changes over time.

That said, his conclusion is true. If you raise money in great times, you may
need to take a hit in bad times. Better not to overpromise.

~~~
jacques_chester
The Efficient Market Hypothesis is actually a family of hypotheses. Folk
usually pick the strong EMH because it's easiest to transform into a strawman
and beat about the head and neck.

One of the bloggers I host gave a very good explanation of what the EMH is and
what it actually implies: [http://skepticlawyer.com.au/2013/05/29/bubble-
trouble-all-in...](http://skepticlawyer.com.au/2013/05/29/bubble-trouble-all-
information-is-not-equal/)

Having particular bearing on the Horowitz post is this remark:

    
    
        Commentary often seems to presume that EMH,
        or notions of market rationality generally, 
        provide some implicit or explicit guarantee 
        that current prices will be sustained, which
        is false. No guarantee against asset price
        volatility follows from either.

~~~
mathattack
Exactly! Even the strongest form assumes many shocks.

------
cmbaus
It is in Andreessen Horowitz's best interest to get valuations for Series A
funding down.

~~~
davemc500hats
... and similarly, it's in YC's best interest for valuations (of YC co's) at
Series A to go up ;)

------
minimax
_In fact, if you are like most companies, your managers probably implied to
your employees that your stock price would only rise as long as you were
private. They might have said something ridiculous like: "Based on the current
price of the preferred stock, your offer is already worth $5 million." As if
the price could never go down. As if the common stock were actually the same
as preferred stock. Silly them._

Is this something that actually happens or is he being hyperbolic? I thought
there might be some legal issues around making claims like that.

~~~
pmarca
That happens exactly as Ben described it, including at some very well known
startups.

It's a ticking time bomb not just in terms of employee morale but also 409A
(tax law).

------
inthewoods
A simple rule I've found - if an investment manager is doing an interview,
he's generally talking his book in one way or another.

------
gbadman
I think that making claims on the changing capital market climate based on
historical P/E ratios may be measuring the wrong thing. A declining trend in
P/E ratios may suggest a decline in valuations but it also may suggest a
change in capital structure. Or it may suggest a combination of the two.

It would be interesting to look at the trend for EBITDA multiples over time
instead: [https://cloudup.com/cHNL3Wcy5yH](https://cloudup.com/cHNL3Wcy5yH)
[1]. In this view, you can see that TEV/EBITDA ratios are very similar today
to what they were in 1995 even though they took a very circuitous route to get
there.

1: S&P Capital IQ (exported just now)

------
joshuaellinger
I don't think the data says what he think it says.

Sure, it is not 1999 or even 2002. I don't think anyone thinks it is.

Focus on the last 4 years. It looks pretty flat with a blip in 2010.

3/31/2009: 14.5 3/31/2010: 18.8 3/31/2011: 15.4 3/30/2012: 15.5

Of course, Ben could be (and probably is) right but the P/E ratio does not
look like evidence to me.

------
chiph
_You just need one to say yes and she will erase all 20 no 's._

That works as long as the potential investors aren't comparing notes: "I heard
Moneybag Ventures only offered you $180 million valuation..."

~~~
jusben1369
I think the points simpler. 20 people have told you a flat out no. One person
says "yes" That's all you need.

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ryanobjc
I find that CEOs are often the last to realize or admit the reality of
suckitude a company is under.

I mean if you did your job right as CEO, you are the dumbest person there. You
spend all your time being upbeat and optimistic in public (maybe horribly
depressed in private?). Your engineers and managers, who are experts in
divining information out of the smallest bits of data (single line bugs
anyone?) are much smarter than you realize.

I have rarely seen a CEO that I completely respect. They just don't have the
ability to aggregately integrate every detail in the company and tend to lead
things to a crash and burn as a result.

~~~
kaib
Extrapolating from your use of "they" and the implied "us" I'm guessing that
you haven't worked in the role of a CEO yourself. Taking that responsibility
for a few years might not increase your respect for individuals but it will
increase your respect for the difficulty of the job.

~~~
ryanobjc
I think my problem doesn't have to do with how hard the job is or not, but
with the quality and honesty of the communications.

A lot of the startup CEOs I have seen tend to have a "this is my company" sort
of feeling. But by expressing that feeling to their employees, they crowd
their employee's feelings in this regard. Everyone who works for a startup
wants to feel like they OWN the company. That's why you join one. For that
feeling of ownership.

But when a CEO talks with these "sole ownership" feelings, people GET it. Also
if a CEO uses evasive or trivializing language or behavior about the state of
the company, people's internal sense of dissonance causes a rift of trust AT
THE WORST POSSIBLE TIME.

I have seen this pattern play out a few times as the "non CEO" position. Yeah
it's a hard job, but if you didn't want the challenge of a lifetime, why take
the job?

