This has been an important year for us as a firm, as well as the market in general. We couldn’t begin any recap of 2016 without focusing on the bubble we hear so much about. The industry entered the year bracing for an apocalypse. Every announcement – whether it was a funding round, exit or layoffs – was analyzed within the context that the tech bubble has definitely burst or that we’re still in the bubble.
So, what really happened in 2016? There was a significant pull-back of the public markets in Q1. As Tomasz Tunguz of Redpoint showed, in February 2016, public SaaS companies had fallen 57% from their highs. Yet while they were trading at 3.3x forward revenue in February 2016 (the low), they appreciated by 6% each month for the following six months. As Tomasz points out, these public companies are now trading at 4.7x forward, which is relatively comparable to the median of 5.2x for the last two years.
In other words, any correction in public valuations happened quickly and has now stabilized.
But what kind of impact has this had on the private markets? The fundraising environment is certainly tougher for later rounds. From Series A and onwards, fundraising takes longer and valuations are typically below the expectations and benchmarks of 2015. At the same time, seed money is still abundant due to the proliferation of micro VC over the past few years. This can set up a perfect storm if early-stage companies don’t manage their expectations and reality properly.
Mattermark (a portfolio company) looked at the matriculation rates for a class of startups. They started with a simple question: if 100 startups raise a Seed round, how many of those will go on to raise a Series A, and then a Series B?
Mattermark found that, on average, around 31 of the initial startups raised a Series A. From there, the number of startups that raise a Series B halves and continues to halve in a stepwise function through Series F and beyond. It’s a pretty steep drop-off rate.
The challenge here is that founders – having an easy time raising their seed rounds and maybe Series A – can be lulled into thinking that each subsequent round will be just as easy. Likewise, early-stage investors may not appreciate just how much follow-on support their portfolio companies will need.
2016 for Version One companies
So, how have Version One portfolio companies done in this environment?
- Collectively, our companies raised over $100M in 2016
- We welcomed five new companies to our portfolio: Abstract, Trim, and three yet-to-be-announced
- Across Funds I and II, eight companies raised follow-on funding. The ones we announced publicly are: Shippo (Series A), Mattermark (Series B), Outreach (Series B).
- In total, we now have 28 active companies with the highest concentration of companies in the SF/Bay Area (11) and Toronto/Kitchener-Waterloo (7).
Looking ahead to 2017
We expect that the financing scene in 2017 will look very similar to 2016. Of course, upcoming IPOs like Snapchat will bring some added excitement to the industry.
We also believe that we’ll get more clarity on what the next platform will be. Every 10-15 years, a major cycle reshapes the computing landscape: PC (1981), Internet (1994), Mobile (2007). If historical trends continue, we should now be at the cusp of the next big thing. Chris Dixon for example believes that we’re in the early stage of multiple new eras, fueled by advancements in deep learning and different platforms (autos, wearables, drones, IoT, and AR/VR).
If we look beyond the cyclical nature of computing platforms, we can see that technological innovation comes in waves – with a surge of technological development followed by quieter periods of adaptation. First, there was the Industrial Revolution, followed by the Age of Steam and Railways; Steel & Heavy Engineering; Oil, Autos & Mass Production; and now the Information and Communications Technology Revolution.
In his post “The Deployment Age,” Jerry Neumann discusses our current stage within this historical context, providing a great synopsis of Carlota Perez’ theories surrounding the path that each technological revolution takes, including the social, economic, and institutional ramifications.
In short, Perez believes that we are currently in the deployment period for web and mobile. In this phase, companies move from creating entirely new markets to expanding and consolidating their existing markets. They make their products cheaper and easier to use in order to appeal to more customers. And, funding moves entirely to production capital, with little to no focus on next-wave technologies.
As investors, we need to be future-looking…whether we’re looking for the next new computing platform or looking for new ways to expand the existing market. As such, we are excited about:
- Cryptocurrencies (blockchain/Ethereum)
- Quantum Computing
- And more
In the coming year, we’ll be spending significant time on these themes, likely focused on the application layer. It’s important to note that we’re looking for startups leveraging network effects in these new themes, because they are platform-agnostic after all.
We still love marketplaces, social platforms, and applications of AI/ML, but starting January, we’ll begin writing more about these new themes with the hope of stirring up new dialogue about emerging technology. If you’re enthusiastic about these themes as an entrepreneur, investor, or operator, please reach out!
But until then…
… we thank our LPs, colleagues, partners, portfolio companies, friends, and followers, for their continued support this year. We are fortunate to love what we do because of the people who make it worthwhile.
Our best wishes to you and yours for a happy holiday season and here’s to an awesome 2017!
– Angela & Boris 🙂