As I sit in William’s and my office in Los Gatos, I’m struck with how empty everything feels. The aux offices nearby are now empty as the call of the wild beckons folks back to the non-performing real estate that leaves many CEOs fuming. People who once revelled in the glories of a non-commute day now struggle to drive the crowded freeways and fight to park near the lobby entrance, grab a quick drab coffee from the machine, and stagger to a shared table “desk”. Just like in the Before Time.
As I always told the kids, “Traffic is the most important thing is Siicon Valley”.
Does this upset me? Not really. I no longer have to hear the bellowing of the sales guy wafting through the walls. Nobody builds offices to be sound-proof. My relaxing music sounds so much nicer when I don’t have to crank it up to compensate, or put on noise-cancelling headphones.
But for those who worked at home, the demands of working in an office must be quite a struggle. Startup types do their “zero to one” juggling pitch act in any place that will suffice, whether it is a coffee shop, a conference room, a beach, or even, dare I say it, at home. Obtaining an office to work is actually a milestone funding achievement – not a given.
Hence, I am at our office today, surrounded by memorabilia, computer and software and writings, seeking inspiration!
Well, perhaps inspiration should step aside for the moment. Let’s take a bit to check the weak pulse of venture and startups.
As we move out of the “spend money for anything online” phase of a cloistered culture in the grips of the pandemic, major companies responded by 1) laying off all of their excess employees hired to keep other major companies from hiring those same people they just laid off and 2) forcing everyone back to the office to listen to the CEO tell them how useless they were when they were stuck at home working.
In like kind, investment in the wacko side dropped like an anvil. Crypto currency was shown to be a fraud (is anyone shocked?). Blockchain is too narrow for application. Gaming is hit and miss, usually miss. The gig economy is a bust. And whatever happened to Meta?
So now venture is hyping AI. Again. Yes. Again.
In lockstep, startups are all adding their AI gambits to their existing offerings to look mod and rock their asses. Sigh. It’s a living.
So where do we stand. Easy. We have 1) M&A in the doldrums, 2) down rounds and the potential for clawbacks, and 3) VCs on the defensive. Let’s take these one at a time.
M&A:
As VCs closed their wallets, they hoped that continued hype would propel their less favored dead dogs into the eager arms of corporate strategy guys. (Note — William actually handled strategy and new ventures for Tandem in the old days, so I heard about this a lot, every day). Well, these guys aren’t quite as stupid as they thought. A bunch of desperate sounding VCs selling a high discount startup (hey, it’s 50% cheaper than last time!) wasn’t enough to move the acquisition forward. Frankly, these deals take time and are usually lined up well before one needs funding as their “Plan B”.
At the same time, while venture was eager to deal, corporations looked at their bottom line and didn’t like what they saw. Stock prices are depressed, or at the very least not increasing dramatically. Integrating new companies into the fold is a costly investment in people and technology. And last and not least, the random pivots by VCs from one unicorn technology to a completely different unicorn technology has heads spinning and disrupt the acquisition process.
In an effort to preserve the appearance of astronomically priced unicorn startups, venture has grasped the tail of the AI GoogleBull while Microsoft NoPilot yaws and ChatGTFO hallucinates. It is a strange summer, even for Silicon Valley.
Already the tech journo crowd is side-eying all this sturm und drang. They’re starting to whisper that all this stuff is passe. After all, when you start to have ignorant Texas Aggie profs flunking students because he heard about AI taking over writing essays, you know the jig is up.
Down Rounds, Discounts and Clawbacks:
Let’s face it, startup valuations have always been, shall we say, invented? Created? Innovated? OK, yes we look at the upside potential. That’s because in zero-to-one that’s all you have — Potential. And potential can mean nothing — or it can mean everything.
But we also had to demonstrate a product, market, path to profitability, and an exit strategy.
Guess what? This is where the tech innovators and the con-men (like poor little rich boy Sammy Bankrupt-Fried) and con-women (Orange is the New Black Liz Holmes) separate, if not actively scuttle away.
Building a prototype and product is hard. Convincing customers to pay for it is extra hard. Making enough money to actually not need investment is super hard. And finding a means to transition beyond the startup mode, whether through acquisition, IPO or just plain good sales is excrutiatingly hard. So it’s no surprise that most unicorns skipped all that other stuff and got lots of money when money was basically free.
Now that things are hard, VCs are looking at all those other pesky hard things. And most startups funded in different conditions can’t step up and evolve. The end result is a lot of startups will not get further funding. They just aren’t worth it, valuation-wise.
While some of the fatter venture unicorns are pitched as promising M&A opportunities (see above), many others will shrivel and starve. The ones that pivot to some kind of revenue and profitability with real customers may survive, while those that restructure to some kind of “NewCo Tech Opp” (cough, AI, cough) may squeak by with fresh funding.
As venture partners and their Limiteds get increasingly disappointed in their portfolios, anticipate clawback. It’s never pretty, but it will happen.
VCs on the Defensive:
It’s only common sense that as returns nosedived, folks would start looking for someone to blame. And VCs are in the thick of it.
This lovely little article from Crunchbase is an excellent example of forensic analysis of successful investments. On this Fun Friday, I leave you with these thoughts from that article:
“What’s concerning with our sample of the largest IPOs of the past 10 years, however, is the absence of any real star performers among the big names. None are even above their first-day prices, let alone returning a multiple to their IPO investors.
It’s even more worrisome when one looks at how much capital has been going into startup investment. Over the past 10 years, investors have plowed more than $1.4 trillion (!) into seed through late-stage and pre-IPO financings.
At the peak, in 2021, a whopping $329.5 billion went into North American startup investments across all stages, per Crunchbase data. That — to put it in context — is more than the total recent valuation of all 20 of the biggest IPOs in our sample set.
To make good on that level of investment, startup backers will need not just hits but grand slams. Their recent batting averages indicate that’s unlikely to happen.“