Southeast VC

Public SaaS Valuations Are Diving. How Should You React?

I received data 48 hours ago from Pacific Crest which shows valuations of SaaS companies in a sharp decline.

Given 90% of our investments are into software companies, this is very relevant and I forwarded the data to a few of the entrepreneurs we work with. One of them emailed me back and asked:

What do you think is going on? How does this change our playbook?

Here is my response and I thought I'd share it here. But also need to mention I did make some edits since it was slightly more customized for the CEO that asked the question.

1. First, some companies have been whiffing on earnings and their outlooks are short of what Wall Street has been expecting (based on guidance from management). Fast forward, the models get revised and their share prices get annihilated. The ones that meet (or even beat) get swept up and get hit too (or stay somewhat steady..this is rare).

Second, we have been screaming to our LPs and many of our companies that the market is frothy. We have strongly encouraged those that needed to raise to do it asap. We think most valuations were WAY out of whack so none of this came as a surprise to David or me. The chart I sent is proof. Our quarterly reports for the last 2 years talk about it. And at our LP meeting last year, we focused SUPER HARD on it.

2. Going forward, VCs will be more selective, the A players (defined by quality of entrepreneur/business/market) always get funded (and potentially get a premium multiple). The Bs probably get funded but at a more market multiple, Cs and below don’t get funded (and this is the way it should be). This obviously shifts even more if the market continues to go down. Meaning the Bs also don’t get funded and the As get funded but no premium.

3. Companies that closed funding at the peak (this includes you) even with close to perfect execution, could see flat rounds. Why? Because the “new normal” valuation metrics have changed. We are already seeing this with one of our companies that wants to raise and a VC firm is offering flat to last round because market dynamics have changed. The entrepreneur points to all the progress. The VC can point to the “new normal” valuation ranges.

Things I would think about going forward (no matter what):

1. One of our software entrepreneurs always says he wants to make sure his customers are “delighted.” Would our customers say the same? “Delighted” = pretty solid lock in. I say this leading into #2

2. Is the burn controllable? What happens in another hard downtown. Will (the market we sell to) be soft? What happens if capital sources dry up completely? Can we hunker down and be a cash flow neutral business (if we had to).

3. Be a hawk on watching spend and make sure BIG bang for the buck.

4. Consider a strategy that uses this capital to get to cash neutral. Gives you potentially more leverage (you don’t need the money). Proves to the market you can get there if wanted. Then use the next round (10-15m?) to pound away at growth again, etc.

Why It's a Mistake to Raise Money Too Soon

The topic of raising money is popular with many entrepreneurs. But here is some great advice to from Joel Holland, CEO Washington DC-based VideoBlocks. He tells founders to wait as long as possible and not have a "race to raise."

Spend the 60 seconds to watch this.

 

Andreessen Horowitz: What's Going on in Venture Capital

Really good deck from Scott Kupor and the guys at Andreessen Horowitz on the current VC market and thought it would be good to share here. Topics:

• What's going on in the public markets.
• What are all these unicorns
• What's going on in VC

U.S. Technology Funding -- What's Going On? from a16z

 

Be Proactive to Grow Your Business

I had coffee with a local service provider last week. I am always up for meeting new people and it was the first time we had met. 

Our conversation went really well, but he mentioned he was very disappointed one of our portfolio companies didn't invite him in to pitch when they were selecting someone that offered a similar service. 

While I always respect someone that wants to grow their business, I was a little surprised to hear his disappointment. After all, other similar providers have surrounded the company for years and invested a ton of time building up that trusted relationship with the management team and board.

So, when I sat there last week, I realized we were meeting because it was reactive to what had happened (him not getting a shot). The others that were proactive and given our company attention over the years were the ones that were given the chance to compete. Of course we selected one of them. 

So when growing your business are you proactive or reactive?

Scott Kupor Andreessen Horowitz Speaks with Entrepreneurs at BCVP

We invited some local tech founders over to our office Wednesday night to meet Scott Kupor Managing Partner at Andreessen Horowitz. We have been close with Scott since before he joined Andreessen Horowitz. We thought this would be a good chance for folks to have an informal conversation with him in a small group setting while he was in town. 

One entreprenuer asked Scott what North Carolina needed to do to improve. Another founder immediately responded that the region needs more capital. It was not a very popular comment but I challenged that. Do we need more capital here? Or do we need more passionate founders. More risk takers. My take is that is what we need. 

But duh, if you have more entrepreneurs, don't you need more capital to fund them? Yes! And here is my answer to that.

1. There is more angel capital in this market than any point I have seen of being a VC. This comes in the form of angel groups and a lot of individuals. 

2. Once a company gets some decent (doesn't have to be revenue) traction, there are out of state VCs really interested in writing checks here. In fact, I count five venture investors that have written a check to a NC-based company for their first time in the last 6 months alone! So capital is very mobile.

So, what's your take on this? Do we need more capital? More entrepreneurs? Or what else is missing?