tom tunguz talk at wharton san francisco
DESCRIPTION
Overview of the forces shaping the early stage venture capital market in 2014TRANSCRIPT
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$3.5B under management
Offices in California and
China
Seed, Series A, B and Growth Investments
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How the Fundraising Market is Evolving
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VC Fundraising is Steady; 2014 Strong Start at $8B+ in Q1
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Meanwhile, VC investments also steady at 10 year mean of $25B
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And average investment size is stable to up
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But Consumer Publics are down 25%
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And the fall has been broad-based
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Enterprise has been hit harder, falling 40%
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Depressing Multiples from All Time Highs
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• Public markets depressing multiples…
• But the venture market is increasingly competitive among venture firms who are raising a constant amount of dollars
• Net effect: relative stability in the fundraising market
Two Forces in Tension
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Startups Are Markedly More Capital Efficient
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IPO Cohort Average ROIC
Median ROIC Count
1998 0.82 0.82 2
2002 1.05 0.88 6
2006 1.78 1.15 13
2010 2.00 1.24 15
Startups today require half the capital to go public compared to 12 years ago
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2010 Cohort Segment Average ROIC Median ROIC
ROIC <= 2 1.04 1.00
ROIC > 2 13.5 4.80
Certain segments are unbelievably capital efficient
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• Recent IPOs are 2x more VC dollar efficient as their older brothers
• Outliers require negligible capital before IPO because of more efficient avenues of customer acquisition
• Net effect: startups need to raise less capital and will require a different pattern of financing
Startups are far more capital efficient than they used to be
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Is Seed the New A?
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Seed investment dollars has tripled in 4 years to $1.5B in 2013
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And while angel rounds have increased some…
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VCs involvement in rounds increases round size by 400%
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Top quartile seeds, aka MegaSeeds are larger than most series As
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MegaSeeds show no signs of slowing down. VCs buying early access to startups.
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Consequently, the MegaSeed has replaced the traditional Series A
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• VCs have 4x’ed the size of a traditional angel-only seed round
• VC dollars have created a new category of seed investment, the MegaSeed which has replaced the Series A
• Net effect: Series A investment sizes have increased because capital startups are further along than before
Competition in the VC market has pushed VCs to invest in seeds
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Startup Fundraising Playbook
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Larger seeds correlated to higher chances of raising a Series A
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Larger seeds are better and equally as common as smaller seeds
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Metric Angel Seeds VC Seeds
Series A Success Rate 33% 54%
Mean Seed Raised $M 1.3 1.6Median Seed Raised $M 1.2 1.5Mean Series A Raised $M 7.3 7.4Median Series A Raised $M 5.3 6.0
Raising seed from VCs increases seed round size but no impact on Series A
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Metric Insider VC Leads A All VC Seeds
Mean Seed Raised $M 1.6 1.6Median Seed Raised $M 1.5 1.5Mean Series A Raised $M 7.2 7.4Median Series A Raised $M 5.8 6.0
Signaling risk is zero for companies who are able to raise Series A
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Q4 is the least attractive time to raise a seed
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• Raise more than $900k
• Easier to do with VC involvement. Typical round has 1.6 VCs
• Raise earlier in the year if you can
Best practices for raising a seed
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Impact of Increasing Seed Investment in Follow On Rounds
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More seed dollars = more seed companies = more series A competition
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Series As rising. Crunch is in the Series B.
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$5-$10M Series As have 2xed in 4 years
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But Series Bs are flat across the board
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Huge increase in the number of Mega Rounds
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• Series A investment up 200%, responding to increase in company formation and seed companies
• Series B flat, creating a crunch for follow-ons
• Clear winners able to delay IPO/M&A for years because of IPO-sized rounds available in the private markets
• Net effect: Winners have access to tons of capital. Others may struggle with the Series B crunch.
Series A and B and later rounds are in flux
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Appendix
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qs
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