Tom Tunguz Talk at Wharton San Francisco


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Overview of the forces shaping the early stage venture capital market in 2014

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  • > let me tell you a bit about redpoint
    highlights of the portfolio companies
    lots of enterprise investments, about 80% of our investments in our latest fund are enterprise
    > thanks for having me today. my goal is
  • Dollars entering VC not anywhere close to the bubble
    Operating at or below median for the past 5 years
    2014 strong start. Q1 figure is 8B. Holding the same pace would imply $32B which would be the second highest year since the bubble
  • Dollars going out is relatively constant
  • So the fund raising market is relatively stable
  • In contrast there has been quite a bit of public market volatility
    Mean share price is down 25% in consumer tech over the past six months
  • Trend has been broad-based across all different industries. Real Estate is the only sector that has out-performed relatively speaking.
  • Same story but worse in enterprise. Here is a basket of about 30 publicly traded software companies, down 40%.
    Again all of these companies have been hard hit.
  • Historical TEV/NTMR for software in the mid-aughts has been 4-5x. We’ve seen run-up and then a correction. It’s unclear what the “right” or long term multiple is.

    But SaaS in particular, huge opportunity. Only 2-3% of all IT spend dollars are spent on SaaS. At least a 10x upside from here.
  • > let me tell you a bit about redpoint
    highlights of the portfolio companies
    lots of enterprise investments, about 80% of our investments in our latest fund are enterprise
    > thanks for having me today. my goal is
  • Tom Tunguz Talk at Wharton San Francisco

    1. Tom Tunguz Redpoint Ventures
    2. $3.5B under management Offices in California and China Seed, Series A, B and Growth Investments
    3. How the Fundraising Market is Evolving
    4. VC Fundraising is Steady; 2014 Strong Start at $8B+ in Q1
    5. Meanwhile, VC investments also steady at 10 year mean of $25B
    6. And average investment size is stable to up
    7. But Consumer Publics are down 25%
    8. And the fall has been broad-based
    9. Enterprise has been hit harder, falling 40%
    10. Depressing Multiples from All Time Highs
    11. • 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
    12. Startups Are Markedly More Capital Efficient
    13. 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
    14. 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
    15. • 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
    16. Is Seed the New A?
    17. Seed investment dollars has tripled in 4 years to $1.5B in 2013
    18. And while angel rounds have increased some…
    19. VCs involvement in rounds increases round size by 400%
    20. Top quartile seeds, aka MegaSeeds are larger than most series As
    21. MegaSeeds show no signs of slowing down. VCs buying early access to startups.
    22. Consequently, the MegaSeed has replaced the traditional Series A
    23. • 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
    24. Startup Fundraising Playbook
    25. Larger seeds correlated to higher chances of raising a Series A
    26. Larger seeds are better and equally as common as smaller seeds
    27. Metric Angel Seeds VC Seeds Series A Success Rate 33% 54% Mean Seed Raised $M 1.3 1.6 Median Seed Raised $M 1.2 1.5 Mean Series A Raised $M 7.3 7.4 Median Series A Raised $M 5.3 6.0 Raising seed from VCs increases seed round size but no impact on Series A
    28. Metric Insider VC Leads A All VC Seeds Mean Seed Raised $M 1.6 1.6 Median Seed Raised $M 1.5 1.5 Mean Series A Raised $M 7.2 7.4 Median Series A Raised $M 5.8 6.0 Signaling risk is zero for companies who are able to raise Series A
    29. Q4 is the least attractive time to raise a seed
    30. • 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
    31. Impact of Increasing Seed Investment in Follow On Rounds
    32. More seed dollars = more seed companies = more series A competition
    33. Series As rising. Crunch is in the Series B.
    34. $5-$10M Series As have 2xed in 4 years
    35. But Series Bs are flat across the board
    36. Huge increase in the number of Mega Rounds
    37. • 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
    38. Appendix
    39. qs