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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Tom Tunguz Talk at Wharton San Francisco
- 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. โข Public markets depressing multiplesโฆ โข But the venture market is increasingly competitive among venture firms who are raising a constant amount of dollars โข Net effect: relative stability in the fundraising market Two Forces in Tension
- 12. Startups Are Markedly More Capital Efficient
- 14. 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
- 15. 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
- 16. โข Recent IPOs are 2x more VC dollar efficient as their older brothers โข Outliers require negligible capital before IPO because of more efficient avenues of customer acquisition โข 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
- 17. Is Seed the New A?
- 18. Seed investment dollars has tripled in 4 years to $1.5B in 2013
- 19. And while angel rounds have increased someโฆ
- 20. VCs involvement in rounds increases round size by 400%
- 21. Top quartile seeds, aka MegaSeeds are larger than most series As
- 22. MegaSeeds show no signs of slowing down. VCs buying early access to startups.
- 23. Consequently, the MegaSeed has replaced the traditional Series A
- 24. โข VCs have 4xโed the size of a traditional angel-only seed round โข VC dollars have created a new category of seed investment, the MegaSeed which has replaced the Series A โข 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
- 26. Larger seeds correlated to higher chances of raising a Series A
- 27. Larger seeds are better and equally as common as smaller seeds
- 28. 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
- 29. 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
- 30. Q4 is the least attractive time to raise a seed
- 31. โข Raise more than $900k โข Easier to do with VC involvement. Typical round has 1.6 VCs โข Raise earlier in the year if you can Best practices for raising a seed
- 32. Impact of Increasing Seed Investment in Follow On Rounds
- 33. More seed dollars = more seed companies = more series A competition
- 34. Series As rising. Crunch is in the Series B.
- 35. $5-$10M Series As have 2xed in 4 years
- 36. But Series Bs are flat across the board
- 37. Huge increase in the number of Mega Rounds
- 38. โข Series A investment up 200%, responding to increase in company formation and seed companies โข Series B flat, creating a crunch for follow-ons โข Clear winners able to delay IPO/M&A for years because of IPO-sized rounds available in the private markets โข 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
- 40. Appendix
- 41. qs
Editor's Notes
- > 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. Weโve seen run-up and then a correction. Itโs unclear what the โrightโ 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.
- http://tomtunguz.com/the-hardest-round-to-raise/
- > 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
- http://tomtunguz.com/mrr-growth/