The Sentiment Index - Q4 2015

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The Sentiment Index - Q4 2015

Private & Confidential - All rights reserved - Visible.vc, Inc.
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The Sentiment Index Contents
The Sentiment Index
Current / 1-Year / 3-Year Market Indices
The VC Funding Flow
Valuations
Company Growth Trajectories
Exit Opportunities
Investment Attractiveness
Sector Analysis
The Narrative
The Bubble
Market data used in the survey is via Pitchbook and available here.

The Sentiment Index
77.01
65.25
The Takeaway: Across all time horizons and all
topic areas (company quality, investment
attractiveness, etc.) investors are less bullish on
the seed stage market than they have been in
past periods.
While the constant debate over the health of the private
markets can distract from the business of building and
investing in companies, there is a general sense that a
recent funding slowdown, combined with growth and
operational difficulties among later stage companies,
portends a long term decline in capital availability and a
power shift in favor of investors.

Current / 1-Year / 3-Year Market Indices
87.42
93.13
96.71
63.23
85.32
90.24
The Takeaway: Sentiment dipped significantly
across all time horizons as investors are less
impressed with company quality and fear a
continued tightening of capital availability.
In addition to current sentiment, we gauge investor
expectations over the next 12 and 36 months. This
quarter, the 3-year expectation is particularly interesting
since it coincides with a time when funds who raised in
2014 (a record year for seed fund formation) will be
looking to LPs for fresh capital.

Will the funding flow continue to support the seed stage?
The 6.6% dip in 3-year investor expectations may be
partially driven by an uncertainty around the private
markets continuing to support the seed stage at the level
we have seen over the past couple of years. 2014 was a
record year for so-called “Micro-VC” fund formation.
With an average time between funds of about 4 years
and an average fund closing time of 13 months, many
firms that raised a fund will be right in the thick of
fundraising 36 months from now.
The ability of these firms to raise follow-on funds will, of
course, be impacted by a number of factors - yields in
other asset classes, eventual outcomes of current
portfolios, and changes to the way emerging companies
raise funding (AngelList Syndicates, etc.).

Valuations
86.21
100.00
89.58
86.67
57.69
78.05
The Takeaway: Uncapped notes and sky-high
valuations may be going away as the power
pendulum seems to be shifting back to the
investor side of the table.
Valuations across the board remain high, as projected in
our Q3 survey, but a major dip in near term expectations
for valuations signal an anticipated market pull back as
well as a power shift back to the side of investors when it
comes to how much seed stage companies are worth. A
sea change already seems to be underway at the later
stages - with highly publicized issues at companies like
Dropbox, Zenefits, and Evernote - which investors
believe will trickle down to the earlier stages.

Company Growth Trajectory
88.00
92.50
95.45
75.00
91.67
89.74
The Takeaway: In a market where the “greater
fool” may not exist, investors are valuing
sustainability over top line scale.
In last quarter’s survey, investors were excited about the
quality of companies they were seeing and cited strong
revenue growth as one of the factors driving that
bullishness. Now, with many investors publicly sounding
the alarm on negative gross margins and poor unit
economics - even at companies previously held in
universally high regard - our survey takers have begun
reevaluating the quality and profitability of the top line
trajectory they previously trumpeted.

Exit Opportunities
While the number of VC backed exits saw general growth from early 2010 until mid 2014, recent periods have seen a
sharp decline, mainly driven by lack of desire on the part of would-be acquirers to pay what are seen as excessively high
valuations and the ability for companies to continue raising at higher valuations. Should follow-on funding opportunities
tighten up, exit via acquisition may become a more attractive as large acquirers will be less interested in sustainability of a
startup’s business model and more interested in the technology and team and how they fit into current offerings.

Investment Attractiveness
With declines in both the number of deals being done and the gross amount of capital being allocated to the seed stage,
investors are voting on so-called “Investment Attractiveness” with their (or their LPs’) wallets.

Relative Sector Bullishness Over Time
For the 3rd consecutive quarter, Enterprise
SaaS took home the top spot on our relative
sector bullishness list. Our take on a few
primary reasons why:
• A robust and established M&A market
exists, something that can’t be said for
some other markets listed
• The inherent stickiness of the business
model presents opportunities for
continuous upsells, inexpensively
accelerating growth
• Models for success are well-understood,
making it the evaluation of SaaS businesses
less risky for VCs

The Narrative

The Narrative
40.00
30.77
22.22
In addition to answering questions that we pose,
investors also have the opportunity to add some color,
providing commentary on interesting sectors, trends, and
concerns on the market. We then classify these
responses as Bullish or Bearish (or Neutral) and build an
index score to understand how optimistic (or in this case,
pessimistic) investors are.
Since our Q2 survey the ratio of Bullish commentary has
been cut almost in half, focusing heavily on the
perceived difficulty of raising Series A capital and
concerns around a trickle-down of worsening conditions
in the growth stage market.

The Narrative - Interesting Quotes
“I can sense the headwinds, starting at revaluation of unicorns and now moving downstream, takes time but now
routine Series As and Bs are getting hard to get done as the bar is moving higher and later stage investors are taking a
wait and see approach. This will continue for foreseeable future.”
“Many companies currently in Series A stage will face a Valley of Death when it comes to growth financing.”
“Series A funding is always tough - but good companies tend to get funded. Growth trumps all at this point, but it
can't come with negative gross margins and terrible unit economics. That might raise a couple rounds but doesn't
build a business.”
“The "bubble" has largely burst for late stage companies with high net burn rates and sub-optimal operating and
growth metrics. Those wells have dried up. For early stage companies, there continues to be active venture investing
for high potential entrepreneurs.”
“I see valuations hitting a plateau while real value catches up.”

The Narrative - Interesting Quotes
“Amazing amount of disruptive ideas, quality of entrepreneurial teams, exponentially growing startup ecosystem…”
“The Series A squeeze is real and follow on from Seed Rounds are less and less likely given the # of companies that
raise angel/seed capital.”
“I think the bubble is a Valley issue. It will blow back on the rest of us, but we are not in a bubble outside of a certain,
few geographies with a certain few dramatically overvalued companies.”
“It’s too easy to start a business these days, get funded, then shut it down 12 months later when the funding runs
out...this equates to founders being less dedicated and resilient, they would rather just go start Company #2.”
“I think there will be a strong correction and not nuclear tech winter.”

The Narrative - Visualized

The Question on Everyone’s Mind
Many signals from - capital patterns to sentiment -
point in the direction of a market correction. But
predicting the when and how is a fools errand. In
lieu of prognostication, we will leave you with this
great piece of advice that an investor offered in
our Q2 Sentiment Index survey:
“Quality companies will continue to get funded
in all market cycles...so stop worrying about
what may be coming and build your fucking
company!”
Well said.

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