One characteristics of venture markets is persistence: the best investors can find and negotiate better terms with top entrepreneurs and can usually help sell them for more money.
There can sometimes be an element of luck to get the first win in, which is why some firms doing a form of spray-and-pray at an early stage (think early years of GV, formerly Google Ventures, when it backed 100 companies inside three years), or early in the economic cycle, for example 2009-2010, to boost the chances of this luck.
But once the luck is in, capitalising and building a firm takes people management skills and the ability to burnish your reputation to stay in entrepreneurs’ and buyers’ minds as having an edge.
If deal making is the sine qua non (indispensable action) of venture then one way to do this polishing is to play public relations well. A year on from the well-publicised warnings that “winter is coming” and “sub-prime unicorns” it is interesting to look at which firms helped stir the concerns and invested through them.
First among them is Sequoia, a legendary VC firm whose 5.5-eight times returns the WSJ parsed through based on such exits as Youtube ($1bn to Google pre-revenue back in 2006), LinkedIn (floated then sold to Microsoft for $26bn this year) and the motherlode, WhatsApp’s sale to Facebook for $22bn in 2014.
In October, “revered” Silicon Valley venture capitalist Michael Moritz, a partner at Sequoia Capital, in an opinion piece in the Financial Times said many startups recently valued at $1bn or above “seem the flimsiest of edifices” or were “sub-prime unicorns”.
Moritz, who was an early investor in Google, YouTube, Yahoo and PayPal and remains on the board of LinkedIn, said investors were being too easy on many private companies and many founders themselves were “deluded.”
People certainly took heed, especially given Sequoia’s earlier prescience in saying “RIP good times” eight years before as the great recession started kicking in.
Barry Kramer, partner at law firm Fenwick & West, said after its second quarter survey of 195 venture financings of companies headquartered in Silicon Valley: “This was the third quarter in a row of declines in the venture valuation metrics. Such metrics hit an all-time (12-year) high in mid-2015, but have since fallen to be generally flat with the 12-year average for such metrics.”
Back in late 2009 VC peers such as Mark Suster noted: “I hear from several sources that Sequoia is very active in the market aggressively chasing several deals and even driving up prices on some early-stage deals.”
Sequoia had, for example, led the $600,000 seed round for Y Combinator alumnus Airbnb in April 2009 (Sequoia also committed to the accelerator’s angel fund in March), with other deals in that half-year including C12 Energy, Kenshoo, GameGround. Data provider Pitchbook noted 34 Sequoia deals in the first half of 2009.
This time seems similar. Sequoia was ranked first for deal activity by Pitchbook in the first three months of 2016 with 27 deals, and second over the first six months. Either pricing moved more into its reach or the fears it helped engender potentially put off some competition.
As the New York Times also noted this week: “A Silicon Valley startup crash may still take place, especially if the stock market tanks or if there is a financial shock to the system.
“And some tech investors like Mr [Bill] Gurley, the venture capitalist [at Benchmark], are still sounding the alarm. In April, Mr Gurley wrote a blog post that laid out how venture investors remain overcapitalised to a dangerous degree, which made investing in startups more risky.
“While there has been no crash since then, he does not regret any prognostications. He said he was glad if young companies had stopped overspending because of his warnings. ‘Funding for just anything under the sun has gone away,’ Mr Gurley said. ‘I spoke out because the longer those things go on, the worse things end up later on. This is the impact I wanted to have.’”
Benchmark has multiplied investors’ money 11-times net of fees in its 2011 fund, according to a source for the WSJ, including blockbuster investments like Uber Technologies and Snapchat, but was not in Pitchbook’s list of most active investors in either of the first or second quarters, similar to the first six months of 2009 when it invested in 15 deals including Twitch.
With such returns comes attention and the ability to move markets. It is a policy that the best corporate venturers could do well to take note of.
Picture of Edward Bernays, the “father of public relations”
Article updated with Pitchbook data for Sequoia and Benchmark figures for 2009.