Preparing for re-entry
Gil Dibner

Astronauts who spend substantial time in zero-gravity must exercise regularly so that when they return to earth they are able to function under the sudden stress of gravity. I’m starting to sense that that is where we are in start-up land: We are in orbit, enjoying the beautiful views and the weightlessness, but we might be running out of time to prepare ourselves for re-entry.

Over the past few days, I’m finding myself brushing off my valuation skills — concepts I haven’t really dealt with in a serious way since my days in equity research back in 2003. Back then, my job was to try to value a set of stocks down to the dollar. There was a great deal of precision — or, at least, a great deal of purported precision — in the discounted cash flow (DCF) valuations we’d develop for the stocks we covered. We’d carefully model revenues and expenses to generate net income forecasts for ten years. We’d model balance sheets and cash flow statements to try to adjust net income into free cash flow (FCF) forecasts. We’d come up with terminal growth rates weighted average costs of capital (WACCs) to try to convert the FCF in year 10 into a terminal value that we could plausibly defend. As any student of DCF valuation will tell you, the terminal value determines the lion’s share of the valuation — and the assumptions one uses for terminal growth rate and WACC have a massive impact on the terminal value. Skeptics might argue the whole exercise is a massive waste of time — because almost any valuation can be justified if you just put in the assumptions needed to get there. The skeptics have a point.

And yet, despite the fact that I am supposed to spend my time focused on very early-stage companies, I have found myself drawn back into these sorts of questions. This has nothing to do with our portfolio — at least not yet — but it has to do with the valuations we are increasingly seeing for companies throughout the eco-system. Unicorns are so common that the term is by now clearly a misnomer. We are seeing decacorns on a pretty regular basis. Valuations in the $50B are also increasingly common. At the same time, the public markets are jittery. At least half of the tech IPOs of 2021 are trading below their opening price. Even some of the late-stage private venture investors seem — at least anecdotally — to be getting nervous. Between the screaming headlines and the eye-popping valuations, we hear stories and rumors from credible sources: this late-stage term sheet got pulled, that late-stage deal isn’t happening, that late-stage valuation got squeezed. At some point — inevitably, inexorably, always — public and private valuations converge. Somewhere on Wall Street the bean counters are counting beans and realizing that some of these valuations don’t exactly add up.

This is where the esoteric and deeply flawed DCF methodology comes into play. I am under no illusions that some valuation exercise I perform in Excel is going to accurately model the “correct” valuation of a late-stage startup I know very little about. But the exercise just might shed some light on what one would have to believe to pay a given price for a company. And as valuations keep climbing, that analysis becomes clearer and clearer: in too many cases, one would have to believe a completely implausible set of assumptions to justify the valuations being paid. In some cases, for example, a basic DCF would show that you can justify the valuation being paid if you assume a business will generate $1B of FCF annually. In reality, the business in question is still losing money. To go from negative net income to $1B in FCF is possible, but far from certain.

And in some cases, it’s even easier to see the logical problems: Just this evening, for example, a friend told me of a late-stage slide deck he saw on a well-known company. The market size assumptions in their deck, he said, (if one takes the trouble to total it all up) added up to a number greater than global GDP. You do not need a detailed DCF valuation model to bring to question some of the valuations being paid by the late stage venture market. In many cases, even the crudest analysis would cast a lot of doubt on some of these valuations.

Does this matter for early-stage founders and for early-stage investors like Angular that back them? At first glance — no. We invest so early (and in such risky opportunities) that these later-stage valuation questions are completely disconnected from the day-to-day reality of the founders with whom we work. But these worlds intersect fairly quickly. Founders are coming under increasing pressure to accept very high valuations for their businesses — and that can create tremendous challenges if markets come crashing down. As an industry, our collective obsession with securing high valuations can have a painful cost when market sentiment turns.

Let me be crystal clear: I believe that tech’s best years are ahead of us and that there is unprecedented opportunity to create value. Furthermore, I believe that in our portfolio alone there are multiple companies that are poised to become multi-billion dollar companies. That said, I also see valuations in the tech market on a daily basis that make little or no sense at all — and I am picking up on very clear signals in both the private and public markets that I am not alone in this sentiment. The zeitgeist may be shifting, our trip through the wonders of weightlessness may be coming to an end, and it may be wise to strap ourselves into the space station’s treadmill so that we are prepared for re-entry if and when it happens.

EVENTS

Jan 27 / 20 Years of Growth Learnings
Darius Contractor, Chief Product & Engineering Officer, Vendr

Feb 2 / The Importance of Culture and Values As You Scale a Business
Oren Kaniel, Co-Founder & CEO, AppsFlyer

FROM THE BLOG

What Childhood Can Teach Us About Entrepreneurship
Childhood as a solution to the early stage entrepreneurship explore–exploit dilemma.

How to Overcome “Customer-Built” Software’s Learning Curve
“Customer-built” companies and the challenge of user activation.

The Long Road to Creating a Category:
Category creation strategy, with a little inspiration from Apple.

Three Methods of Venture Capital:
A guide to navigating a manic market as a venture capitalist (part 1).

EUROPE & ISRAEL FUNDING NEWS

UK/Payments. Checkout raised $1B for its full-stack payments platform consisting of a gateway, an acquirer, a risk engine and a payment processor.
France/SME Bank. Qonto raised $556M to continue its mission to become the challenger bank focused on business bank accounts.
France/Retail Marketplace. Ankorstore raised $286M for its marketplace that lets independent brands sell their products to independent retailers.
Israel/ML Tooling. BigPanda raised $190M for its AIOps event correlation and automation platform.
Israel/Security. Pentera raised $150M for its automated security validation platform.
Spain/SME Travel. TravelPerk raised $115M for its SME-focused business travel booking platform.
Israel/Retail Analytics. Placer AI raised $100M for its real-world intelligence platform producing analytics on physical locations.
Germany/Security. SoSafe raised $73M for its cybersecurity awareness and testing platform.
Germany/Real Estate SaaS. Alasco raised $40M for its cloud-based financial management platform for the real estate industry.
Austria/Data Tooling. Mostly AI raised $25M for its platform that produces synthetic data on demand.
UK/LMS. Looop has been acquired for $20M by 360 Learning for its learning management system.
Germany/Marketing. Superchat raised $15.6M for its omnichannel customer messaging platform.
Germany/SaaS Spend. Satrify raised $15M for its SaaS tool procurement platform that helps companies optimising the management and cost of the SaaS tools they use on a daily basis.
UK/SME Finance. Vitt raised $15M for its revenue-based financing platform for SMEs.
Germany/Manufacturing Operations Automation. Operations1 raised $11.5M for its software that captures and shares adaptive employee-led production processes that provide intuitive worker guidance and connects the organization to manufacturing companies.

WORTH READING

ENTERPRISE/TECH NEWS

Computing and data infrastructure in ’22. Bucky Moore of Kleiner Perkins annual muse on the emerging trends in the field. On the disintermediation of the cloud providers: “The implications of this shift are enormous. The relationship between developers and the cloud providers will eventually be disintermediated by serverless infrastructure players. We will begin to think of the cloud providers as “utility” rather than “solution” providers. This evolves our perception of the clouds to be similar to the entities that bring us electricity and internet connectivity — providers of access to higher-level solutions we rely on to solve fundamental problems in our working and personal lives. A healthy partnership between the serverless ecosystem and the cloud providers is in the best interest of the developer, and likely to accelerate consumption in a manner that grows the pie for all.”

HOW TO STARTUP

The best leaders are (both) demanding and supportive. Former Instacart CFO, Ravi Gupta, writes about tough times and reflects on Mike Moritz’s (VC at Sequoia) leadership through those challenges. “Mike Moritz was our board member from Sequoia. Anyone who has ever met Mike or read his writing knows that he has a special way with words. In this meeting, he delivered a simple and devastating message: if we didn’t change — immediately — we would go out of business. It was the single worst meeting of my career.”

In 2017 “Amazon bought Whole Foods. Our biggest partner. 43% of our volume. Bought by Amazon with a reputation for annihilating competitors. You know that scene in Game of Thrones when the White Walkers broke down the wall? It felt like that. I woke to 263 text messages. Some from our team, some from our grocery partners, some from friends, some from people I hadn’t spoken with since high school. One was from my mom — “Are you ok?” (I love you, Mom!). Many were from our investors asking what it meant for their investment.

One was from Mike. “What do you need?””

Product Qualified Leads. Product Qualified Leads (PQLs) are users who signal their buying intent based on product usage rather than just traditional marketing or sales qualification. OpenView has a great guide to PQLs. Following this post, Alexa Grabell, the CEO and co-founder of Pocus, reflects on how to convert product-qualified leads PQLs into revenue. “As we know, Product-Led Sales is a team sport, so sometimes just an outreach sequence from your sales team may not be enough. You might want to layer in product engagement, email marketing, ad retargeting, and more.”

Lessons from a hyper scaler. Jamie Cuffe who runs New Products at Retool reflects on lessons growing from less than 100 to 1000s of customers in the last two years. “Engineer your GTM. Eng resources are as useful to GTM as they are to your product. We’ve built 1000s of reusable templates, landing pages and top of funnel tools for marketing to drive programmatic SEO.”

Hiring outside the Bay. Patrick Collinson co-founder and CEO of Stripe talks about their hiring numbers based on geography: “In Q1 2019, 39% of Stripe’s hiring was outside the Bay Area and Seattle. Last quarter, it was 74%”.

HOW TO VENTURE

The new YC deal. Y Combinator’s new deal sparks fear in seed investors, Y Combinator said “that in addition to its usual $125,000 investment in startups in exchange for 7% equity, the organization would provide another $375,000 at a valuation determined by a company’s later investors”. Sheel Mohnot of btv.vc tweeted “makes YC incompatible with seed-stage VC’s that lead rounds”. Kevin Kwok of Greylock tweeted “it’s actually worse than prior deal for companies doing well. And better for those struggling with funding”.

Global league table. Crunchbase shared their report covering the record-busting 2021 year of venture capital funding. “SoftBank Vision Fund and Tiger Global topped the list of largest lead investors globally in venture and growth-stage rounds. Y Combinator, meanwhile, was the busiest investor by round counts, with 642 deals last year, followed by rival startup accelerator Techstars.”

Where were unicorn founders born? Ilya Strebulaev, a Finance Professor at Stanford, analyzed 1,078 founders of 500 US unicorns countries of birth. Conclusion: over four out of ten unicorn founders are first gen immigrants.

PORTFOLIO NEWS

LoudNClear has emerged from stealth and launched their new website.

Forter’s GM of EMEA, Aaron Begner, covered the impact of supply chain shortages on retailers and fraudsters.

Levity published the definitive guide to how Natural Language Processing works.

Sisense’s CEO, Amir Orad, wrote about the promise of analytics in Forbes.