The pros and cons of liquidity
David Peterson

High growth tech stocks are taking a beating. On Friday, Netflix lost $48bn in market value after announcing late Thursday that its subscriber growth would be less-than-stellar in 2022. Zoom has fallen by around two-thirds since its peak in 2020. Twilio has been more than cut in half. Amazon is down over 10% in just the last 5 days. Even Google, Microsoft, and Meta are off all time highs since the beginning of January. Few tech players have been spared.

There are signs that the tech rout is spreading. More than 300 stocks listed on the US S&P 500 are down at least 10% from recent highs. More than 100 are down at least 20%. Of course this isn’t limited to public markets. BTC is down almost 20%. ETH is down almost 30%.

And this public market repricing appears to be trickling down to the private markets as well. As Softbank Vision Fund CEO Rajeev Misra told Dan Primack, public SaaS multiples have fallen from 20x forward revenues to 12x, but “in the private markets they’re still at 20x or higher…I believe that gap is going to tighten over the next six months.” At the growth stage, the top of startup valuations isn’t coming. It’s already behind us.

And the sickness may have spread even further! In a paper published on Thursday, investor Jeremy Grantham didn’t mince words, writing that we are experiencing “simultaneous bubbles across all major asset classes.” This is, according to Grantham, the fourth “superbubble” in history (following the US in 1929 and 2000 and Japan in 1989). He estimates wealth losses could total $35 trillion in the US alone.

I don’t know what the future holds. Uncertainty abounds. But it’s times like these that I’m thankful to work with early stage companies, for one simple reason: illiquidity.

Investors in liquid assets (e.g. public market equities or crypto) are constantly confronted with the market value of their investments. Which means they’re constantly faced with the question: should I buy or should I sell?

Staying calm, staying focused and maintaining conviction in your ideas is hard enough already. It’s a lot harder still when the market is telling you that you might just be the greater fool.

This isn’t just true for investors, but employees as well. Employees at tech companies like Zoom have seen their net worths cut by two-thirds over the last year and half, despite beating revenue expectations each and every quarter. What must that be doing to morale internally? Zoom is the extreme, yes, but pretty much every tech employee hired in the last 6 months is currently underwater on their equity grant.

Similarly, it’s worth asking if this same dynamic will play out in the world of web3, too. Tokenization aligns incentives on the way up (which is a huge advantage for early stage projects), but what happens when the market crashes? Will early believers jump ship as it appears their investment in an ecosystem or protocol isn’t panning out?

Of course, there’s a version of this playing out in late stage private markets, as well. The fastest growing startups have seen some heady valuations in the past two years (100x+ forward looking revenue at least). But in an environment where prevailing sentiment says the gap between public and private valuations is going to narrow, suddenly those valuations look like more of a burden than a blessing. I’ve increasingly heard stories of how exceedingly high valuations are undermining company efforts to recruit senior talent. Execs look at the valuation, and the growth needed to maintain that valuation post-IPO as multiples contract, and they lose interest. Why make a risky bet when so much of the upside has already been pulled forward by the market?

Given all these dynamics, it’s easy to see why illiquidity can be an advantage for projects — like early stage company building — that require long term commitment and focus.

Early stage company building is messy and uncertain, but it’s also simple. Only one thing matters — solving a problem for your customers. That’s it. That’s the entire game. Stay alive long enough to solve a big, meaningful, painful problem for your customers. Minute-by-minute market repricing need not distract you from this goal. And with low, early stage valuations, the upside is still near stratospheric to entice any particularly discerning hire to take a chance on what you’re building.

So, those of us in the early stage will soldier on. And as the world erupts into turmoil around us all, there’s something comforting about that clarity.

EVENTS

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

Mar 23 / 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

France/SME Finance. Spendesk raised $113M to help small businesses manage accounting jobs such as invoicing, expense reimbursement and compliance.
Germany/Productivity. Lendis raised $90M for its operating system for hybrid work.
Israel/Financial SaaS. Personetics raised $85M for its AI-powered platform used by some of the world’s biggest banks to issue tailored advice and insights to customers.
Austria/Construction SaaS. PlanRadar raised $68M for its platform that helps construction & real estate teams to execute projects and collaborate with ease.
Switzerland/QaaS. Terra Quantum raised $60M for its quantum-as-a-service platform.
France/OEM Food. La Vie raised $28M for its vegan bacon.
UK/Legal SaaS. Juro raised $23M for its browser-based contract automation platform.
UK/Supply Chain. 7bridges raised $17M for its AI-based supply chain automation platform.
Israel/Sales Enablement. Walnut raised $15M for its a company that creates sales and marketing demo experiences.
Germany/SW Development. Softr raised $13.5M for its no-code web-app building platform.

WORTH READING

ENTERPRISE/TECH NEWS

The perfect (negative) storm. While 2022 has already been brutal for tech stocks, valuations may continue to falter as the Fed aims to tighten its monetary policy amid record inflation (in 2021, inflation hit a 39-year high of 7% in the US). The Fed’s commitment to quantitative tightening in 2022 is troublesome for tech stocks, given their particular sensitivity to rising interest rates. Another sign of things to come: “49% surveyed by Deutsche Bank believed US tech shares are in a bubble”.

Israeli tech’s growing salaries. The amount of money pouring into Israeli startups has reached sky high levels. In 2021, “780 Israeli startups raised a record $26 billion from investors”. The influx of startup capital is pushing Israeli startup salaries way up — particularly for engineering talent. “The Central Bureau of Statistics says the average monthly salary in the tech industry reached 25,812 shekels ($8,240) in October, more than 8 percent above a year earlier. The best-paid jobs in R&D and software engineering pay 2,000 and 3,000 shekels a month more. Meanwhile, average pay in Israel was at 11,277 shekels in October, with the number falling 2.6 percent over the previous 12 months.”

And just like that… Peloton halts production.

HOW TO STARTUP

Early stage startup mistakes. Noah Eisner, the Co-Founder of Coupa, a publicly traded company currently valued at $9.5B, shares the five biggest mistakes of early stage startups. The whole post is worth a read, but two mistakes are worth highlighting, especially since they’re both still commonly made. The first is failing to talk to customers. Too often “founders get an idea, talk to a couple buddies who work in the space, and start building. Most likely, they soon find themselves wondering why they can’t get more than a handful of early customers.” However, “a smart founder will have a wealth of conversations with decision-makers or influencers at companies that may be in her target market. She will ask plenty of open-ended questions about a “pain” in the focus area. She will listen, take copious notes, and look for patterns.”

The second all too common mistake is underpricing the solution. “The four undesirable effects of underpricing are:

1. You will struggle for meaningful revenue. This likely needs no further explanation.

2. You will gain less attention from your actual customers. You want to be an important solution for your early customers. You want them to sing your praises and recommend you to others. If a customer is paying you $100K annually for your SaaS solution, it’s important to them. They are making a real investment and will put the right players on the project. You’ve got their attention. If a customer is throwing $10K annually for it, they may have snuck it under some procurement rules. It’s a nice-to-have and may not get the focus it needs.

3. You will decrease your stickiness. They say that B2B apps tend to be sticky. That’s true, except in two circumstances. First, if the app was never put into production or rolled out to a wide number of users. And second, if you ask for a significant price increase. Nothing is sticky when the customer values the solution at $10K, and then can’t explain why the new price is $75K.

4. Underpricing your offering attracts the wrong type of sales people. It’s uncommon to have a B2B offering that is marketing-driven, i.e., prospects come to your site, learn, and buy with little to no sales involvement. Most B2B offerings require some form of sales outreach. On the people front, good sales people are financially driven. They’ll look for opportunities to sell at a high price point. That’s how they make their numbers.

All four of these aspects can hurt your ability to fundraise, which means your flywheel won’t start spinning.”

This is such an important topic and it’s worth further exploration for early stage founders grappling with pricing questions. For more on this, underpricing was covered extensively in our recent Angular Insights episode with Emil Efrem — Co-Founder of Neo4j. To listen to the discussion about open source, pricing, and how Neo4j navigated to the pricing model they have now, check out the video here or the podcast here.

Retention during the great resignation. As the number of workers quitting their jobs continues to grow amid the great resignation, founders and managers should take a proactive approach to retaining their top talent. Why? Because “52% of exiting employees stressed that their manager or organization could have done something to prevent them from leaving their job.” Voluntary turnover is also a massive expense for companies, “the cost of replacing an individual employee can range from one-half to two times the employee’s annual salary — and that’s a conservative estimate.” Losing top talent is about more than the monetary expense, ”losing your best people means losing your reliable winners, your constant innovators and your most effective problem solvers. Internally, it breaks down team morale. Externally, it can mean lost customer relationships.”

HOW TO VENTURE

European VC’s remarkable 2021. Pitchbook has released their terrific 2021 Annual European Venture Report. The report highlights how last year was truly a remarkable year for Europe and Israel’s VC market. The main headline: for the first time ever, capital invested in the region surpassed €102B, more than double the amount invested in 2020, €46B… which was also a record-breaking year. “Despite uncertainty stemming from the COVID-19 pandemic and macroeconomic volatility, particularly rising inflation, VC-backed companies have attracted copious amounts of capital. The number of completed VC deals reached a record 10,583, thus indicating that rounds are growing in frequency as well as magnitude across the European VC landscape.” Aggregate exit value also reached a new record “spiking to a staggering €142.5B — more than triple the previous best set in 2018”. Public listings were the main growth driver behind the massive increase in exit value in the region. Notable exits that helped drive the record aggregate exit value included Sportradar (NASDAQ: SRAD), On (NYSE: ONON), Wise (LON: WISE), Deliveroo (LON: ROO), and AUTO1 Group (FRA: AG1).

PORTFOLIO NEWS

Valohai strengthens its advisory board with Robocorp CEO, Antti Karjalainen.

Zigi is an AI-powered personal assistant that manages developer’s non-coding tasks and their closed beta recently launched. Request an invite to their beta here.

JFrog’s CHRO, Keren Massad, writes about building the company from 1 to 1000 employees. “We need to constantly not only attract and retain the right people, but build the right culture for them to thrive in. This culture needs to go beyond typical tech company perks. It’s not the table tennis or free snacks that you see in the office. It has to be an inherent part of who you are as a people.”

Sisense released a new study, “The Business Intelligence Landscape”.