In our second and final episode on the Bubble, we share what is happening in Venture Capital, on the exit – IPO, M&A, etc – front, as well as share clear “so-whats” for entrepreneurs and VCs. For in-depth views on the status of the economy, listen to our previous episode, episode 25.
- Section 1: What is happening in VC? (02:05)
- Section 2: Exits are great, though, right?! (17:52)
- Section 3: So-what? Implications for entrepreneurs and VCs (25:57)
- Conclusion (43:49)
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Nuno: Welcome to episode 26 of tech deciphered. This episode will conclude our two-part series on the bubble and why we actually believe there is one going on. In this episode, we will discuss the VC landscape and how it is evolving. We will talk about exits, not just IPOs, but also other types of exits like mergers and acquisitions and how that landscape is looking like.
And finally, we will end up with something pragmatic, the “so what”, the takeaways, the implications for both entrepreneurs and investors.
Section 1 – What is happening in Venture Capital? (02:05)
Nuno: Moving to venture capital, there’s a lot of interesting elements to talk about. Some really interesting analysis from our friend Tom Tunguz but also of what’s happening in the macro space, some analysis of what we’ve seen from PitchBook and CB insights, it seems we’re going to have an incredible year in venture capital. This is it. There’s no crisis there’s a ton of money, dry powder, there’s new funds, I actually have a new fund going. So I’m very happy with that, but in some ways it’s like, woh, this is all fantastic. Increasing everything, increasing everything, more deals, more money deployed.
We’re all great. We’re going to have, a flagship year in venture capital. And somehow I’m like I like being in the market. We just closed our first deal, which is great. Thank you. So what’s going to happen? In our micro world of startups and entrepreneurs and venture capital firms, 2021 is going to be an amazing year, but what’s going to happen?
Bertrand: Yeah. And to share some numbers it’s pretty insane what we see. And for me, what’s crazy is that it’s at every range. So maybe it varies by country, by industry, but overall if I take Series A valuations, for instance, you have seen a jump from what? like more than 50% in two quarters this is the very definition of insanity.
I’m not sure if we have ever seen that, and it’s happening. At every level in the stack. So maybe early on in the pandemic, it was less true that it was at every level of the stack. Maybe, initially it was more: you are only investing in people you already knew, in companies you already knew, the first quarter or two. And because you are not used to work like this, you didn’t know how long it would be like this. So you had a different approach that maybe favored existing companies bigger rounds, insider the rounds. But now I believe that we’re at a stage where it’s not at all about that anymore.
Or not just that anymore. It cannot be: to stay competitive you have to stay in the market, you have to invest. And maybe on that point maybe not every fund agree. We have a wide range from Tiger Global investing I forgot how many deals a day, actually 1.3 deals a day from Tiger global these days.
But at the other extreme in a global ranking I have not seen Sequoia U S in the top 10 investors. So I wonder if there is less investment from them and they decided that right now is not the best timing. So I think there are still, some fair questions, and a wide range of answers to these questions. But numbers are pretty insane.
And stuff are changing.
So, one is that we see a record financing $ 156 billion in Q2 alone. We see new unicorns, it’s a record high of 136 new unicorns globally in Q2. That’s six X what was a year ago, six X more unicorns in Q2 2021 versus Q2 2020.
These numbers are just totally insane. One of my big worries is that the number of good entrepreneurs has not increased by six X. And I think you and me, Nuno, have been around the block long enough, maybe too long You don’t increase the number of great entrepreneurs six X, year after year. I’m not sure where it’s going to go. I think that at least in the private markets, implosions will happen more often but it can take a long time before it’s visible. It can be years before we see the effect of too much money in the wrong hands.
Nuno: Yes, and it’s pretty pervasive, as you said, it’s not just late stage companies that should probably already have IPOed that are getting more capital like Epic and others. It’s not just, mid stage growth companies that are getting funded to ridiculous levels. It’s early stage in general.
We play in the early stage for the most, and valuations are going up series A in particular. They’re growing up at levels that are just, in some ways mind-boggling. Post money valuations. I think there was some analysis from Tom that was talking about the 75th percentile post money valuation of a cloud software infrastructure company has grown 11% annually. In 2021, it’s spiked 60% in 2021. It’s 60% again, growing 11% annually in last 10 years, if that’s not a sign of a bubble, what is. It depends what you are, right? If you’re a VC firm where there’s an optional value of just putting a lot of capital to deploy a lot of assets under management, a lot of dry powder, coming to the end of your investment period for the fund that you are currently deploying capital from, maybe you are like, you know what, I’m just going to increase pace because I need to, and that’s life and I’m going to pay and be relatively valuable insensitive. So I won’t pay much attention to the valuation, I just need to deploy my capital.
If you have the chance, if you’re early in a fund or if you’re more seasoned investor and you have a chance to wait a little bit, you’ll probably do that and be a little bit more selective on your investments. I think we’re probably playing more of that, of the latter approach, let’s call it the Sequoia capital Silicon valley approach. The Sequoia China seems to be very aggressive as well right now in terms of number of deals done.
Bertrand: Sequoia China is very aggressive.
Nuno: So I think we’re more on that camp. I wouldn’t call it conservative, but we are not valuation insensitive. So if we see a deal and there’s no ARR, there’s no annual recurring revenue and people are like, oh, we’re worth 30 millions. Like why?
Even if you’re a price earnings ratios forward would be a 30 X, 40 X, 50 X, 40 times zero is zero. I’m kidding. Anyway, at the end of the day I think this is the time where the discipline will be there and you can have a little bit of Delta in early stage. It’s like the difference between.
You know, a 15 or 20 million valuation on certain deals is nothing. The difference on a 20, 30 million sometimes and in other deals is nothing. The difference between a 30 million and a hundred million in terms of valuation is huge. And so you can’t be just insensitive at that point in time.
And we’re starting to see silly deals like that. A lot of party rounds, a lot of angels deploying capital, family offices, newly formed micro funds, deploying capital. Like there is no tomorrow. Maybe there won’t be for them. I don’t know. At some point in time and we’ll come back to that when we’re talking about the “so what”, and the advice to entrepreneurs at this stage is something that we want to really put a stick on the ground on. You have to be a little bit cautious on who are you receiving capital from as well, will these guys be around? Will they be able to follow on?
Will they be able to stick with you through thick and thin? But definitely I call it bubble it’s more serious than that. And maybe that’s a good segue into our next section, which is, this is not just the US right. This is not just the US or China that are just super hot because they’re super big markets.
And there’s a lot of capital to deploy into those markets because historically they’ve had a lot of capital deployed. Europe is going silly right as well in terms of capital deployment. And, I look at my country Portugal and it’s an interesting, I would call it still a tier two European VC landscape / startup landscape.
We got to tier two, I think we will get even higher. It’s a really interesting market. There’s a lot of talented entrepreneurs, startups, a lot of talent migrating. But I look at deals right now. I’m like, why is that company getting funded? And they’re getting funded by international investors, which is again, great news for the ecosystem.
But sometimes if there’s no fundamentals, you’re like, why is it so easy for those guys to raise money? I just saw a company. I won’t mention their name or the area, just so that I don’t booboo them too much. They were at much lower rate of annual recurring revenue than the company for example, I’m investing, which is actually an American-based company.
And they’re getting a similar round to this company that I’m investing in at a much higher valuation, much, much lower ARR, let me again, be clear much, much lower ARR. And I’m like, what’s going on. And again, international investors, not just Portuguese investors. So there’s something going on on supply and demand as well in Europe. I don’t know. Can you make sense of it Bertrand?
Bertrand: I would be glad to make sense of it. I think that a few things, first I’m excited for Europe. I think it’s time that Europe has a bigger share of VC investment. And that was critically missing. And I think people are as smart in Europe as in the US or in China. No question.
Definitely not the easiest market or regulation and maybe a lack of entrepreneurship. But this has changed. At least in term of lack of entrepreneurship. There is way more than before. It’s not a dirty word anymore like it used to be 10, 20 years ago. So I feel that, a lot of what’s happening is: there is a lot of pent-up demand: entrepreneurs who can finally be entrepreneurs.
And at the same time there is probably a lot of hot money at two levels. One is government, government-led money, because they finally realize we need to encourage this ecosystem, this investment. And I think this is good, in some ways it’s necessary.
Where I’m probably more worried is the tourist money. US investors investing in Europe, Asian investors who don’t really have a global strategy. Who don’t really understand Europe and some of them do to be clear, but I think many don’t. And it will be a very bad marriage when you wake up and you realize that. It’s not the right partner for you.
They don’t understand how Europe is workings. They don’t understand how European companies are built. And after one or two years of making poor investment, these funds are probably going to pack up and leave. And that will be bad for entrepreneurs who took money from them because instead of helping them lead their next round, they will be left hanging and managing what’s to do next.
Part of me welcome this change? It’s also great that Europe traditionally who was really missing in term of late stage / growth stage investment. So the is dramatically changing right now. So that’s from me again positive, but what is true is that we don’t see the same level of expertise and experience from entrepreneurs and their executive teams in Europe.
So that’s also not good if you give too much money to people who might not know how to deal with it. So it will be interesting to watch, but I’m very excited. I’m very supportive of what’s happening in Europe. Again, I feel it was time. I guess what is still missing is local exit through either European IPOs or IPOs of European companies on European markets, not just on NASDAQ that is still missing. It’s also missing big acquisitions from European companies by European companies, not just by the big American tech companies. I think that piece of the puzzle is still unsolved, but at the same time, given how fast things have changed in the past 10 years in Europe, I am pretty positive, at least optimistic that things will change in that direction as well in the coming five to 10 years, but it will require a lot of coordinations and work with different actors from the stock markets themselves in Europe to European regulations, to motivating European public equities investors who have definitely not been investing in the tech industry in the past 20 years. Not to the level of the American and Chinese and Asian counterparts.
Nuno: So back to your point, agreed with the excitement piece. I think there’s a lot of things to be excited about in the European landscape. We invest in Europe, we have an office in Europe. Actually a significant part of our activity is looking at deal flow in Europe, and I’m very bullish of great European startups and European companies.
So all of that very much in alignment, the piece that I’m not sure where disagreeing on, but I am skewing maybe towards more of that, is I believe there a wave, a tidal wave that’s bringing everyone to the top and everyone’s raising money across the table from early stage, mid stage, late stage. Again, agree with you that midstage.
In late stage, that was for many years missing, seems to be getting there in some cases in Europe. And to be honest, some of these actors that are putting the mid to late stage money are actually non-European. So that’s good news.
Bertrand: Good and bad
Nuno: I agree with you that there’s some tourist investors, but in all honesty, if you’re writing a hundred million, $200 million checks, as tourist as you can be it’s significant.
Bertrand: It’s more than I mean that I would hope that the wealth is built in Europe not just for foreign investors. And if you only have foreign investors investing you are also forcing probably foreign exits.
Nuno: Capital flows, capital flows, I believe that capital flows. I actually care a little bit less than you on that. It shouldn’t be just European capital fueling these big growth.
Bertrand: No, not just. I can tell you some stats in France, I think 10 out of the top 10 deals were from foreign capital. I don’t think you see that happen in the US or in China.
Nuno: Yeah, we’ll get there. Cause if then European VCs make ridiculous returns as well, and some of them already have in the past, we will see that money floating back. So again, on that, I’m a little bit more permissive, a little bit more open. The part where I’m not so open is this rising of the tide is creating again for me, going back to that title of these episodes, a bubble.
It’s creating over inflated assets and some of these assets, I’m not sure have the right to exist, certainly at the valuations that they’re at. And some of them will implode over time. Life is like that. We know that some startups fail anyway, but they’re going to fail, having raised a lot more capital.
And I’m seeing the same effect in Europe. You were talking about the supply and demand of good entrepreneurs and great entrepreneurs. Agreed. You don’t six X great entrepreneurs in one year. Again, this is not happening. It’s not going to happen. There is a float back of people that have worked, early employees, have founded companies before, there’s a float back as I call it people that come back to the industry and they start companies. But again, that is not six X.
What I believe it’s happening right now, and maybe I will be aggressive on that is if I think there is a huge shortage on this supply side of great entrepreneurs.
It’s probably more felt in, for example, Europe than it is in the US. It’s more significant. And so I don’t see how we can have a tidal wave that pushes everyone to the top with first-time entrepreneurs or people that are pivoting their first startup, because they massively miss their target, and now there isn’t even larger rounds having pivoted.
There are some companies that I’m seeing in the market right now that I’m like, this is a bit Mickey mouse. Pardon me for my expression. This is cartoonish, it’s not true. And it’s literally, I have to invest in companies in this space. I’m going to just deploy capital. If you do that two hour due diligence, which is not a proper due diligence, just to be clear to the people that are listening to us, it’s not a two hour due diligence, right?
We spent hours on due diligence, not two hours. If you did like your two hour fireside aggressive chat, literally asking difficult questions, you would see all the holes in it. Right? And it’s not just holes in strategy, it’s holes on product and stuff like that. So what I’m seeing is I’m seeing more and more deal flow in Europe at a very micro level on a weekly basis that are companies that are going to raise money, some already raised, that I’m not sure should be raising.
Certainly not the amounts that they’re raising or at the valuations that they’re raising. And I see that more pervasively in Europe than I see, for example, in some of the top markets in the US like the bay area, et cetera.
Bertrand: Yeah, I think I would agree with you that what you say makes sense. I would just maybe argue that it’s the same in every market. When China started it’s VC industry, tech industries, you also had a similar issue. And at the same time, ultimately they managed to go through it, to survive it and get better over time and still be massively successful in term of returns.
So I’m hopeful something similar in Europe might be happening. Is that you have this, how could I say, this massive call of entrepreneurial energy and tech solution that companies, individuals population at large, consumers, are looking for, and asking for, and finally they are going to get And therefore, even if it’s young, even if it’s not perfect, might still manage to get very good returns.
So of course, Europe is not China, it’s not walled off from the rest of the world, protecting its entrepreneurs. So that might not get the same result, but I have some level of hope, but at the same time, I think you’re right to highlight the risks and the challenges.
Nuno: And let’s hope you’re right for the sake of Europe.
Section 2 – Exits are great though, right?! (17:52)
Nuno: Moving on to the exciting part of exits and how big they’ve been over the last six months, the last eight months, the last nine months, this is all becoming a blur. And well, it’s been a great market. It’s been a fantastic market, both for venture backed companies and for the overall world of M&A globally.
Bertrand: Yes. I think the numbers are pretty amazing actually. It’s a real surge of acquisitions. We keep talking about IPO, SPACs, but acquisitions have actually been doing great in 2021 so far. It has been we can say most certainly a very amazing year already and we are not over yet.
It’s on pace to completely outpace the previous three years. And I guess it’s because COVID slowed things done in term of acquisitions. I still remember 2020 where there was a lot of question marks around, am I paying the right price? Should I wait? What’s going to happen to the world. Initially at least 2020 was not a great place for acquisitions. So there has been probably a lot of pent up demand. And also relatively quickly, valuations were going up. So I guess it was a lot of interrogations, is it really the right time, the right price. But I guess now we are 2021 and there is the conclusions that actually you don’t want to wait too long on the sideline and you have to show growth.
And what’s usually the best way to show growth if you’re a large company specifically, is to make some acquisitions. So it’s really back up. And at this stage, the other piece is that at price have gone up, and because companies had a lot of opportunities, acquisition was not your only path , IPO window was wide open, SPAC window used to be wide open.
It’s probably less open today, at least in the second half of 2021, but that has given pressure in term of price point, because if a company has option you can drive price up. And as we know, the public markets have been very high. So your comparables are high. Your acquirer is probably a public market company as well.
So they have a high valuation. So it helps explain why we have seen a lot of acquisitions and we have seen a lot of expensive acquisition.
Nuno: The two key drivers for me are: one, the fact that there was a huge uncertainty at the beginning of this period last year. And obviously there were a lot of deals that maybe were being explored and didn’t get done. There were some opportunities that were not really happening in the market. Let’s not also forget that there were a couple of distressed assets in the market because of this.
But at the end of the day I think we went from a moment of uncertainty to a moment of certainty, or more clarity that hopefully at some point, this COVID mess will come to hopefully. And then the second piece is more around the fact that in particular, a lot of the acquirers to your point are public companies.
Their valuations in many cases have gone through the roof. So even though they’re paying higher prices for companies that they want to acquire at the same time, their stock is valued much higher than it was before as well. So they can do a lot of deals using quite a lot of stock to prop the value price of the acquisition.
So I think that those are probably the two most fundamental things that have led on the M&A side to this incredible surge that we’ve seen. And again, some numbers just to share with our listeners: by the end of the first half of the year, around the first half of the year, venture back companies, we have seen basically 1,070 acquisitions for reported total of 91.9 billion. To put that in perspective, 2018, which was an incredible M&A market saw 1,945 deals with a reported total of 129.9 billion for the whole year.
So that’s pretty incredible. And then if we look at some of the dynamics around the global market, then the numbers are just silly. We’re talking about trillions of dollars. And again, this is until now, which is again, halfway through the year,
Bertrand: This was until end of May.
Nuno: Yes, so it is i not even half way, it’s five months.
Bertrand: 40% of the year.
Nuno: Yeah, five months. So incredible, absolutely incredible numbers.
Bertrand: So as we said, we’re already totally on track to do way better than any of the past three years.
Nuno: Yeah, and probably this will be record of all time if we look at certainly the global numbers that might be the case , on track to that.
The other element you were talking about, was public markets and SPACs. I would untangle both. Obviously there has been a lot of IPOs, certainly in the tech space, a lot of well-known companies that have gone public, most of them have fared well, we’ve had a couple of companies that have had some more hiccups than others, but mostly a lot of these IPOs have done quite well in public markets after they went public.
And the SPAC space, I would agree, and that’s why I unbundled it. It was an interesting trend. Was in a different way to take certain companies public.
In some ways I saw it as a flow of capital to make companies liquid faster. So think of it as almost like a supercharge secondary type of play. There’s been a slowdown, as we know on SPACs. Some SPACs have also not done very well as public entities after all the transactions were concluded.
I’m a bit of a skeptic. I think SPAC is a vehicle rather than really a trend. It’s not like magically this is gonna come in and save the day. It’s just a different way of taking companies public and like everything else it has a lot of flaws if not done properly. It has a lot of flaws if the company doesn’t have the right intrinsics.
If the people that are doing this are doing it, maybe not for the right reasons, but just in search of a very quick liquidity, in what seems to be a rather bullish market. Sometimes it doesn’t work out. Again very heavy, very positive IPO market, very heavy, very positive M&A market, SPACs seem to be simmering down.
But it’s been an interesting time for exits as well.
Bertrand: Yeah, SPACs definitely, from my perspective, a hype machine, a way to generate way more hyper than you usually can at an IPO time where actually, you have a silent period, which force you to communicate even less. Which when you think about it insane, not rational, but that’s how the regulations are, and for sure SPACs were kind of the other way around, it’s like, you can say as much as you want, we can promise as much as you want, at least in your marketing of this SPAC event. So it has been the total opposite. I would expect that to change. I would expect both of them to start To go closer and closer to each other in term of marketing approach following some regulatory pressure.
So yeah I’m not super optimistic where SPACs are going. But as we see, it’s not a big issue at the end of the day because IPO market is very good. Because acquisitions in general also very good and very healthy. So SPAC was probably somewhat an epiphenomenon.
It will stay there with us, but not to that extreme probably.
Nuno: So some of you might now be saying well, you guys have been saying, there’s a bubble going on, but certainly there’s exits. And even if we take away the public markets, which we’ve already talked quite a lot about, there is always the M&A logic to it.M&As are happening, right? So mergers and acquisitions are happening right now, so there’s definitely exits. That’s not a sign of a bubble. Wait a second. It still might be a sign of a bubble. And there’s actually a very ironic deal that I remember sometimes life repeats itself, which was AOL Time Warner.
Oh, Do you remember that?
Nuno: It was announced in January 2020. It was the beginning of the end, right?
Bertrand: Yep, exactly, the beginning of the end.
Nuno: And what did we have this year? We had Warner Media and Discovery. I’m like, it’s like Warner, are they the indicator of bubbles bursting or what?
You have to be careful. Just for our listeners, the fact that we have a very active M&A space that seems to be propped a lot on stock value. Might also be an indication of bubble. It might not be an indication that there’s any fundamentals against it. I would keep my notion that we are indeed in the middle of a bubble.
Some of these valuations are silly because everyone’s overvalued a lot of the deals that are getting done with stock. We’ll see the readjustment, I think is just ironic that Warner’s shows up again. Two decades later.
Bertrand: Yeah. And it’s not a small merger. It’s $110B merger.
Section 3 – So-what? Implications for Entrepreneurs and VCs (25:57)
Nuno: Maybe we move to implications. And the “so what” of all of this. We’ve talked quite a bit about this notion of bubble. Just putting a stake on the ground, my view is that we will have a hard landing. I have heard a lot of people that are much more educated than me talk about soft landings, 10%, 15% corrections.
And Bertrand what’s your view on this, do you think we’re going to go into a hard landing? You think it will be soft?
Bertrand: I’m not sure if I have a strong view at this stage. I think there are many things happening all at the same time. One is, there might be finally the realization by many that the digital world is truly on us this time. Even if you are a traditional legacy company, you have no choice, but to change and adapt, or die.
And it was more and more true the past 20 years, but suddenly you had this disruption and everyone had to go to zoom. Everyone had to sign DocuSign. Everyone had to work remotely. Everyone had to change their habits and we are not over yet. So if you don’t truly transform yourself as a digital company, basically you were dead and your customers were not in retail malls anymore and they had to shop online.
So what’s happening is realization by many that yes there was a difference in quality in these new companies, in this pure digital companies. Also that they are less at risk of change in the global economy from the perspective that it’s not like airlines or cruise ships we don’t know where they are going.
And to be clear, airlines themselves are probably very pessimistic about their future when I believe 70% of their profits were coming from corporate travel if not 80%. And corporate travel has been completely destroyed. And is not coming back because it’s not the same as I want to go to vacation and enjoy sea beach and sun.
It’s why should I travel long distance? Why should I lose so much time? Why would I miss my family? Why would I spent so much money to travel when I can do a zoom video. It’s pretty dramatic. We will still travel for business, but much, much less than before, and companies have already were re-allocated budgets to somewhere else that is more profitable.
So to convince them to travel again will be hard. It would be made harder because even if you traveled doesn’t mean that the party you want to meet willing to meet you. Other than saying it’s a waste of time to see you in person.
So my point is that there are network effects in travel, so it will be hard to kick that back on track.
So my point is that yes, it might look a bubble. And at the same time there has been a dramatic shift that every company has to become a digital company or die and therefore is going to be more efficient as a business and realization that actually the true tech companies are even better because they are digitally natively driven, and therefore much better to adapt and there should be a premium to that. It should not be like am I valued in similar ways or just for growth. There should be some level of valuation for flexibility of the business model in times of uncertainty. And I don’t know how long it will be there, might take is that it will be there for quite some time with us.
So that’s one point.
Another point is around inflation. Inflation is worrying me a lot. And I think that governments all over the place felt they had a magic wand where they just burn money like crazy to save part of the economy and have made the overall economy somewhat inproductive by paying people to stay home instead of pushing people to get a job.
And now we have crazy inflation. I was just reading this report that the white house is expecting 5% inflation in Q4 annualized. This is insane 5%. And just to be clear, if they are predicting five, it’s going to be seven or eight. You have to expect that. So we are going to unchartered territories. Unchartered from the perspective of the last 30 years. Of course we experienced higher inflation in the past, but that was not a good thing.
That was a very bad thing for the economy. I don’t know how we are going to learn to manage that. And I’m not even talking about further disruption between China and US economy, for instance, that could drive and more inflation. I’m very worried about a new world with significant inflation. And I truly don’t believe those that tell us that it’s a mirage it’s temporary. You don’t temporary increased salaries. That’s not how it work at scale. You don’t say, hey, let’s take a pay cut. That’s not going to work that way. So it won’t be that “easy” quote-on-quote.
So I think it’s there with us. There are growing pains on supply chains and there is a limit to the game of printing money is going in the wrong direction and mis-allocating money at global scale of trillions of dollars a year.
So that worries me a lot. In some ways I believe that tech and where is it going, is probably what’s going to save us from somewhat incompetent governments all over the place. And as we have seen now what was left working the best 18 months? It was Amazon, it was Google, it was Facebook, it was a Zoom.
So I’m not sure what to expect, but I just don’t see how you can keep running the economy in the wrong way, with the wrong tools, forever, without a massive shock. And the question is what will it mean for tech? What will it mean for the world in general?
I start to be definitely very optimistic in term of the resiliency of the tech industry, tech economy. But beyond that it’s not clear, it’s more fragile and I’m not sure where all of this is going. It looks like we are going to keep the same chairman of the fed. So I’m worried, but I don’t know how it will look like.
But I guess something will happen next year will be my take.
Nuno: Okay. So I’m a bit more assertive in thinking hard landing. You’re seeing a lot more mixed signals and who knows, but there’s good, positive things. There’s less, less positive things. Certainly on the inflation side, we probably both agree that maybe our corporate overlords could take better care of us than many governments.
Bertrand: Sadly so, and that does not make me happy to be very clear. would have preferred efficient and good government.
Nuno: Ideally, because that’s why they’re there
Bertrand: And why we pay taxes.
Nuno: Moving maybe to a more pragmatic part, and putting a bookend on this discussion on the bubble, what are the implications for you who are listening to us? And today we’re going to focus on two personas.
So maybe not everyone that’s listening to us would fit into these two personas but let’s cater to do those two personas.
Entrepreneurs in the first instance, and then let’s talk also about investors. Not only angel investors, venture capitalists, and other types of investor.
Maybe let’s cater to both of them, starting with entrepreneurs and giving my pieces of advice. And I’m going be of the high level of it. There’s been quite a lot of thinking that I’ve done over the last few months around this. And at a recent panel, I made a comment on this and seem to have made a few people unhappy.
But the first point I would like to make is if you’re an entrepreneur right now, and you have a chance to raise money, raise it. And actually, if you’re trying to raise money right now and you can’t, and this is the part that was quite controversial. I’m not sure there will be a better market or an easier market to raise in.
Now it might be that the fundamentals of your business of your company don’t make sense. It might be that, actually in any case you wouldn’t be able to raise, but this is probably one of the best moments, certainly in my experience in the investment world, to raise that I can recall. So that’s the first piece of advice I would give.
If you can raise right now, raise right now, you’ll probably get the best valuations you could get at any point in time. You’d probably would get as much capital as you could get at any point in time for all the reasons we’ve mentioned previously.
The second piece is I would be quite careful though, on how I go through that cash.
So whatever you raise, be cautious with it, manage your burn rate. Be clear that it might be easy to raise right now, but if Nuno for some reason is right, then there’s a hard landing let’s say in the next six months, 12 months, whatever it is, it might be very difficult to raise then. And prepare yourselves to, instead of having the classic runway of 18 months, which everyone seems to love, maybe you need to have a little bit more buffer. Maybe you need to adapt your burn rate more to the variability of your top line.
The third piece, very important that I would give as an advice to entrepreneurs, is in any case when you’re raising, if it feels like silly money and you can’t do anything with it, or if it feels like your valuation is silly as well, never forget, we’ve talked about this analogy before it’s baggage. You have to carry it. You have to achieve it at some point in time. So it’s not just, oh, I’ll raise as much money as I can. Be thoughtful about how much money you’re raising. Even if you want to get whatever very non-dilutive money. And so a very high valuation also be careful about the valuation you raise at.
Never forget there’s expectations that come after that cash, there’s liquidation preferences that you’re subject to, there’s expectations from your investor in terms of the valuation will be able to attain.
Bertrand: Expectations from employees.
Nuno: Expectations from employees as well, who see their value in the stock options that are getting from you.
So just be very thoughtful about that. So those are my three pieces of advice to entrepreneurs. Again, raise right now, if you can, if you can’t then maybe think a little bit through your business. Two be very cautious on your spending and be very flexible around your spending and the burn rate. You don’t know when you’ll be able to raise again at scale. And three still be very thoughtful about valuation and how much cash you raise in any case.
Bertrand: I think this is great advice Nuno, I am in pretty big agreement with you. Maybe I can add some additional perspective. I’m talking about small companies, series A series B type of companies who are growing just 30%. At the end of the day if you are still very small and growing slow, and burning money, all 3 combined, you don’t deserve a very high premium in term of valuation. If you’re in that situation, you should refocus on how do you run your business better, how do you make your business more efficient? How do you grow faster?
So focus on running the business and if you are going to be in very limited cash situations then at least be realistic about what type of valuation you can raise.
That is a problem that has created some very weird perspective on what is rational in the market. It’s a turn around situation in some ways, So be careful with what you spend, adapt your burn rate. I think you’re right, and I believe like you that there is risk, next year is going to be a risky one, that you look more at 24 months of runway versus 18, that would be more prudent.
And as you say it all come back to valuation. If you raise at a reasonable valuation, because you recognize truly where you are, it will be a safer place and don’t forget high valuation. Very high expectations in term of perfect execution. Good luck with perfect execution. There will always be years where it is stuff and it’s not going to be fun if you have sold the moon, and you land on earth with very high valuation. And as you say, it’s disappointing for everyone, but let’s not forget employees. I mean, they are coming with high expectations with high valuation. If suddenly valuation is not realistic, why should they stick around? So you have to be very careful in term of valuation. It’s not just the founders, it’s not just the VCs, it’s the employees who deserve a fair evaluation.
Nuno: Moving to the investors. And the advice I would certainly give to investors and be it angel investors, venture capital investors, growth investors, private equity investors. First piece is really one word and I’ll stick with it for a bit, which is discipline. Don’t forget the discipline you’ve had in terms of valuation.
Don’t become valuation insensitive if for the last five years you haven’t been valuation insensitive because all of the whole market is going up, well not the whole market is going up. A lot of the market’s going up, but don’t be fully insensitive, understand and adapt when you need to. But don’t just all of a sudden become undisciplined on that.
The second piece of discipline, I’ve seen this as a big issue in the last few months is the discipline of process. For you to make a decision in investing in a company, you need to go through certain steps. Now, some of them are more complicated right now because we’re not meeting in person in certain cases, but you can still do due diligence.
You can still do those reference checks. You can still look at the documents. In some cases you can still actually go in person and seeing the company. So don’t lose that discipline. Oh, but there’s a lot more party rounds. Things are moving very fast. Tiger is coming in, they’re doing everything in three days.
Understood. Maybe that’s not a good deal for you. Maybe it is a good deal for you. Maybe you can go all hands on deck and magically do a due diligence in three days. Very difficult, but you can try. At the end of the day, keep to the discipline on process. Don’t just throw your process out of the window.
You have a process, stick to it. If you have doubts, explore those doubts, ask questions, why is this happening? Oh, but I’m a small investor in a large round. And they’re oversubscribed. I’m trying to get in. Understood. You need to sell yourself to get in into that round, but at the same time, you still need to do that due diligence, even if you’re a small angel check in a round. Again, discipline.
The third piece around discipline is: be very thoughtful on how you’re giving advice to your portfolio companies. So the companies that you’re already supporting in some way, either again, as an angel, as a VC investor, don’t just go for the, okay, this is the shiny new object, let’s go all in on this.
That shiny new object might be really an illusion, a Mirage, and it will go away in a couple of months and the whole team, the whole company will be direct in the wrong way. So when giving advice to your companies, to our portfolio companies again, discipline, think through. Do analysis, ask your teams to also do the analysis, make decisions that are fact based.
Don’t just go after shiny objects. Don’t just go after that acquisition that looks great because our stock is going through the roof right now and we should actually buy those guys right now. Think through things. Don’t leave it to the side. So again
Bertrand: Yes. And again I agree pretty strongly with you Nuno, and to go back to your points, you are really making great points. Doing diligence in three days, it’s just insane, you are not going to do diligence in three days. I think you can play that game if you are organized like a Tiger global and invest in an index of startups. Get most of the good looking ones of the year, a hundred or so, and if 30 miserably fail, why not? It was first part of the strategy and the analysis. But if you invest in five companies a year, that might be a way more dangerous situation because your 30% might become 60%.
So you have to be very careful about why a strategy could work or could not work. And the other piece as an entrepreneur, I would tell you, you are very crazy to decide to work with someone you have met three days before. Or it’s your strategy to have a silent partner just providing cash. And then that should be your expectation.
That’s your expectation that you have a partner, that is not going to be there, that is not going to add value or actually might destroy value by providing bad advice. If they show up at board meetings and as long as you are open and clearly understand that maybe.
But, for me getting a new investor and it’s like getting married. Yes, it’s a special relation because you are getting married multiple times every two years with a new one but practically, would you already getting married with someone you met three days ago? No, of course not. That’s insane.
So I think that you have to keep that in mind. Do you want someone who is going to provide more than cash? Is it someone that’s going to be operationally supporting you and you will need it because it’s hard and tough out there. You might have one or two or three or four good years, and then you will have one or two or three very tough years.
And if you have a tourist investor, it will be hell, it will be like hell on earth. Or the guys will be just invisible and provide you zero support and good luck with that when your last lead investor is invisible, it’s not going to be fun and easy. So you are really putting like a big target on yourself and the other piece that typically a good investor is bringing visibility, is showing that you’re a good company, but now if you have an investor who is known to invest in just three days, it’s not putting the same stamp on approval on your business. Because people are going to know that there was no due diligence, there was limited analysis.
And that will be seen by employees, that would be understood by clients, that will be understood by partners. Again, if you’re going there with open eyes, that’s fine. But my worry is that most companies are not going there with open eyes.
They are just seeing some potentially easy money. And I don’t think that’s the smart long-term way to build a business in most cases. In some cases, maybe 20% of the time, you know what you are doing, you’re very careful, you know you’re playing with plutonium and that’s fine, you know how to handle it.
But most companies, most entrepreneurs are not prepared to deal with that. And to be very clear I highly respect the different VC firms with different strategies. My point is just to highlight that some strategies are made for some VCs and some strategies are made for some entrepreneurs and you have to meet each other and understand each other and realize what you are going into. My worry is that most are not realizing what they are doing.
Nuno: That’s a great point that you make Bertrand and maybe to wrap it up again, a land of opportunities for both entrepreneurs and investors right now, but a lot of land mines as well.
Bertrand: And as you say, it has never been a better time to be an entrepreneur right now, to raise money right now, if you cannot, again, just build a good business because you will find financing. There is no question. You could argue money is flowing, it’s helicopter money right now, but yeah, there are a lot of land mines and some of these land mines are only going to explode in 6, 12, 18, 24 months.
But once you are in a marriage, it’s too late.
Nuno: The problem with our space, is everything takes a really long time. And so even if you see signals today, it might take, as Bertrand was saying, 12 months, 18 months, 24 months for something to really happen that is nefarious to your business.
Bertrand: Thank you Nuno. So this episode concludes our two episodes, 25 and 26 on the bubble. I hope it was informative for you. We don’t have definitive answers, but definitely we have some opinions. It’s definitely interesting times. And hopefully we gave you some good perspective about where’s the economy going at large, as well as where the VC and tech industry going. And what does the implications for entrepreneurs and VCs.
Thanks again for listening and see you next time.