Wednesday, January 14, 2015

2014 - A delayed reckoning, and more uncertainty ahead

2014 was supposed to be a good news/bad news type of year: More tech IPOs than in 2013, but a reckoning for startups facing the Series A crunch. Both pretty much played out as expected: The Dow Jones Industrial Index started at 16500 to close the year end at 17824, Alibaba went public in the biggest IPO ever in August, Whatsapp was acquired by Facebook for $22 billion, private unicorns like Uber, AirBnB and Box continued to raise hundreds of millions of dollars, and Zendesk, Lending Club, GrubHub, Hortonworks, HubSpot, New Relic were just a few of many notable tech IPOs. All companies that went public had been founded a decade ago or so, except for Hortonworks which was only spun out of Yahoo! in 2011.

Until 2013, round sizes increased, and second seed rounds emerged to stave of the Series A crunch. The largest seed rounds included VC participations and exceeded traditional Series A. While late stage fundings seemed to spiral out of control in 2014, it also appeared that valuations and overall activity on the seed funding side cooled off significantly. For the Band of Angels, the overall dollars invested stayed fairly constant, but the number of deals invested in dropped by half - consequently the amount invested per deal almost doubled.

Players in the seed funding game continued to evolve: Accelerators churned out start-ups at ever increasing rates, and the accelerators and their business model went international. The transaction volume on Angellist reached $104 million. The MicroVC market of super angels and freshman funds continued to expand and fill the gap towards Series A, although consolidation may be on the horizon already .

I spent more time on my existing investments versus seeking new deal flow. My own portfolio comprised nine enterprise focused software companies at the beginning of the year, where some had already raised second seeds and now needed to raise a substantial next round. Retailnext/Nearbuy (2010) raised $30m in July and Navera (2010) $8 million in October. I was reminded that getting to a minimum viable product is so easily said, and yet it is so difficult to achieve: Two of my investments (from 2010 and 2011, respectively) were able to get acquihired, and one (from 2013) closed its doors. The only real surprise was a McKayla Maroney moment when a seasoned CEO sent an email announcing that his company would have no cash left in two days. I do want to give a special shoutout to my Band of Angels colleagues Jack Carsten for taking the lead on restructuring of A6, Ken Arnold for looking for the crazy ones, and Carol Sands for teaching a world class course on being ‘The Effective Startup Board Member’ at Stanford.

Several spaces stood out as potential sources of new deal flow: Workflow and productivity tools, wearables, 3D printing, drones and associated systems, healthcare communications involving patients, nurses and doctors, social media marketing and advertising (still!), and HR applications. Three other broad trends: SaaS applications to every buying center, anything and everything as-a-service, and the continuing API-ification of software. Out of the 100+ companies I saw and the dozens I talked to, I ended up making three investments

  • Truevault offers healthcare applications a secure API to store health data in a HIPAA compliant way. Jason Wang started the company in June 2013 and was part of the  Winter 2014 Y Combinator class.

  • Secured3D’s encrypted 3D printing cloud allows centralized command and control of 3D intellectual property, 3D printers, and users. John Dogru is maniacal about product development, and his Estonia based development team is peerless.
  • 3ten8 helps mobile operators better understand and optimize their wireless networks and subscribers experience. Miro Salem drinks from the deep fountain of professional experience and is driven by the mission to make the mobile network world a better place.

I authored a dozen blog posts, mentored at the Alchemist accelerator, and shared my experience at the annual Band member workshop ‘Good outcomes and bad outcomes and the lessons learned’. My resolutions for 2015 are much the same as last year: Work closely with the teams, leverage my colleagues in the Band of Angels. and continue to build my network.

My outlook for 2015: caveat emptor. The tech IPO pipeline is still full, but the overall climate continues to be somewhat uncertain. The huge number of seed funds means that there are a lot of companies testing different things, and that there are many copy cats.

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