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This blog represents my own views, not those of my employer, Brooklyn Bridge Ventures.

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Instead of sticking a fork in the venture market, realize... there is no fork

If you like this post, consider helping me raise a few bucks for charity while I run the NYC Marathon...

 

The other day, I noticed an eye-catching headline:

"Internet Funding Boom Ends as Fast as It Began"

It was from the Wall Street Journal--a publication I count on for emphasizing quality journalism over empty linkbaity headlines above hollow stories.  Perhaps I need to rethink that.

How else can you explain this headline matching a story about a professional social network still trying to explore revenues raising $17mm on an $80mm valuation?  This is a company that, according to the article, got term sheets from half of the VCs that expressed interest in the company.  Not a bad close rate, I'd say--and a pretty great pay day.  Did I mention it only took the founder a month?

On top of that, the article comes with a chart--this chart to the left entited "Fewer Bets".  Is it me or does it show the first half of this year ahead of last year's pace?  So, even if we did just about the same as last year for the second half, we'd cap off our third consectutive year of funding growth since the '08 crash--and we'll be in the ballpark of where we were before '08.  If we're ending as fast as we began, I'll be expecting continued, steady "ending" over the next three years.

And fewer bets?  Fewer than what?  Fewer than four or five years ago?  According to that chart, the post '08 crisis decline is at least a three year old story, but we've been recovering nicely ever since.

What follows in this story is pretty laughable:

"...venture capitalists are now asking tougher questions about start-ups' revenue and profits."

First off, I'm pretty sure we've always asked those types of questions.  But second, how do you back this up?  How can you measure it?  Is this an opinion?  Whose opinion?  How would they know unless they surveyed a critical mass of startups all at the same stage now and then three years ago or so to compare?

Well, they did ask David Chao of Doll Capital, who said that the "frothy bubble is over".

David's firm most recently participated in the $77 million second round financing of SoFi, a one year old startup focusing on student loans.  I suppose, more specifically, the bubble ended in the last two weeks of September--right after this financing.  Don't get me wrong, I'm sure this company is awesome and the market is certainly huge, but that's kind of a lot of dough coming from the firm quoted in this doom and gloom piece.

The other entrepreneur quoted in the story is from a guy pitching a Pinterest clone.  Needless to say, he's having some trouble raising.

The reality is that, most of the time--like two thirds of the time--the venture market is totally open for good businesses to get fair valuations in reasonable turnaround times.  A small percentage of the time, there's a rush to fund things and about an equal amount of time, the market is closed while it figures out what a mess it made out of itself while it was rushing.  The last closed market we had was from about September 2008 until June 2009--10 months.  After that, we were pretty much back on track, growing every year.

These closed periods have more to do with trends in other markets or macro fears than they have anything to do with prospects for innovation.  In fact, I would argue that we have some of the most fantastic prospects for innovation over the next give years that we've ever had:

  • The majority of new phones sold are smartphones.
  • The tablet market has absolutely exploded.
  • We're seeing, for the first time, investment and some disruption in huge areas like education, food, healthcare, government and even hardware based startups.
  • Television disruption seems right around the corner, with Apple working on the in home viewing experience and lots more consumers getting internet connected devices plugged into their TVs.
  • The number of markets where innovation is coming from has also exploded--it's not just a Valley game anymore.  International and non-Valley startup communities are developing at a rapid pace.
  • More and more of our best and brightest are learning to code and/or joining the ranks of innovative startup companies instead of working for banks and consulting firms.

In 2008, people weren't sure if we were heading into a complete financial collapse.  While job recovery is slow, it seems that we've probably ducked that bullet and there won't be a major shift in people's interest in funding the venture capital asset class.  It's been said that long term returns are bad, but yet, where else are these institutions going to put the money to get growthy returns?  From what I've seen, smart instutions are extremely interested in backing top new managers that show progress.  They're also falling over themselves to put tons of money into the really big funds with long track records of success. 

The truth is, there's really only one perspective on the market that counts--yours.  There is only one individual market--the market for investors in your business.  We're not in a nuclear winter--and if anyone tells you that they're having trouble raising money, it's probably due to the following:

  • Their business isn't killing it, so they haven't gotten to that "next level" you need to get to move up to Series A funding.
  • They're just not very good at raising venture capital--which, in the later stage, has more to do with your own ability to run a sales process.  The industry has made it very easy for companies to raise seed money through online marketplaces like Angel List, accelorators
  • The venture process just takes time--many rounds take three months to close, if not more.  The entrepreneur will tell you things are really tough, because they don't want to think that it has anything to do with the quality of their company or their own fundraising skill--it's easier to blame some outside force.

The Wall Street Journal not only can't seem to take the temperature of the venture market correctly, they definitely don't know the market for YOUR business--which is totally unique.  Here's what else you should know about the funding market for YOUR business:

  • If you're killing it, there will be investor interest in your company.
  • Each investor has a unique background and set of experience--so they'll all see things just a little differently.  Finding the one that sees things as you do can take a while, but is often a volume game.  The trick is, as any good salesperson will tell you, to minimize the time you spend with bad leeds and maximize your efforts with your best prospects by identifying them early.
  • This is a relationship game.  You need to seed the market for investor interest by building relationships as early as possible--pretty much right after your previous round.  Most founders that get funded know their backers or have close connections to them well before they officially "pitch."

So ignore the hype, the industry surveys and what the person next to you at your co-working space says. 

There is no fork.

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