Early stage trends March 2014

Early Stage Internet/Mobile Investing: Trends and Strategies

David ShenLaunch Capital

March 2014

TRENDSInternet/Mobile

Internet Seed Funding SF Bay Area

Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg

Seed Deals, All Regions

Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013

Mobile Seed Funding SF Bay Area

Source: http://www.cbinsights.com/blog/wp-content/uploads/2013/07/bayareainternet.jpg

Mobile Deals, All Regions

Source: http://www.cbinsights.com/blog/trends/venture-capital-report-2013

Halo Report on Angel Investing Q3 2013

Source: http://www.svb.com/halo-report-q3-2013-infographic/

1H 2013 M&A Dynamics Online/Mobile

Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

1H 2013 M&A Online/Mobile

Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

1H 2013 M&A Online/Mobile

Source: http://berkerynoyes.com/publication/trends/13halfonline.aspx

Corporate M&A has fallen dramatically in 2013; Deal volume and prices are down to levels seen during recession

Source: NVCA 2013; BerkeryNoyes

Notes:

• M&A transactions in 2013 have dropped significantly both in number and value.• The mean M&A value in the

internet/mobile space was ~$23m in 1H ‘13 down from ~$35m in 1H ’12 & ~$51M in 1H ’11

• 61% of transactions were sub-$20M

• Continue to see two types of liquidity events in Silicon Valley and NYC (less so in Boston)• HR Acquisition: Large companies are

purchasing 2 and 3 person start-ups for the engineering talent

• Later stage VCs providing liquidity to the market via buyout of founder and early investor stock for top 5 venture backed companies

Q1 '09Q2 '0

9Q3 '0

9Q4 '0

9Q1 '1

0Q2 '1

0Q3 '1

0Q4 '1

0Q1 '1

1Q2 '1

1Q3 '1

1Q4 '1

1Q1 '1

2Q2 '1

2Q3 '1

2Q4 '1

2Q1 '1

3Q2 '1

30

20

40

60

80

100

120

140

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

M&A Transactions

M&A NOT Disclosed M&As DisclosedDisclosed $

OTHER TRENDSInternet/Mobile

Mobile Rising Aggressively vs. Desktop

Source: http://www.kpcb.com/insights/2013-internet-trends

China Mobile Internet Access

Source: http://www.kpcb.com/insights/2013-internet-trends

Rise of CrowdfundingJOBS Act

July 10, 2013SEC Chairperson Shapiro: New offering created called a 506(c) which allows companies to freely advertise fund raising to the general public.

More to come…

Crowdfunding Part II: Kickstarter/Indiegogo/Medstartr

Rise of the Accelerator

422 Accelerators in the US

Souce: http://www.f6s.com/programs/united-states?type=accelerator

Explosion of Startups

2009: 472

2010: 770

2011: 1065

2012: 1749

Source: https://www.cbinsights.com/blog/seed-investing-report

Series A Crunch

2009: 418

2010: 515

2011: 703

2012: 692

…leading to more bridge rounds or death of startups who can’t land their A… Number of Series A VCs has not increased; if anything it has decreased.

Source: https://www.cbinsights.com/blog/seed-investing-report

2013 Estimated “Series A Crunch”

20

Notes:

• Entire venture industry is now shifting due to this crunch. • Companies raising much larger seed

investment rounds to extend runway• Seed investors forced to support

companies longer• Seed investors forced to proactively

shut down underperforming cos.

Source: CrunchBase

Funding Gap 177 113 336 635 1681

2009 2010 2011 2012 2013 YTD0

500

1000

1500

2000

2500

3000

799 821

1205

1558

2510

622 708869 923 829

Pending Series A Funding Gap

Seed + Angel Series A

Explosion of (Digital) Seed Investors

• Groupon, Facebook, LinkedIn, Twitter go public.• Secondary markets allow early employees/founders in

private companies to exit with $millions in their pocket – circa 2011.

• Acquisitions of startups pay out to founders – they become angels.

• New VCs raise seed funds.• Private Equity/Investment Bankers enter the fray with

Wall Street money. • International investors!

Founders and Ideas• Smart, energetic founders are a commodity.

• Seasoned entrepreneurs are not.• Great ideas are a commodity.– It is too easy to come up with good/great ideas.

• Awesome ideas that no one else is working on are not.

Competition• Too easy and cheap to create software. – Already leading to the explosion of internet startups

• The search for “no competitors”– OK with old traditional, offline competitors.– Don’t want other startups competing with the same or

near idea.• Battle for attention -> Everyone is your competitor– Too many startups chasing after the same customers,

B2B or consumer. Battle for attention=too long to get to breakeven or next round.

Design/User Experience• Great design/UX required, but it is also a

commodity and too easily duplicated.– Assuming you can find and hire a great designer

• Advantage is usually short term only.

U.S. Early Stage Valuations 2006-2013

• 2006: $2-3M pre• 2007: $3-4.5M pre• 2008: $2-2.5M pre (economic crash)• 2009: first $5M capped note appears from YC• 2010: $6-8M capped notes• 2011: $8-12M capped notes• 2012: $6-8M capped notes• 2013: $5-6M average, upwards to $8M+ capped

notes

Fueled by New Investors• New angel investors replace those who slow

down– IPOs create new wealth– PE and Investment Bankers getting access

• New seed funds are being raised each year

• All new investors take what the market gives them – they have no history to draw upon

Early Stage Bubble• Bubble exists in early stage

only• Risk vs. reward does not

match– Estimate 1 in 20-40+ for hit,

most die• Early stage VC doesn’t have

great incentives with this kind of data

• Angels can still make some money if valuation is good enough but VERY hard to pick

• Acquihires are a great way to lose money

“No matter how much we want to go on and on (and on) about how cheap it is to start a company these days, actually building a sustainable company has never been more expensive. Venture studies show the time and money it takes to get public are longer and higher than ever before.”

“A rare defense of venture capital classic” - Sarah Lacy, PandoDaily

Source: http://pandodaily.com/2013/08/30/a-rare-defense-of-venture-capital-classic/

Funding round $ vs. Runway

• Too many raising not enough– Seed rounds going $1+M, upwards of $2M

• Acquiring customers take too long– Consumers deluged by apps; B2B sales cycles

taking longer – 12+ months• Takes 24-30 months to develop an idea. – Get to breakeven or metrics worthy of the next

round.

Super Sized Seed Rounds

Source: http://www.cbinsights.com/blog/trends/seed-venture-capital-super-sized

THANKS!

David Shendshen@launch-capital.com