March 8, 2021 Sammy Abdullah via Medium : Net dollar retention from 59 SaaS co’s
Focus on the customers that matter. You shouldnt care so much about losing customers that weren’t a good fit (every SaaS company is guilty of signing up customers they shouldn’t have), whereas you should obsess over customers you lost that are a good fit. Creating real value means driving upgrades. The difference between 90% gross dollar retention and 95% gross dollar retention is meaningful, but not huge. However, the difference between 99% net dollar retention and 147% net dollar retention is massive. Net dollar retention needs to be above 100%. SaaS is a beautiful business model when net dollar retention is 100% or higher. It means you’re effectively keeping the customer for life. (read more…)
February 26, 2021 Wall St Journal : SPAC Frenzy Emboldens Silicon Valley Startups to Forgo Venture Funding
SPACs have flipped the script on the multidecade model of development for early-stage startups, enabling fledgling companies with little or no revenue to tap public markets sooner. The shift lets amateur investors—long excluded from startup wealth creation—get in on the ground floor of disruptive businesses. It is a dynamic that can lead to huge returns but also carries big risks, as young companies are far more vulnerable to going belly up. Jay Ritter, a finance professor at the University of Florida who studies public stock listings, found that the shares of tech companies going public with annual sales under $50 million underperform the market by 28% over the first three years of trading. The median annual sales for tech companies completing a SPAC deal since the start of 2020 is $48 million. (read more…)
CATEGORY: alternative financing, capital, VC
February 9, 2021 Institutional Investor : Private Equity Firms ‘Try to Manipulate Their Performance’ When Raising Money
The researchers found that when private equity firms exhibited high fundraising stress index scores, they were more likely to engage in “upward earnings management” in portfolio companies. A one-unit increase in the stress index resulted in a 10 percent increase in discretionary working capital accruals. The researchers found that a firm’s reputation — as measured by the Private Equity International ranking — did not have an effect on whether or not a firm engaged in this practice. However, the level of dry powder on hand does matter, but only in cases of extreme stress, the research showed. (read more…)
February 8, 2021 Andranik Tumasjana, Reiner Braun, Barbara Stolz in the Journal of Business Venturing : Twitter sentiment as a weak signal in venture capital financing
How do venture capitalists (VCs) incorporate weak and strong signals in the valuation of technology-based startups? Based on a sociocognitive perspective of signaling theory, we introduce Twitter sentiment as a novel and weak signal, which we juxtapose with patents as a traditional, strong signal. While we find a positive association between both signals and VCs' venture valuations, our results reveal that Twitter sentiment does not correlate with actual long-term investment success, whereas patents do. (read more…)
CATEGORY: valuation, VC
February 8, 2021 Institutional Investor : What Investors Lose in an Undeveloped Secondary Market
Using Oxford Economics’ macroeconomic forecasts, the paper’s authors argued, for example, that investors should be cautious about their current allocations to venture capital as the sector is flush with capital and competition for deals has pushed valuations to near records. Assuming that the economy remains in a rut for the next five years — Oxford’s baseline economic forecast — the researchers projected lower expected returns relative to history in private equity and private debt. They said that private debt will still be an important source of diversification, because those assets outperform similar public credit instruments. The researchers also expect natural resource and real estate funds to outperform in the next few years. (read more…)
CATEGORY: capital, secondaries
February 5, 2021 Semil Shah via Twitter : 2021 Venture Capital Market Dislocation – “WTF Is Going On?”
Adam Nash tweeted this earlier, paraphrased: "The VC industry went from looking for $1 billion-dollar outcomes to $10 billion-dollar outcomes to $100 billion-dollar outcomes in less than 24 months. This end-market acceleration has occurred during a time of zero-interest rates (not being touched until 2023, per Fed), high IPO liquidity, huge chip stacks at various VC funds, and making investments via Zoom. Investing in technology feels like the only game in town now in a pandemic world. Public investors are now full in privates; growth investors are doing As and Bs like they're seeds; traditional VC firms are straddling seed and Series A (tho many have multi-stage arms); and seed investors, angels, rolling funds, syndicates, accelerators are conducting massive experimentation to unearth the next great thin. (read more…)
CATEGORY: capital, risk, VC, winner take all
February 3, 2021 Courtney Rubin via Medium : The Shocking Meltdown of Ample Hills — Brooklyn’s Hottest Ice Cream Company
As Smith tells Marker, having Disney behind them fueled much of the co-founders’ overconfidence, encouraging them to think they could become the next Ben & Jerry’s. Disney’s interest also helped the company attract investors, he says, which created “a runaway train of raising and raising and growth and growth.” By chasing rapid expansion without paying enough attention to how much they were actually spending, the co-founders ended up making big bets that cost the company millions — and mistakes that left thousands of gallons of ice cream literally swirling down the drain. “It was a fairy tale,” says Greg O’Connell, one of Ample Hills’ biggest investors. “They were kind of living in a dream world because their marketing was so great.” [...] Meanwhile, Smith and Cuscuna still hoped they could fundraise their way out of the problem. (read more…)
CATEGORY: leadership, resilience
February 1, 2021 Brett Fox via Medium : What Happens When Your Investors Give Up on Your Startup?
But none of this answers why Donald Ventures would kill a company they decided not to invest in. Here’s my educated guess as to why they would act this way. It’s much easier to not have to explain to a limited partner (the people that invest in a VC fund) why you gave up on a company that later became a success. So, you just kill every company you walk away from.
And, you the entrepreneur that gave your blood trying to make the company a success, you’re just collateral damage.
(read more…)CATEGORY: resilience, VC
January 13, 2021 Pitchbook : PitchBook-NVCA Venture Monitor Q4 2020 Report
At the outset of the pandemic, many thought the US venture industry was staring down a major decline, but 2020 actually ended with new records in dealmaking, exit value, and fundraising. Investors and LPs remained active, and tech-enabled industries rode tailwinds created by the pandemic-forced unlocationing of business, education and healthcare. 2020 top-line figures of the US VC industry are staggering: $156.2 billion invested, $290.1 billion exited, and $73.6 billion raised by VC funds. These record figures should set the industry up for continued strength moving into 2021. (read more…)
January 11, 2021 Alex Danco : Why the Canadian Tech Scene Doesn’t Work
Successfully funding a VC-backed company all the way through series C or whatever (at which point something resembling an actual valuation can take place) is essentially an exercise in rolling forward a “discount on a discount on a discount”: I’ll pay this $6M pre-seed valuation, not because there’s $6 million of tangible value here, but because it’s a discount to the next round (20), and then the next (50) and then the next (180). VC financing is a controlled bubble. This method, as recursive as it sounds, is a legitimate financing innovation: it lets startups dig deeper into the J curve, repeatedly financing their business off of the possibility of “what could go right”. But for it to work, you can never at any point formally value what’s been built. If you do, you puncture the bubble. (The exception is 409A valuations, which you want to be as low as possible. The sleight of hand with these, of course, is fantastic. Valuations are high and aspirational when we need them to be high, versus low and literal when we need them to be low.) The difference between the Canadian startup ecosystem versus the actually-functioning one in the Bay Area isn’t an incremental difference of degree. They’re two systems running in totally contrasting modes: one runs fast, rules opportunities in, rolls valuations forward, and is optimized for infinite-game-mindset founders. The other runs slow, rules opportunities out, feels the need to “defend” valuations (thereby collapsing them to their literal milestone value) and optimizes for fixed, finite games. (read more…)
CATEGORY: VC, winner take all