At Rubicon Venture Capital we believe 2016 is already a new and different economic cycle from 2015 and 2014 for startups and VCs trying to agree on appropriate valuations and size of financings. The venture economy ebbs and flows much like the public markets, but not as tightly in tune as logic might suggest. Startup CEOs have their own idea of what their valuations should be and how much capital they should raise and how often. Venture capitalists have their own ideas on the same topics and deals get done when both sides agree.
Our take is that the venture world has been in an upward boom in recent years and peaked in August of 2015. There was a “Chinese chill” in August followed by a controlled “hitting of the breaks” without skid marks in September, October, November and December. What has happened with venture is a mild market correction; however, not all entrepreneurs or VCs have gotten the news yet. As we all know 2016 began with a hammering of the global public equity markets. Some of our companies already restructured in 2015 cooling burn rates and recapping their companies at more humble valuations raising funding when they didn’t need it. Funding has become more of a continuous process than big forklift monumental “series” financings. Now many mid to late stage companies are lowering expenses, lowering growth expectations, raising more capital ahead of schedule and adopting new operating plans to sail through potential rough waters that may be ahead.
What does this mean for Rubicon? Lower valuations for us to invest in. Ability to drag startups through more due diligence and investigation than they were willing to tolerate in 2014 and 2015. Rounds are taking longer to close which is good and more rational for investors like Rubicon. We are now doing more biz dev to see how we can juice revenues for a startup before investing. 2016 will see a return to business fundamentals of identifying positive unit economics and clear path to profitability before investing capital. More than ever we seek to invest in companies with real proprietary technology that provides a miracle for growth and defendable market positions with high margins. More than ever we like to see demonstrated traction and not just vision. 2016 will see fewer VCs investing in startups that sell $1.00 for $0.85.
Not all startups have gotten the memo yet and it will take three to six months for the word to get out that quick irrational financings with valuations at 20x forward looking sales revenue run rates are over. We now have a gap between expectations of VCs who are operating post market correction and entrepreneurs who think it’s still 2014. We expect that the experience of going through slower financings with lower valuation term sheets will push the memo out to the entrepreneurs over the next six months.10x current revenue run rate which was the norm is cooling to 6x to 8x. This may cool further. The market will speak. It is also clear that Marc Andreessen’s words “software will eat everything” has truly become a reality the world over. No industry is safe from disruption of software, big data, the internet and an accelerated volume and pace of new pioneering entrepreneurs. Harvard and Stanford MBAs want to create and join startups not work for banks, consulting companies or corporates. Every industry is getting disrupted. Welcome to 2016!