As the Unicorn Age prances on, more and more investors are getting worried they could get trampled.
This week at the TechCrunch Disrupt conference held in at San Francisco's Pier 70, it was ground zero for tech startups and the venture capitalists and angel investors who fund their dreams. There was plenty of buzz in the noisy, crowded Startup Alley where dozens of companies strutted their stuff. And the conference itself attracted 40% more attendees than last year.
But while everyone partied on, there were also a few signs that even if a lot of unicorns--businesses valued at a billion dollars or more--have real businesses, the upward pressure they're exerting on startup valuations is starting to give investors the willies.
One sign: The most prominent angel investor in Silicon Valley is downsizing its next fund. Ron Conway and his son Topher Conway of SV Angel, which has stakes in 26 unicorns including Airbnb, Pinterest and Snapchat, said they plan to reduce their next investment fund to $40 million, down from $75 million raised for the last fund last summer. They needed more money for the last fund because seed rounds had gone from about $1 million on average to $2 million to $3 million. Now, said Topher Conway, "We want to go back to basics. The market has gotten a little more crazy," adding quickly, "in a good way."
More specifically, the younger Conway said the firm wants to get back to being a true seed fund. "We don't want to think like a portfolio manager," he said. "We want to trust our gut." Not least, Ron Conway added, "with a smaller fund, you pay your investors back quicker."
When interviewer Mike Arrington, founder of TechCrunch and now a VC himself at CrunchFund, pressed them on why a $40 million fund is better than a $75 million fund when presumably they thought $75 million was better than $40 million last year, Topher Conway repeated that they're just getting back to their roots. But it's no stretch to think they believe valuations are getting out of hand across the board.
Still, they insisted that there's no bubble because, as Topher Conway put it, the mobile phone ecosystem on which many of the new startups depend is still growing quickly. Arrington couldn't help pushing back, noting that the younger Conway is only 29 years old. Topher admitted that he was in eighth grade when the dot-com bubble happened.
Anyway, the elder Conway added, most of the run-up in valuations is in private companies. And investors in private companies are probably more informed about their investments than public market investors are in theirs, he said.
Another worrisome sign of overheating in startup formation and valuations: Some VCs said there are fewer attractive new companies. "This year, we haven't seen as many big new ideas," said Aileen Lee of Cowboy Ventures, who first applied the term "unicorn" to billion-dollar startups. She said these less promising startups are nonetheless asking for more investment and higher valuations at the seed stage, so "we have not been super-active, because we've been looking for new ideas at the right valuations."
The problem, said Dana Settle of Greycroft Partners, is that although seed-stage valuations still aren't "crazy," following Series A and B rounds are--double what they used to be. "The math gets tough," she said, since a 10X multiple that VCs like to see eventually suggests a larger company than many of these startups can become.
What's more, some of those unicorns, and many other startups, won't make it because their business models are flawed from the start. "There will be a lot of roadkill," said Bill McGlashan of TPG Growth. "A lot of companies won't survive because the unit economics don't work. Ultimately, they have to get to a place where they generate cash."
Some VCs say that even if there is a bubble in private valuations, it's not much to worry about because overheated valuations don't yet extend to public markets. As a result, said McGlashan, "if the gas gets let out, it will be in a slow way." [Famous last words.]
Others, however, say a bursting bubble is a very big deal for private companies and the people in them. "It's worse than as a public company," said Jeremy Liew of Lightspeed Venture Partners, because investors looking to be made whole usually have first preference on getting their money back, so founders and employees can get hurt.
For all that, VCs are generally an optimistic bunch, or else they wouldn't be in the business. The ever-upbeat John Doerr of Kleiner Perkins Caufield & Byers said he thinks the "the DNA of today’s amazing entrepreneurs is the same as it was" when Larry Page and Sergey Brin started Google--just five years younger. In the next five years, he said, he expects breakthroughs in brain science, augmented reality, education, health care--and three so-far undiscovered huge new fields.
