The Sentiment Index - Q4 2015

Private & Confidential - All rights reserved - Visible.vc, Inc.

The Sentiment Index - Q4 2015


Visible helps you turn your company’s data into a story.

https://app.visible.vc/create-account?ref=sentiment

@VisibleVC | © 2015 Visible.vc, Inc.

The Sentiment Index Contents

The Sentiment Index Current / 1-Year / 3-Year Market Indices

The VC Funding Flow Valuations

Company Growth Trajectories Exit Opportunities

Investment Attractiveness Sector Analysis The Narrative The Bubble

Market data used in the survey is via Pitchbook and available here.

http://pitchbook.com


The Sentiment Index

77.01

65.25

The Takeaway: Across all time horizons and all topic areas (company quality, investment attractiveness, etc.) investors are less bullish on the seed stage market than they have been in past periods.

While the constant debate over the health of the private markets can distract from the business of building and investing in companies, there is a general sense that a recent funding slowdown, combined with growth and operational difficulties among later stage companies, portends a long term decline in capital availability and a power shift in favor of investors.


Current / 1-Year / 3-Year Market Indices

87.4293.13

96.71

63.23

85.3290.24

The Takeaway: Sentiment dipped significantly across all time horizons as investors are less impressed with company quality and fear a continued tightening of capital availability.

In addition to current sentiment, we gauge investor expectations over the next 12 and 36 months. This quarter, the 3-year expectation is particularly interesting since it coincides with a time when funds who raised in 2014 (a record year for seed fund formation) will be looking to LPs for fresh capital.


Will the funding flow continue to support the seed stage?

The 6.6% dip in 3-year investor expectations may be partially driven by an uncertainty around the private markets continuing to support the seed stage at the level we have seen over the past couple of years. 2014 was a record year for so-called “Micro-VC” fund formation. With an average time between funds of about 4 years and an average fund closing time of 13 months, many firms that raised a fund will be right in the thick of fundraising 36 months from now.

The ability of these firms to raise follow-on funds will, of course, be impacted by a number of factors - yields in other asset classes, eventual outcomes of current portfolios, and changes to the way emerging companies raise funding (AngelList Syndicates, etc.).


Valuations

86.21

100.00

89.5886.67

57.69

78.05

The Takeaway: Uncapped notes and sky-high valuations may be going away as the power pendulum seems to be shifting back to the investor side of the table.

Valuations across the board remain high, as projected in our Q3 survey, but a major dip in near term expectations for valuations signal an anticipated market pull back as well as a power shift back to the side of investors when it comes to how much seed stage companies are worth. A sea change already seems to be underway at the later stages - with highly publicized issues at companies like Dropbox, Zenefits, and Evernote - which investors believe will trickle down to the earlier stages.


Company Growth Trajectory

88.0092.50

95.45

75.00

91.6789.74

The Takeaway: In a market where the “greater fool” may not exist, investors are valuing sustainability over top line scale.

In last quarter’s survey, investors were excited about the quality of companies they were seeing and cited strong revenue growth as one of the factors driving that bullishness. Now, with many investors publicly sounding the alarm on negative gross margins and poor unit economics - even at companies previously held in universally high regard - our survey takers have begun reevaluating the quality and profitability of the top line trajectory they previously trumpeted.


Exit OpportunitiesWhile the number of VC backed exits saw general growth from early 2010 until mid 2014, recent periods have seen a

sharp decline, mainly driven by lack of desire on the part of would-be acquirers to pay what are seen as excessively high valuations and the ability for companies to continue raising at higher valuations. Should follow-on funding opportunities

tighten up, exit via acquisition may become a more attractive as large acquirers will be less interested in sustainability of a startup’s business model and more interested in the technology and team and how they fit into current offerings.


Investment AttractivenessWith declines in both the number of deals being done and the gross amount of capital being allocated to the seed stage,

investors are voting on so-called “Investment Attractiveness” with their (or their LPs’) wallets.


Relative Sector Bullishness Over Time

For the 3rd consecutive quarter, Enterprise SaaS took home the top spot on our relative sector bullishness list. Our take on a few primary reasons why:

• A robust and established M&A market exists, something that can’t be said for some other markets listed

• The inherent stickiness of the business model presents opportunities for continuous upsells, inexpensively accelerating growth

• Models for success are well-understood, making it the evaluation of SaaS businesses less risky for VCs


The Narrative


The Narrative

40.00

30.77

22.22

In addition to answering questions that we pose, investors also have the opportunity to add some color, providing commentary on interesting sectors, trends, and concerns on the market. We then classify these responses as Bullish or Bearish (or Neutral) and build an index score to understand how optimistic (or in this case, pessimistic) investors are.

Since our Q2 survey the ratio of Bullish commentary has been cut almost in half, focusing heavily on the perceived difficulty of raising Series A capital and concerns around a trickle-down of worsening conditions in the growth stage market.


The Narrative - Interesting Quotes“I can sense the headwinds, starting at revaluation of unicorns and now moving downstream, takes time but now routine Series As and Bs are getting hard to get done as the bar is moving higher and later stage investors are taking a wait and see approach. This will continue for foreseeable future.”

“Many companies currently in Series A stage will face a Valley of Death when it comes to growth financing.”

“Series A funding is always tough - but good companies tend to get funded. Growth trumps all at this point, but it can't come with negative gross margins and terrible unit economics. That might raise a couple rounds but doesn't build a business.”

“The "bubble" has largely burst for late stage companies with high net burn rates and sub-optimal operating and growth metrics. Those wells have dried up. For early stage companies, there continues to be active venture investing for high potential entrepreneurs.”

“I see valuations hitting a plateau while real value catches up.”


The Narrative - Interesting Quotes“Amazing amount of disruptive ideas, quality of entrepreneurial teams, exponentially growing startup ecosystem…”

“The Series A squeeze is real and follow on from Seed Rounds are less and less likely given the # of companies that raise angel/seed capital.”

“I think the bubble is a Valley issue. It will blow back on the rest of us, but we are not in a bubble outside of a certain, few geographies with a certain few dramatically overvalued companies.”

“It’s too easy to start a business these days, get funded, then shut it down 12 months later when the funding runs out...this equates to founders being less dedicated and resilient, they would rather just go start Company #2.”

“I think there will be a strong correction and not nuclear tech winter.”


The Narrative - Visualized


The Question on Everyone’s Mind

Many signals from - capital patterns to sentiment - point in the direction of a market correction. But predicting the when and how is a fools errand. In lieu of prognostication, we will leave you with this great piece of advice that an investor offered in our Q2 Sentiment Index survey:

“Quality companies will continue to get funded in all market cycles...so stop worrying about what may be coming and build your fucking company!”

Well said.


Thanks for Reading!

If you enjoyed what you saw here, you can share The Sentiment Index by

clicking here >>>

http://ctt.ec/4618d


Visible helps you turn your company’s data into a story.

https://app.visible.vc/create-account?ref=sentiment

The Sentiment Index - Q4 2015

Business

Transcript of The Sentiment Index - Q4 2015