Weekly Update: Is Capital Efficiency Back In Style? Not (Yet) at the Seed Stage
A few highlights from the week of 10/10
Cloud stocks got hammered this week, with the WCLD down 11% to $24.25. Revenue multiples are at levels last seen in 2016.
Is this the bottom for cloud stocks?
If inflation subsides, Lemkin’s call will prove prescient. Meanwhile, the market is pricing in a 1.5% increase in the Fed Funds rate to 4.5% over the next two Fed meetings:
The market for wagers on the Federal Reserve’s policy rate is leaning toward pricing back-to-back 75 basis point rate hikes in the next two central bank meetings after consumer prices rose more than forecast in September.
With the Fed hiking, “risk-off” selling has catalyzed a brutal valuation reset for public tech companies. In many cases, “brutal” doesn’t fully capture the magnitude of the valuation reversal. For example, publicly-traded Bird (BRDS), the once-celebrated scooter startup that raised 800m+ of VC, has an enterprise value of 171m. Sticking with the aviary theme, publicly-traded shoe-seller Allbirds (BIRD), valued at 1.4b in a late stage venture round in 2018, currently has an enterprise value of 256m.
While public companies have no choice but to confront the new market reality, private startups are in no rush to reset their valuations. With late-stage VC deal activity slow, VCs are turning to the public markets, where their dollars go much further:
Venture-capital firms are jumping into the stock market, buying up battered shares in publicly traded tech companies at a time when they are investing less in the startups that have long been their focus.
At the other end of the spectrum, the seed stage has also emerged as a safe haven for VCs:
Many VCs recognize that last year’s “growth at all costs” mindset was a bubble-era non sequitur. Yet the glut of funding at the seed stage means it still might be a while before capital efficiency regains its rightful status as a highly desirable trait.
If any of us need a rode model for capital efficiency, I propose Distrokid:
At HorizonVC, we are big proponents for venture capital to fuel growth. But we are also strong advocates for capital efficiency. There is something magical about software products that so tightly nail PMF that they can grow rapidly & efficiently into industry-defining companies.
Podcast recommendation of the week:
Can anyone defend quitting? If anyone can, it’s Annie Duke. The former pro poker player and cognitive neuroscientist has many thought-provoking insights in this podcast:
I personally made a “quitting breakthrough” about 15 years ago when a friend convinced me of the merits of quitting any book that wasn’t fantastic. Previously, I took pride in pushing myself to finish all books I started, no matter the quality. Lesson learned!
Reading recommendation of the week:
I must confess: I am in awe at the disconnect between the exuberance in early stage VC and the rest of the market. Here’s a good insider view from Eric Newcomer:
Software investors came back from their summer vacations and decided to funnel all their energy into expensive early stage rounds in artificial intelligence, database technology, open source software, and large language models.
Founders with great pedigree and/or open source traction can raise early stage rounds at valuations that would have been at home in the most ebullient moments of last year. Newcomer’s article (which is behind a paywall) has numerous examples, such as Fireworks, which raised “pre-startump formation:”
Ultimately, Benchmark’s Eric Vishria won the deal. The firm is investing with participation from Sequoia at a $100 million valuation, sources tell me. I hear that investors are putting in more than $20 million.
Benchmark’s Vishria has an amazing record (Confluent, Benchling, Amplitude, etc), so I don’t doubt the wisdom of this particular investment. Yet it’s remarkably divergent from the broader market conditions.