What we're reading...
Mahesh Vellanki at Redpoint points out that the oft-cited 10x revenue multiple is no longer a rule. He breaks out the forward revenue multiples for a number of sectors, showing that some fare better than others. Travel, surprisingly, is trading at 4x forward revenue, and SaaS companies are trading at about 4.2 times forward revenue. Link
Tomasz Tunguz at Redpoint writes about the huge drop in SaaS valuations. He points to this phenomenon as a harbinger for a weaker startup fundraising market ahead. Link
“Fundraising is a train and the public markets are the locomotive. It can take a while for the public market’s impact to be felt in the private markets, but there’s no denying the locomotive has halved its speed by more in 24 months.”
Yuri Gitahy applies Geoffrey Moore’s life cycle of innovation to Twitter, arguing that the service is not doomed because it can still try out many business models without sacrificing the product for money, as Facebook did. Link
Mark Cuban argues that the ‘stay private movement’ is devastating our economy. Money from investors is tied up and can’t be reinvested. Employees of those companies cannot easily sell their stock. The problem is exacerbating inequality. But the biggest problem is what he calls “precognitive anti-trust violation:” Link
One of the reasons today’s 3700 public companies hoard cash is because they know that rather than investing in uncertain R&D and productivity enhancements to protect them against the “Innovators Dilemma”, upstart companies that could disrupt them and their industries, they can simply buy those companies. They recognize that the current conventional wisdom for those disrupters is to stay private. Which means that with just a minuscule number of exceptions, their investors will be crying for them to be acquired. Why would a company invest in the uncertainty of R&D and other innovative organic options when there are hundred of billions of dollars of dead money tied up in ground breaking companies, all looking for liquidity ? In this age of stay private, it makes no sense to build when you can buy.
Jeffrey Carter of West Loop Ventures discusses the lack of seed funding in the Midwest. You don't often see rounds in the Midwest until way later stage, he points out. You have to be on the ground there to find those companies at the early stage.
Josh Guttman of Softbank Capital discusses the importance of 'optionality.' He points out the importance of staying nimble, not holding on to subpar hires, minimizing fixed costs, and nurturing many relationships with potential acquirers. Link
An importance video on diversity in tech that has been widely shared and discussed in the venture community: