With the most recent unemployment report we have officially entered into a recession. I believe this also marks the end of the Web 2.0 mini bubble. During the days of inflated valuations we had some - most notably Marc Andreesen - saying that it was not a bubble. I think that was at least in part so as to not make their own investors feel like they were getting a bad deal (ditto for Peter Thiel and Facebook). Yet it is exactly these kind of non-VC deals in the stratosphere that are the best indicator that things are out of whack.

Somewhat surprisingly these bubbles have repercussions all the way into Series A valuations. I think of it as surprising because the time horizon for a typical venture investment is 5+ years. So relatively short term fluctuations in exit valuations should not really impact initial valuations. But investors compete for Series A deals which they think might ride the wave. When the wave passes it’s a lot harder on the entrepreneur than on the investor. Just ask anyone who has ever done a down round.

But it’s not just us VCs who are at fault here. After all no one is forcing entrepreneurs to take their Series A at a high valuation. Most entrepreneurs tend to be “irrationally exuberant” (as Tom Evslin likes to say “nothing great has ever been achieved without irrational exuberance”) and tend to overestimate the likelihood of success. As a result most are willing to go along with the competing investors.

None of this is to say that companies that are executing well against large opportunities don’t deserve a real premium in their later rounds (especially in a last round), but to go into the Series A essentially assuming that this will be the case is a big risk.

Apologies for absence of links – sent from my phone.  Will add later.

With the most recent unemployment report we have officially entered into a recession. I believe this also marks the end of the Web 2.0 mini bubble. During the days of inflated valuations we had some - most notably Marc Andreesen - saying that it was not a bubble. I think that was at least in part so as to not make their own investors feel like they were getting a bad deal (ditto for Peter Thiel and Facebook). Yet it is exactly these kind of non-VC deals in the stratosphere that are the best indicator that things are out of whack.

Somewhat surprisingly these bubbles have repercussions all the way into Series A valuations. I think of it as surprising because the time horizon for a typical venture investment is 5+ years. So relatively short term fluctuations in exit valuations should not really impact initial valuations. But investors compete for Series A deals which they think might ride the wave. When the wave passes it’s a lot harder on the entrepreneur than on the investor. Just ask anyone who has ever done a down round.

But it’s not just us VCs who are at fault here. After all no one is forcing entrepreneurs to take their Series A at a high valuation. Most entrepreneurs tend to be “irrationally exuberant” (as Tom Evslin likes to say “nothing great has ever been achieved without irrational exuberance”) and tend to overestimate the likelihood of success. As a result most are willing to go along with the competing investors.

None of this is to say that companies that are executing well against large opportunities don’t deserve a real premium in their later rounds (especially in a last round), but to go into the Series A essentially assuming that this will be the case is a big risk.

Apologies for absence of links – sent from my phone.  Will add later.