#26 – The Bubble we are in and its implications – Part 2

In our second and final episode on the Bubble, we share what is happening in Venture Capital, on the exit - IPO, M&A, etc - front, as well as share clear “so-whats” for entrepreneurs and VCs. For in-depth views on the status of the economy, listen to our previous episode, episode 25. Navigation: Section 1: What is happening in VC? (02:05) Section 2: Exits are great, though, right?! (17:52) Section 3: So-what? Implications for entrepreneurs and VCs (25:57) Conclusion (43:49) Our co-hosts: Bertrand Schmitt, Tech Entrepreneur, business angel, advisor to startups and VC funds, co-founder at App Annie, @bschmitt Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro Our show:   Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Intro (01:34) Nuno: Welcome to episode 26 of tech deciphered. This episode will conclude our two-part series on the bubble and why we actually believe there is one going on. In this episode, we will discuss the VC landscape and how it is evolving. We will talk about exits, not just IPOs, but also other types of exits like mergers and acquisitions and how that landscape is looking like. And finally, we will end up with something pragmatic, the "so what", the takeaways, the implications for both entrepreneurs and investors.  Section 1 - What is happening in Venture Capital? 
(02:05) Nuno: Moving to venture capital, there's a lot of interesting elements to talk about. Some really interesting analysis from our friend Tom Tunguz but also of what's happening in the macro space, some analysis of what we've seen from PitchBook and CB insights, it seems we're going to have an incredible year in venture capital. This is it. There's no crisis there's a ton of money, dry powder, there's new funds, I actually have a new fund going. So I'm very happy with that, but in some ways it's like, woh, this is all fantastic. Increasing everything, increasing everything, more deals, more money deployed. We're all great. We're going to have, a flagship year in venture capital. And somehow I'm like I like being in the market. We just closed our first deal, which is great. Thank you. So what's going to happen? In our micro world of startups and entrepreneurs and venture capital firms, 2021 is going to be an amazing year, but what's going to happen? Bertrand: Yeah. And to share some numbers it's pretty insane what we see. And for me, what's crazy is that it's at every range. So maybe it varies by country, by industry, but overall if I take Series A valuations, for instance, you have seen a jump from what? like more than 50% in two quarters this is the very definition of insanity. I'm not sure if we have ever seen that, and it's happening. At every level in the stack. So maybe early on in the pandemic, it was less true that it was at every level of the stack. Maybe, initially it was more: you are only investing in people you already knew, in companies you already knew, the first quarter or two. And because you are not used to work like this, you didn't know how long it would be like this. So you had a different approach that maybe favored existing companies bigger rounds, insider the rounds. But now I believe that we're at a stage where it's not at all about that anymore.  Or not just that anymore. It cannot be: to stay competitive you have to stay in the market, you have to invest. And maybe on that point maybe not every fund agree. We have a wide range from Tiger Global investing I forgot how many deals a day, actually 1.3 deals a day from Tiger global these days.  But at the other extreme in a global ranking I have not seen Sequoia U S in the top 10 investors. So I wonder if there is less investment from them and they decided that right now is not the best timing. So I think there are still, some fair questions, and a wide range of answers to these questions. But numbers are pretty insane. And stuff are changing.  So, one is that we see a record financing $ 156 billion in Q2 alone. We see new unicorns, it's a record high of 136 new unicorns globally in Q2. That's six X what was a year ago, six X more unicorns in Q2 2021 versus Q2 2020.  These numbers are just totally insane. One of my big worries is that the number of good entrepreneurs has not increased by six X. And I think you and me, Nuno, have been around the block long enough, maybe too long You don't increase the number of great entrepreneurs six X, year after year. I'm not sure where it's going to go. I think that at least in the private markets, implosions will happen more often but it can take a long time before it's visible. It can be years before we see the effect of too much money in the wrong hands.  Nuno: Yes, and it's pretty pervasive, as you said, it's not just late stage companies that should probably already have IPOed that are getting more capital like Epic and others. It's not just, mid stage growth companies that are getting funded to ridiculous levels. It's early stage in general.  We play in the early stage for the most, and valuations are going up series A in particular. They're growing up at levels that are just, in some ways mind-boggling. Post money valuations. I think there was some analysis from Tom that was talking about the 75th percentile post money valuation of a cloud software infrastructure company has grown 11% annually. In 2021, it's spiked 60% in 2021. It's 60% again, growing 11% annually in last 10 years, if that's not a sign of a bubble, what is. It depends what you are, right? If you're a VC firm where there's an optional value of just putting a lot of capital to deploy a lot of assets under management, a lot of dry powder, coming to the end of your investment period for the fund that you are currently deploying capital from, maybe you are like, you know what, I'm just going to increase pace because I need to, and that's life and I'm going to pay and be relatively valuable insensitive. So I won't pay much attention to the valuation, I just need to deploy my capital.  If you have the chance, if you're early in a fund or if you're more seasoned investor and you have a chance to wait a little bit, you'll probably do that and be a little bit more selective on your investments. I think we're probably playing more of that, of the latter approach, let's call it the Sequoia capital Silicon valley approach. The Sequoia China seems to be very aggressive as well right now in terms of number of deals done.  Bertrand: Sequoia China is very aggressive.  Nuno: So I think we're more on that camp. I wouldn't call it conservative, but we are not valuation insensitive. So if we see a deal and there's no ARR, there's no annual recurring revenue and people are like, oh, we're worth 30 millions. Like why? Even if you're a price earnings ratios forward would be a 30 X, 40 X, 50 X, 40 times zero is zero. I'm kidding. Anyway, at the end of the day I think this is the time where the discipline will be there and you can have a little bit of Delta in early stage. It's like the difference between. You know, a 15 or 20 million valuation on certain deals is nothing. The difference on a 20, 30 million sometimes and in other deals is nothing. The difference between a 30 million and a hundred million in terms of valuation is huge. And so you can't be just insensitive at that point in time. And we're starting to see silly deals like that. A lot of party rounds, a lot of angels deploying capital, family offices, newly formed micro funds, deploying capital. Like there is no tomorrow. Maybe there won't be for them. I don't know. At some point in time and we'll come back to that when we're talking about the "so what", and the advice to entrepreneurs at this stage is something that we want to really put a stick on the ground on. You have to be a little bit cautious on who are you receiving capital from as well, will these guys be around? Will they be able to follow on? Will they be able to stick with you through thick and thin? But definitely I call it bubble it's more serious than that. And maybe that's a good segue into our next section, which is, this is not just the US right. This is not just the US or China that are just super hot because they're super big markets. And there's a lot of capital to deploy into those markets because historically they've had a lot of capital deployed. Europe is going silly right as well in terms of capital deployment. And, I look at my country Portugal and it's an interesting, I would call it still a tier two European VC landscape / startup landscape. We got to tier two, I think we will get even higher. It's a really interesting market. There's a lot of talented entrepreneurs, startups, a lot of talent migrating. But I look at deals right now. I'm like, why is that company getting funded? And they're getting funded by international investors, which is again, great news for the ecosystem. But sometimes if there's no fundamentals, you're like, why is it so easy for those guys to raise money? I just saw a company. I won't mention their name or the area, just so that I don't booboo them too much. They were at much lower rate of annual recurring revenue than the company for example, I'm investing, which is actually an American-based company. And they're getting a similar round to this company that I'm investing in at a much higher valuation, much, much lower ARR, let me again, be clear much, much lower ARR. And I'm like, what's going on. And again, international investors, not just Portuguese investors. So there's something going on on supply and demand as well in Europe. I don't know. Can you make sense of it Bertrand? Bertrand: I would be glad to make sense of it. I think that a few things, first I'm excited for Europe....