Last night I took the bulldogs out for their nightly constitutional and reflected on how amazing my first six months in the Bay Area have been.
San Francisco truly is the city of the future, with the most intelligent and driven minds in the world riffing on each other; while 1/3rd of the backdrop turns into Manhattan, the other 2/3rds remain the “uniquely” permissive, flawed-but-beautiful and kooky utopian kids that the Summer of Love created.
[ Click to Tweet (can edit before sending): http://ctt.ec/9vF9J ]
This week at *the* poker game, the self-made Texan and the self-made Sri Lankan debated the bubble between the bad beats that were bestowed upon “the World’s Greatest.”
I started to model, “Gosh, what exactly would it look like if the stock market tanked again?” Ignore the debate whether there is a bubble, because, let’s face it, there are two distinct bubbles in the financial space that everyone agrees on: late-stage private and seed funding.
Late-stage deals are being priced at public valuations, which isn’t a major deal since it’s public investors who are buying them (and blocking out the little guy). If those big money funds lose a little cheddar it’s not that big of a deal — they can afford it.
The early-stage valuations, where I spend my time, are literally 3-5x, which leads me to say to many folks who tell me their valuations, “We’re going to pass, based on valuation.”
Of course, the good founders always ask, “What would you price our round at?” I give them the bad news: 12 weeks of progress and a two-person team? Hmmm … how about $250k for 10%?” Not surprisingly, half don’t take it — but the other half that do? Well, I spend all my time growing those companies … because I have an actual stake in them! (Note: I’ve done deals at double and triple that as well, but they tend to have something special: like a founder who has an exit or something).
And to be sure, when the market was at 50% of where it is today, the friends and family rounds were $1-2m, the angel rounds were $2-4m, and the A rounds were $4-8m. There was enough room for an angel to actually make a return, not just have the logo of a “hot” startup on their site.
Of course, don’t cry for any angel investors, because at any time they can walk away from the table and sit on their cash. Some are doing that right now, I’m seeing it OFTEN. Savvy investors are saying, “$250,000 for 1% of a four-month old company? I’ll pass and put $50k into five companies for 1%!”
Which makes a lot of sense to me: five bets are better than one.
So, what if the market dropped 50%? What would the world look like?
Well, although a certain % of people would lose their jobs and that would suck for them (my dad is one of those victims — unemployed at a recession, never to be employed again), our *society* would carry on just fine — as it did the last time unemployment went up 5-10%.
Here’s the tweet storm … I’m sorry it’s not formatted super clean, but this is the first time I’m actually trying to embed tweets in WordPress. I wonder, @photomatt, is there a better way to do this?
[ Also, why can’t I put @jason or @photomatt in WordPress and have it automatically make a Twitter link? ]
1/If this is a bubble, what would the world look like tomorrow if the stock market lost 50% of its value today? Apple would trade at $63
— jason (@Jason) March 13, 2015
2/Nasdaq 2,400, late stage rounds in unicorns would end, angel funding would dry up by 2/3rds & startup valuations would be cut in half.
— jason (@Jason) March 13, 2015
3/fifty percent of angel funded companies would shutter or go to zombie level in 12 months (most have 6-12 months of runway on average).
— jason (@Jason) March 13, 2015
4/google, Facebook & apple revenue would stay same, go flat or decrease by 10%. They would acquire many startups & unicorns on sale.
— jason (@Jason) March 13, 2015
5/real estate sales in SF would dip 25% off peak, rents would go flat. Salaries would stay same at big companies
— jason (@Jason) March 13, 2015
6/no new angel or VC funds would form, @sequoia/benchmark/@usv would increase A round findings at $6-9m pre money valuations again.
— jason (@Jason) March 13, 2015
7/trade shows, conferences and new publications would shutter hard — at least half. Business and vacation Travel would come to a halt.
— jason (@Jason) March 13, 2015
8/unemployment across USA would increase by 5 points in 6-12 months and TV news would go wall to wall 'recession casting'
— jason (@Jason) March 13, 2015
9/Europe and Asia would have massive slumps as US buyers stopped spending, potentially civil unrest in China (protests).
— jason (@Jason) March 13, 2015
10/faux founders would go to work at remaining 1/3rd of quality startups, grow them with focus & sane spending…. Couple would break out.
— jason (@Jason) March 13, 2015
11/cycle starts over as angel investors and shareholders in new-unicorns sell their shares.
— jason (@Jason) March 13, 2015
12/folks in cash would buy 2 for 1 apartments and angel investments, those under water from greed in last bubble would go into debt.
— jason (@Jason) March 13, 2015
13/question: what causes 50% correction? a) the bear (Putin does something crazy), b) Pakistan nukes, c) Chinese hidden fraud / collapse
— jason (@Jason) March 13, 2015
14/or super random black swan: d) pandemic kills 10m, e) Iran nukes Tel Aviv, f) president/head of state assassination & retaliation
— jason (@Jason) March 13, 2015
15/in all cases, a correction or bubble bursting only leads to increased–but different–opportunity… If the pandemic doesn't kill you!