One of the benefits of being in San Francisco last week was that I was able to listen to the CEO of some of the biggest tech companies in the world, including Facebook, Slack and LinkedIn, right in the middle of the biggest meltdown in public tech stocks since the GFC.
I was also able to hear the views of partners from A16z, NEA, Goldman Sachs and a bunch of other Silicon Valley and Euro VCs in an environment when everyone is forced to not head nod and high five each other but to think deeply about what is actually going on and where things are headed.
The obvious initial statement is that software will continue to eat the world and every industry and business will be impacted going forward – this is not 2000.
And there are tons of great companies being formed daily.
But while the general US economy seems in OK shape, the tech sector has gotten away from itself a tad in terms of the valuations of some companies and some sub-sectors.
Some tech stocks are just simply not worth as much as they were last month or last year. Some have fallen a lot, and deserve to, some have fallen a little and some have been harshly treated.
Fred Wilson makes the valid point in a recent post that this might be good for all of us in that we have to focus on proper execution – strong product-market fit, positive unit economics, low churn and manageable cash burn.
Parsing through many reports like the ones mentioned the addresses from CEOs and VC Partners this week and a bunch more sources a few things are quite clear:
- Generally speaking valuations for tech overall have come back
- Those most harmed are companies who have failed to meet growth expectations and those that have high cash burns, and possibly short runways. It is interesting to see that in the public markets, in social alone, LinkedIn is down from a high of $US250 to $US100 while Facebook is only down from $US117 to around $US100. They both operate in the “social” market but have very different growth profiles and growth opportunities.
- If you have not met growth expectations and you have a high cash burn you are really in trouble.
- If you have the above and your unit economics are not positive then things are going to get desperate really quickly.
- Getting to cash flow positive actually matters. As the partner from A16z said at the SFO meeting: “once you are cash flow positive your opportunities are endless” with obvious corollary that if you have a long way to being cash flow positive your options are limited.
The Australian market is only just now starting to see that what seemed fair and appropriate a few months ago in terms of valuations may not be the case now.
Given the rapid influx of new money into the market perhaps we will not see the impact for a while as some investors think this is just a blip on the roadto massive returns. But this is just a timing issue – winter is coming, whether or not Australia enjoys a short Indian summer.
Our view is that if you have a great product market fit and solid unit economics then you just need time to grow into a great valuation based on getting to cash flow positive while not trading off too much top line growth to get there.
This means founders need to manage cash and runway to give yourself time. What founders need now is help from people that can actually add value to the business.
We are proud that AirTree was based on providing real operational expertise to companies and the founders have been doing this for more than 15 years. We have also been founders and CEOs and we know what it is like when you have to make hard decisions.
This is not a time for vacuous cheer leading and head nodding from the sidelines. As Fred Wilson – one of the most successful investors of all time – says: “The going is getting tougher – time for the tough to get going”.
Daniel Petre is a founding partner at AirTree VC. This piece was originally published on the AirTree blog.