AirTree Ventures

Things Have Changed – It’s now all about adding real value

By Daniel Petre AO

One of the benefits of being in SFO last week was that I was able to listen to the CEO/COOs of Facebook/PayPal/Slack/Lending Club/Reddit/Yelp/LinkedIn/Dollar Shave Club/ Thumbtack/WedMD (and about 20 more super interesting companies across ecommerce, blockchain, social, online advertising, VR, fintech) 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, a bunch of other Silicon Valley and Euro VCs again in an environment when everyone is forced to not just head nod and high five each other but rather 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.

Secondly there are tons of great companies being formed daily.

However while the general US economy seems in OK shape the tech sector has got away from itself a tad in terms of the valuation 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.

Joseph Floyd (in his Techcrunch post) makes the point re SAAS valuation declines (he shows valuations going from 13 X (EV/NTM) in 2013 to around 4.0 X now. More importantly what his second chart shows is that SAAS valuations have come back in line with Enterprise s/w companies (at 4.0 X EV/NTM).

The chart in the recent post from Fred Wilson also has a challenging chart with regard to SAAS multiples which indicates that the SAAS sector has gone from an average valuation (EV/NTM) of (sector average) of 6.7 X to 4.5 X in a year.

He makes the valid point that this might be good for all of us (investors and founders) in that we have to focus (more?) on proper execution (strong product/market fit, positive unit economics, low churn, 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 (in terms of Revenue or EBITDA multiples).
  • 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 both not met growth expectations and you have a high cash burn (short runway) 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 now just 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 road to massive returns. However 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 is a non-trivial nuance). 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 15+ years. We have also been founders/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 (who is one of the most successful investors or all time) says (and bastardising a great Billy Ocean song lyric)

The going is getting tougher. Time for the tough to get going.