What's 🔥 in Enterprise IT/VC #264

The impact of lofty expectations for investors and founders

Nov 20

Aloha 🍹 from the Lobby: Enterprise conference where I had the chance to hang out with a great group of enterprise founders and investors and have some fascinating discussions on the state of investing, building and scaling, and what’s next in enterprise. While we dove deep into the state of dev tools, cybersecurity, and enterprise/web3, one of the huge topics that came up repeatedly was around valuations, size of funding rounds, and the impact it can have for both investors and founders.

A lot of this discussion reminded me of what Fred Wilson posted earlier this week on why entry price matters for seed funds.

So, in a world where we are seeing more and more $100mm valued seed rounds, one has to ask the question what are the investors expecting? A $100 billion outcome? Doubtful. Less dilution, maybe. A different power-law distribution? Don’t count on it.
I think they are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round. But it seems that person may also be delusional. Because when you model things out, the numbers just don’t add up.

And here’s some historical context on that $100B outcome…

Flaherty.eth @josephflaherty

Some historical context on @fredwilson's latest. Between 1/1/2010 - 12/31/2019, 166 tech startups went public. Here's where their valuations sit now: 2 = $1T+ (TSLA/FB) 4 = $100B+ (SHOP/NOW/TEAM/SQ) 48 = $10B+ 35 = <$1B Median = $4.4B Deploy wisely!

Seed Rounds At $100mm Post Money - AVCWe have been seeing quite a few seed rounds getting done in and around $100mm post-money and that concerns me for a few reasons: Seed stage is when a company has a good team, a good idea, but has not yet proven product market fit and a go to market model, and has not yet […]avc.com

Unlikely - so this will be an interesting next year as more 💰 pours into every stage and VCs need to think through entry price and founders need to think through the impact of raising too quickly at too high a price.

What this comes down to is having shared expectations and alignment around the true state of the business and how long it may take to actually scale. Without that, bad things can happen…

Jenny Fielding @jefielding

All this VC money is great until... 1) Series A company doesn't hit their numbers 2) Board is pissed + even abusive (curses at the founder) 3) Pushes out the founder/CEO despite him controlling the equity 4) How? By sinking the bridge round This is just the beginning😵‍💫

And with deals closing so fast, founders and investors rarely have a chance to really get to know one another due to timing, and unless they’ve had a long standing relationship prior, both sides are taking a huge leap of faith on the personal dynamics and fit.

This post from Anu further highlights that:

Anu Hariharan @anuhariharan

The average length of a marriage in the US is 8 years The average tenure of a board member is 9 years Yet may founders decide on a board member after meeting them for 2 hours

Allison Braund-Harris @HardlyAllison

Choose your board wisely: “Board of Directors, on average, last longer than marriages in the US” - @anuhariharan at @ycombinator. https://t.co/FryWeFAUD1

While this is great for the companies crushing it, for those in the middle or who are taking a little longer to ripen, I do worry about the possibility of abandonment from their investor or other problems arising. It will surely be an interesting 2022 as I believe more 💰 will continue pouring into enterprise startups, and we may see some of the first signs of companies that raised at too high a price get stuck for their next round.

Ed Sim @edsim

@aweissman @albertwenger as investments become more "transactional" due to speed, it's even more important for founders to find the right partners - I fear that there will be a slew of these startups treated as such in the coming years...esp. because of super high expectations + entry prices

As always, 🙏🏼 for reading and please share with your friends and colleagues.

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