As signs of a tech apocalypse brew in the US, with unicorns being gored daily, venture capitalists here are still raising more and more funds. This heralds an era where diversity and merit will triumph over steroid-fuelled growth, says John Kennedy.
At the weekend, we reported that Slack, the next generation workplace communications platform, raised $200m in a monster funding round that valued it at $3.8bn. Like Stripe, an e-payments player led by Irish brothers Patrick and John Collison, which is valued at over $5bn, Slack is becoming the exception rather than the rule in Silicon Valley where those start-ups on steroids – erstwhile known as unicorns of the $1bn club – are beginning to wane, prompting fears of a second dot-com crash, or techpocalypse, as it is being referred to in Silicon Valley media.
There is no guarantee a correction of the same scale of 2000 is approaching and, if anything, the indications are that venture capital firms are raising greater sums than ever before.
But they are making more careful and shrewd investments and, if that is a correction, then it’s probably a good thing. Less could mean more.
According to Silicon Valley tech site Pando Daily, venture capitalists are about to have their biggest quarter in three years, with 90 funds raising $90bn so far this year and $10bn of this going to US firms.
In Europe, funding activity is far more localised, with local players like Germany’s Samwer Brothers or Finnvera Venture Capital in Scandinavia leading the charge. In Ireland, Enterprise Ireland is effectively the third most active fund globally, according to Pitchbook, with 196 deals last year.
Last week, Atlantic Bridge Capital closed a €140m fund for Irish and European companies active in the areas of cloud, big data, internet of things, software and robotics.
International investors have a growing appetite for Irish tech firms, according to the Irish Venture Capital Association, which reported venture capital investment in Irish firms soared 30pc to €522m in 2015.
International investors invested €241m (46pc of total funds raised) in Irish firms in 2015 compared to €132m (33pc of total funds raised) in 2014. This source of funds has grown from €45.5m (17pc of total funds raised) in 2011.
However, there are changes afoot. Just because funds are growing, it doesn’t mean investors are tossing cash around like Skittles at a kid’s birthday party.
Recent figures from Pitchbook – timed to coincide with St Patrick’s Day in an article enigmatically titled The Luck of the Irish – showed that the number of deals for Irish start-ups reached a high of 398 in 2014.
But in 2015, there was a sharp decline when the total deal count fell to just 146.
Although deal flow has varied in recent years, PitchBook noted that capital invested during the time has held steady.
Unsurprisingly, Enterprise Ireland has topped the number of investments since 2010, with 409 investments, followed by NDRC with 89 and Enterprise Equity Venture Capital with 50.
Software still attracts the lion’s share of investment and the largest investment round in recent years was last August when Fenergo raised $75m.
What appears to be happening is the number of deals is falling, but the value of these deals is rising.
In terms of the unicorn club – those start-ups valued at more than $1bn – they have grown in number steadily since 2009 when, according to Forbes citing Credit Suisse, there were only four unicorns. By the end of 2015, the number of tech firms that can be called unicorns stood at 142.
But the end is nigh for the unicorn era as many of these companies, despite their valuations, are either losing money or investor sentiment is changing.
The first indications of a change in sentiment occurred in October when Square announced an IPO valuation of $6bn, one-third less than it promised investors in 2014.
In the UK, £1.8bn unicorn Powa Technologies collapsed into administration in February after it emerged that many of its vaunted customers weren’t actually paying for the technology.
If there is a tech correction
Changes are coming and no one can predict with any accuracy how severe they will be. It could be as straightforward as investors simply calling time on investments that aren’t working out or companies failing to go to IPO or deliver that prized exit like an acquisition.
Last week, Spotify raised $1bn in debt financing on the condition that it goes for an IPO in the coming year.
If there is a correction, it is likely to be driven by investor sentiment in the ranks of venture capitalists rather than Wall Street alone.
Technology has taken too firm a foothold in people’s lives for it to be otherwise, but even for tech giants like Apple or Samsung it is true that people are buying fewer smartphones and Apple is likely facing into a period where sales of iPhones will fall rather than rise.
The new virtual reality craze could take years before it is ever to match the crazy growth of smartphones since 2007.
The only thing we can say for sure is the evidence is that funds are growing, but the deal rate may slow. This will make it harder for start-ups to raise funds, especially at the vital seed stage.
When the tech downturn happened in 2000 it also impacted the telecoms equipment market severely. Back then there were hundreds of telecoms equipment vendors. Today there are really only three: Huawei, Ericsson and Nokia-Siemens (which last year acquired Alcatel-Lucent).
A key difference also is that broadband had barely arrived and most computer users were still accessing the internet on 56k dial-up modems. Today, everyone carries a smartphone.
Technology is fully embedded in our lives and, if there is a correction, established players like Microsoft and Apple will continue to thrive, people will still buy devices, apps and consume media and some start-ups will thrive while many others will inevitably fail.
Respect the money
If anything, the nature of tech investment is already beginning to change, with investments becoming more specific and focused. For example, we reported last week how Dublin-based CurrencyFair raised €8m in a funding round specifically geared to transform how it markets itself, which included the appointment of a new CMO.
NVMdurance, a NDRC-backed start-up in the solid state storage space raised €2.23m in a Series A funding round to expand its sales and marketing efforts and grow its engineering team.
In August, Intercom raised a $35m round with plans to double its workforce in San Francisco and Dublin. A talent war is raging and these companies are still going to be fighting tooth and nail for talent for the foreseeable future.
Limerick company AMCS last year raised €45m in a funding round to fuel acquisitions and it is eyeing a potential IPO that will yield a potentially valuable exit for its investors.
The conversation around what venture capital is for needs to change.
A funding round is not a destination but a milestone on a very long road. When I see a company raising finance through venture capital I don’t imagine champagne glasses clinking anytime soon.
Raising finance does not imply that a tech company has made it or arrived.
What it really denotes is people have done their due diligence and decided they believe in the founders’ vision and technology. They are backing this belief with cold hard cash and they will want a return on that investment.
This is really where the hard work begins to get harder.
For founders and company owners it means more people to be accountable to, not just employees, but new board members.
If a company ever gets to the lofty heights of an IPO, there is a whole new class of investors to be mindful of. It’s a whole new ball game.
The new reality of investing
The problem with reading and writing about venture capital and IPOs is that when the deal is done it looks like it might have been easy. A fait accompli. As if it’s an end-game achievement. It is not.
There is a certain romance to start-ups right now that is dangerous if people are led to believe it is easy.
If you study entrepreneurs like Pat Phelan or Chris Kennedy from Trustev or Colm Lyon of Realex, while they may be calm and generous with their time for fellow entrepreneurs on the surface, they have been peddling furiously and making massive personal life sacrifices.
For Phelan and Kennedy to achieve their goal it meant uprooting their lives, moving to the US and pretty much living out of hotel rooms and airplanes on a constant coffee-fuelled basis.
Ultimately the key to the success of Trustev and Realex was an underlying technology and customers. And hard, hard work by their founders.
As engineers and developers become as rare as hens’ teeth – there are 700,000 such vacancies across Europe – ordinary people without tech skills who feel like taking the entrepreneurial plunge will face an uphill struggle. AMCS co-founder Austin Ryan said last week that the company’s presence in Limerick rather than Dublin has enabled it to sidestep the skills shortage to some degree. “A lot of indigenous companies wake up and hear the news that Google or Facebook are creating 200 new jobs and they just sigh.”
Another factor that is changing is banks in 2016 are more amenable to working with tech companies than they were in 2007 or 2008 at the height of the property bubble.
For example, Bank of Ireland’s InnovFin fund – based on the European Investment Fund’s 50/50 Risk Sharing instrument – will provide a total of €100m to innovative companies over the next two years.
Another situation on the cusp of change is how little venture capital goes to women and how few venture capitalists actually are women. Last year at Inspirefest, Sharon Vosmek, CEO of Astia, revealed that just 5pc of venture capital over the last 15 years went to women founders.
As Deborah Magid of IBM’s venture capital group recently pointed out, not only do existing venture capitalists need to change their investment profile, the key here is to get women to invest in other women.
With rising stars like Jules Coleman, who sold start-up Hassle.com, which she co-founded, for €32m last year, the pendulum is finally starting to shift and we will in the coming years see more female-led investments, even specific funds like the Angels Fund established by female Twitter executives in Silicon Valley last year.
Changes are happening in terms of how investments occur and finance is raised.
If anything, if there is a correction, let’s hope that the change is more about thoughtful and inspired investments in sustainable start-ups and tech companies that have real technologies that can make a difference.
If there is a correction, let’s hope it is in how investments are decided upon. And if that means getting away from the steroid-fueled unicorn era into a more diverse world where investment criteria is based on merit then that’s possibly a good thing.
Less means more.
Brink of collapse image via Shutterstock