As Angel Investors Pull Back, Valuations Take a Hit • Hacker News Board

Re: As Angel Investors Pull Back, Valuations Take a Hit

#11

Post by dsacco » Thu, Jan 21, 2016, 2:19 PM UTC

roymurdock wrote: post #8

dsacco wrote: post #2

As an angel investor, I can anecdotally confirm that I've become more cautious recently (in the last year, really). However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. My belief is that a strong company can weather a bear market. I'm concerned with the current state of valuations - I enjoy giving investments to companies on the order of five figures or so…

> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. It probably will as things start to slow down. During the growth phase of the business cycle, many companies do well. Even some with poor fundamentals that shouldn't. This is the danger of stimulus - it promotes an inefficient and wasteful allocation of resources. But it makes investing easier as a lar…

You have a very good point, in that the stock market's current phase ultimately affects the health of all its constituent companies (in both a symbiotic and parasitic relationship).

But like you said, I don't consider it helpful to pay attention on a day to day basis, and I find it to be a more useful indicator for macrotrends than microtrends. In other words, my understanding of the stock market will influence my opinions about the angel investing and startup market en masse, but it would not be anything more than one factor in my opinion about a single company I could invest in.

While it's true that companies with strong fundamentals do fail in a downturn, companies with strong fundamentals can fail for any number of reasons. Just as I'm not all that concerned with my Vanguard funds going down for a while because they'll be back up in 10 years, I'm not too worried about a single company with strong fundamentals getting caught with its shorts down when the tide goes out. If it happens, it happens; in the absence of other poignant data, however, I find it much more important to focus on the company itself and pay attention to macrotrends more infrequently.

Besides, a market downturn is an excellent time to hedge long bets with shorts :)

Re: As Angel Investors Pull Back, Valuations Take a Hit

#12

Post by code4tee » Thu, Jan 21, 2016, 2:34 PM UTC

People are still willing to invest, but the issue is really that valuations got out of control and that's really hurting a lot of companies. For too many companies these days yesterday's glowing press release about being a 'unicorn' is today's oh $%#&! moment dealing with the ugly reality that sets in when valuations return to some resemblance of reality (e.g., employee stock options that become worthless, lots more tough questions about revenue and profitability and less awe over the hype).

Companies that have a solid product, real revenue (i.e., their revenues aren't just coming from other companies on life support from VC cash) are profitable (or close to being so) and have a valuation based on reasonable multiples of their profit will get through the coming rough waters just fine with only a few bumps. Startups that can't tick those boxes are in for a really rough ride ahead.

Somewhat ironically, the downfall of many of these startups will be that they ever allowed themselves to be valued so highly in the first place. A company that's reasonably valued at $20 million is going to be in a far better place than a unicorn once valued at $2 billion that's now valued at $500 million.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#13

Post by aetherson » Thu, Jan 21, 2016, 2:38 PM UTC

jkaljundi wrote: post #10

biggio wrote: post #7

Meanwhile http://www.bbc.co.uk/news/business-35339475

A much better take to look at that data is this: http://www.vox.com/2015/1/22/7871947/oxfam-wealth-statistic It's the same as to compare someone on absolute salary of $100k in Silicon Valley vs $50k in Estonia, forgetting that the latter can provide a luxurious lifestyle with tons of money to spend, while former can mean being barely break-even.

Median income in San Jose is $80k, so 50% of all households make less than that. $100k does not mean you're barely capable of breaking even. For any reasonable amount of income, it is possible to spend in such a way that you're barely breaking even, of course.

But this whole meme of six figures is hard to keep afloat with is the worst kind of cringe-worthy "Oh poor well-paid me." My wife works at Habitat for Humanity in the East Bay. You don't want to consider what the low level employees there are making (and no, they aren't all living with their families or have spouses helping out).

Re: As Angel Investors Pull Back, Valuations Take a Hit

#14

Post by HashThis » Thu, Jan 21, 2016, 3:08 PM UTC

I know the Unicorn market is making a massive pull back, and about time. What is happening to the Valley valuations and number of deals completed?

I'm curious on if this has any effect on seed companies with valuations at $4m to $6m pre in valuations or number of deals funded?

Is this only impacting unicorns (which I don't care about)?

Re: As Angel Investors Pull Back, Valuations Take a Hit

#15

Post by [deleted] » Thu, Jan 21, 2016, 3:16 PM UTC

themartorana wrote: post #3

Valuations are fake, so who cares? I don't mean to be flip, but valuations are only important to other VCs. No surprise they created their own bubble. Valuations for the Uber-of-this or the AirBnB-for-that have been absurd. I'm not saying there aren't business opportunities there, but sometimes those opportunities are in the tens of millions of dollars, not billions, and hey, tens of millions is fantastic by the way.…

[deleted]

Re: As Angel Investors Pull Back, Valuations Take a Hit

#16

Post by tyingq » Thu, Jan 21, 2016, 3:17 PM UTC

aetherson wrote: post #13

jkaljundi wrote: post #10

Earlier quoted context omitted.

A much better take to look at that data is this: http://www.vox.com/2015/1/22/7871947/oxfam-wealth-statistic It's the same as to compare someone on absolute salary of $100k in Silicon Valley vs $50k in Estonia, forgetting that the latter can provide a luxurious lifestyle with tons of money to spend, while former can mean being barely break-even.

Median income in San Jose is $80k, so 50% of all households make less than that. $100k does not mean you're barely capable of breaking even. For any reasonable amount of income, it is possible to spend in such a way that you're barely breaking even, of course. But this whole meme of six figures is hard to keep afloat with is the worst kind of cringe-worthy "Oh poor well-paid me." My wife works at Habitat for Humanity…

>>and no, they aren't all living with their families or have spouses helping out

Honestly curious...what are they doing then? Isn't the typical rent cost higher than the entire salary of a low level employee at a charitable org?

Re: As Angel Investors Pull Back, Valuations Take a Hit

#17

Post by JonFish85 » Thu, Jan 21, 2016, 3:18 PM UTC

themartorana wrote: post #3

Valuations are fake, so who cares? I don't mean to be flip, but valuations are only important to other VCs. No surprise they created their own bubble. Valuations for the Uber-of-this or the AirBnB-for-that have been absurd. I'm not saying there aren't business opportunities there, but sometimes those opportunities are in the tens of millions of dollars, not billions, and hey, tens of millions is fantastic by the way.…

Valuations are fake from one perspective: that they don't reflect anything more than a handful of investors' decisions to pay for a slice of the company.

They have very real meaning when it comes to things like employee options and ability to raise money to pay for employees. If a year ago a company raised $10m at a $50m valuation, but now they want another $50m to scale, they'll have to give up a much bigger percentage of stock to do that, which can essentially wipe out any employee stock (founders likely have a different class of stock that isn't as affected).

And along the same lines, maybe the company can't raise as much cash as they want/need. In this case, they have to cut back on what they pay employees. In these cases, the money starts to tighten up, and people don't see the reason to stick around SV paying $4k/mo in rent if they're only being paid $8k (before taxes), so they start to look for other places to go. This can lead to a spiral where an otherwise good company can't retain or attract talent, and so the cycle continues (don't hit growth targets, can't raise money at good rates, etc)

Re: As Angel Investors Pull Back, Valuations Take a Hit

#18

Post by CPLX » Thu, Jan 21, 2016, 3:26 PM UTC

dsacco wrote: post #2

As an angel investor, I can anecdotally confirm that I've become more cautious recently (in the last year, really). However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. My belief is that a strong company can weather a bear market. I'm concerned with the current state of valuations - I enjoy giving investments to companies on the order of five figures or so…

> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company.

You may be the exceptional person who has no assets whatsoever tied up in the stock market, but nearly every investor who has the resources to be an angel will have money in the market.

When the market falls they have less money. They use money to invest in things. The correlation between the market and seed stage investing should be fairly direct and clear.

Re: As Angel Investors Pull Back, Valuations Take a Hit

#19

Post by haxeny1 » Thu, Jan 21, 2016, 3:31 PM UTC

dsacco wrote: post #11

roymurdock wrote: post #8

Earlier quoted context omitted.

> However, I'm not at all concerned about the stock market. That has never influenced my decision to fund a company. It probably will as things start to slow down. During the growth phase of the business cycle, many companies do well. Even some with poor fundamentals that shouldn't. This is the danger of stimulus - it promotes an inefficient and wasteful allocation of resources. But it makes investing easier as a lar…

You have a very good point, in that the stock market's current phase ultimately affects the health of all its constituent companies (in both a symbiotic and parasitic relationship). But like you said, I don't consider it helpful to pay attention on a day to day basis, and I find it to be a more useful indicator for macrotrends than microtrends. In other words, my understanding of the stock market will influence my op…

> hedge long bets with shorts I am curious, without sharing details obviously, have you actually been able to successfully pull it off or do you expect to see some hits due to changes in direction?

Re: As Angel Investors Pull Back, Valuations Take a Hit

#20

Post by AndrewKemendo » Thu, Jan 21, 2016, 3:40 PM UTC

themartorana wrote: post #3

Valuations are fake, so who cares? I don't mean to be flip, but valuations are only important to other VCs. No surprise they created their own bubble. Valuations for the Uber-of-this or the AirBnB-for-that have been absurd. I'm not saying there aren't business opportunities there, but sometimes those opportunities are in the tens of millions of dollars, not billions, and hey, tens of millions is fantastic by the way.…

>Valuations are fake, so who cares?

Because they actually aren't fake. I mean I get what you are saying, but the reality is that real money changes hands based on those valuations, so they are priced the same way as any other security: Someone says they will pay a certain price per share.

I think the issue is that investors setting the prices as market makers don't have a super strong track record of doing valuations with high accuracy.