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2016: The Road Ahead

29 Jan











Before the last New Year’s Eve sparkler flickered out on January 1 there was already plenty of hand-wringing over the direction of the venture and technology markets and the apparent shift in mood since the heady days of, well, just a few months ago.

For the venture and technology markets, 2015 was a watershed year on many levels. The number of “unicorn” companies exploded which, by extension, gave rise to concerns that the term had lost some of its cachet since it appeared the logic behind according billion-dollar valuations had become somewhat unmoored from reality. 2015 also saw the first wave of valuation re-sets by notable and prolific venture investors and, with it, concern that this was a but a harbinger of what would become a wholesale value reappraisal across the venture landscape.

Judging from the recent gyrations in public equity markets, the first weeks of 2016 have certainly not calmed these fears. Technology stocks, and broad market indices, have taken a beating. Many seasoned observers would argue that this kind of market re-set in technology companies was long overdue and, as it happens, healthy and necessary. I would put myself in this camp. The market had gotten ahead of its proverbial skis. Many unicorns had failed to yet prove their businesses’ core fundamentals. Equity capital had been too readily available in 2015 and, thus, helped fuel “momentum investing” by some that perhaps perverted the economics of how startups should be funded, what they should focus upon, and how long-term success should be gauged.

With that preamble, here are some of my top-of-mind thoughts on what we might expect in 2016:

  1. No bubble pop, but valuation resets abound.

    I am not of a mind that we are in a valuation “bubble”, per se — at least not in a circa 2000-2001 sense of the word. I don’t think we will see the kind of wholesale collapse in valuations as we did 15-odd years ago. The macro fundamentals are simply vastly different. What I believe we will see, however, is a continued reappraisal and level-setting of valuations across the board and, with it, the failure of a few unicorns that will be both unable to sort their unit economics issues and to continue to raise sufficient capital to buy them enough time to figure them out.

  2. A Tougher Equity Funding Environment.

    Venture capital flowed freely in 2015; some might say too freely. For the highest profile companies, venture rounds were raised as if almost on a phone call. While I’ll submit that in 2016 the best companies will continue to have their pick of good venture investors with whom to partner, terms will not likely be as company-favorable, valuations will not be as rich, and the timing to close will not be as brief.

  3. A return to traditional venture firms and processes.

    Traditional venture capital firms were certainly not on the sidelines in 2015. Far from it. However, there was certainly a trend of non-traditional venture investors—I dislike the term “tourists” –taking a more prominent role than usual participating in and sometimes leading venture rounds. This often lead to sniping and charges of irrational behavior between firms. Traditional “Sand Hill Road” investors would argue that the non-traditional firms were only winning marquee deals by “paying up” since, by definition, they did not possess a strong brand nor reputation within venture to win such deals otherwise. This, in turn, raised valuations for everyone involved and forced some Sand Hill Road names out of participating in financings entirely. While 2016 is barely a month old, we are already seeing a clear pullback in the investment activities of firms not traditionally associated with backing early stage tech companies. Expect to see that trend continue in 2016, with the advantages going to the more traditional venture brands.

  4. A ferocious focus on unit economics and core fundamentals.

    In 2015, the growth of a startup in a new, exciting market–often by any means necessary–appeared to take precedence over the less sexy task of making sure a business’ fundamental unit economics were sorted. Given enough growth and enough users the hope was always that, eventually, all the right curves would intersect. But no matter how exciting a startup or its vision, one can get away with selling dollar bills for eighty cents for only so long. In 2016, while we will continue to see many well-funded startups with negative gross margins, the appetite of investors to continue funding upside down economics has likely peaked. This year expect to see a renewed–some might say, ferocious–focus on unit economics and fundamentals.

    Again, these are but a few macro thoughts as we close out the first month of 2016. By and large, this is not meant to be a negative or cautionary post. I remain firm in the belief that we are in a period of intense innovation and value creation across technology. While there will be some fallen unicorns this year, we will also see some breakout stars and new markets emerge that will fuel even more innovation and market expansion. That said, every market must first digest what it has already consumed. I suspect we will see continued volatility as tech markets rightsize and as we head deeper into an election year. I will post again shortly on some of the tech trends I expect us to see in the coming year.


eBay’s Whitman should go.

8 Jan

There’s trouble in the Kingdom; send a message to the King.

..or in this case, Queen.

It seems a cabal is forming in tech circles, in the media, and the blogosphere around the notion that it might be time for Meg Whitman to be shown the door at eBay. Henry Blodget (yes, that Henry Blodget) makes a compelling case for the prosecution in his blog. So, too, do MSN’s Kim Peterson and BloggingStock’s Gary Sattler, albeit in a more measured way.

If this comes to pass, this will be quite momentous for a variety of reasons. I, for one, will have mixed emotions as I consider her stewardship at the company by and large a success, but — in the aftermath of some questionable moves and clear stumbles (Skype!?!) — not an unqualified one.

Without argument, Ms. Whitman guided eBay through serious competitive challenges in its early days to bring the company to its current status as a bona fide ecommerce juggernaut. Her leadership in those years was the sine qua non of the company’s success as the undisputed leader of online auction retailing. During her ten-year tenure, eBay has seen enormous growth, is now active in 40 markets, and has more than 230 million registered users. As I have alluded to in earlier posts, those coveted but elusive “network effects” that all VCs and management teams strive earnestly to achieve in their own companies (but rarely do so in the real world) are in clear evidence at eBay. There are precious few other companies that can demonstrate that in such an abundant, palpable way. The liquidity of eBay’s marketplaces across categories is what draws buyers and sellers to its platform over all other auction-based retail offerings (Yes, there actually are a few competitors to eBay out there, believe it or not.) Each new participant – whether buyer or seller – that participates in the marketplace thereby enhances the total value of that marketplace and the value to all members. And so on and so forth. Competitors could scarcely land a glove on eBay once its marketplaces grew to that level of liquidity.

But, as they say too often in this rough-and-tumble capitalist world we inhabit, that’s old news. What have you done for me lately, Meg?

I’m only half joking, of course. The proponents of the ‘Dump Meg Now’ brigade loooove to point to Skype as their Exhibit A. I will grant them that, but is goes deeper than Skype. There is also the prattling on about her decision to sign up as financial co-chair of the Romney campaign, or the loss of heir apparent Jeff Jordan (now comfortably ensconced at Open Table and, I would imagine, eating well.), or the debacle of eBay China, or the seller revolt last year over restrictive policies and fees, or the God-awful interface that remains as clunky and unrefined as ever. All worth debating, but my sense is it has been the strategic missteps and missed opportunities in growing eBay beyond its core business that is most glaring. — and, by extension, most responsible for the abysmal performance of its stock. I believe that upon examination, and with all the relevant facts, one can conclude in a clear, measured way that eBay needs new leadership. And that time is now.

eBay peaked early, one might say, but has been unable to broaden into new areas of retailing that other competitors — most notably Amazon — have seemed capable of doing with speed and effectiveness. Some cynics have gone as far as to opine that eBay’s market position and momentum when Ms. Whitman came aboard was such that its eventual and lasting domination of its core market was almost pre-ordained. I reject that argument. To her credit, Ms. Whitman has continued to try new marketplaces and new ideas, but lately they have brought largely unsatisfying results. Some ideas simply made no sense. [Does anyone remember eBay real estate? Hello?] Other ideas that made a LOT of sense and were seemingly slam dunks were left to languish so long that the initiative and the window of market entry were lost [i.e., re-launching eBay Motors’ auto parts marketplace. It’s still the mess it was in 2001 when they were (briefly) recruiting an auto parts expert to build the business. Their bloated, glacial hiring process turned off good candidates, they never ended up hiring anyone, and the idea died on the vine; potentially a billion dollar revenue opportunity, blown.]

In past years, eBay’s leadership position would insulate it from these blunders, but not any longer. Amazon has done a remarkable job building a truly inspired marketplace and is now the benchmark for online retailing. It has become a destination site for a whole host of activities beyond purchases — product research, reviews, community features, etc. Amazon has also beefed up the features and functionality that allow users to sell their own items on the site which, naturally, is one step closer to a direct attack on eBay’s core market and raison d’etre. Craigslist, the quasi-crunchy global bulletin board, is another obvious threat; but to date, Messrs. Buckmaster and Newmark seem content with their current market position and — according to their 60 Minutes profile, at least — do not seem bent on online world domination. We’ll see how long that lasts. If Mr. Newmark starts to change his demeanor, or simply takes a few pages out of the Bill Gates competitive playbook now that Bill G will be hanging up his full-time skates come July, eBay will have its work cut out for it in staving off Craigslist.

Amazon’s stock price has skyrocketed, reflecting the company’s new vitality. In contrast, eBay stock has languished at $30-35 last year and had a lousy 2006. For some shareholders, this alone is grounds for a beheading. For me, the issue is that, quite simply, eBay seems utterly bereft of a clear, decisive strategic vision.  Moreover, this comes at a time when the competitive landscape is changing rapidly. Old assumptions must be reconsidered and new approaches applied. For a variety of reasons, Ms Whitman is not the person to implement the kinds of changes and the overhaul required to right this ship. I believe it is high time to thank Ms. Whitman for her long service and to bring on a more visionary leader with bold new ideas to reinvigorate the company and reassure the rank and file, jumpy shareholders and irate users that the future of eBay is bright, exciting, and compelling.

And now back to your regularly scheduled programming…

18 Dec

With this blog I hope to add more than simply another voice to the cacaphony that is the VC-focused blogosphere. As the industry has expanded and increased in intensity, so, too, have the demands and requirements of remaining, as a venture investor, technically conversant, networked into the relevant communities, and knowledgeable about the players and competitive dynamics in emerging markets. In my view, that means travel – and a LOT of it. Great ideas and the companies that drive them come from all corners of the globe. That does not mean, however, that they come at you from all corners of the globe. All of today’s leading venture investors must get out from behind their mahogany conference tables and go find them. So, with Red Carpet Club pass, Tumi rollaway bagDramamine stash, and, sometimes, bug spray in hand, I have set out on a tireless quest to find these great companies–and the great experiences that come along with the journey. I hope you stick around. It’s just starting to get interesting…

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