SV Biz Journals | Funding sea change has pushed startups to new strategies and locations, VCs say

SV Biz Journals | Funding sea change has pushed startups to new strategies and locations, VCs say

Funding sea change has pushed startups to new strategies and locations, VCs say

cromwell By: Cromwell Schubarth | TechFlash Editor – Silicon Valley Business Journal

Jul 7, 2016, 11:26am PDT  Updated Jul 7, 2016, 4:11pm PDT



Bain Capital Ventures partner Indy Guha said most of the companies he invests in don’t have engineering in the Bay Area anymore because it has become too expensive. They are now doing that part of their business in places like Canada, Russia, China, India and less expensive parts of the U.S. like Phoenix.TechFlash Editor Silicon Valley Business Journal

“The latest trend is that sales offices — which is the other big center of gravity for headcount in a hypergrowth company — are not in the Bay Area anymore,” he said at the Pitch event I moderated at Google. “You can get an inside sales rep for 50 grand fully loaded and ready in Phoenix, especially after all the layoffs at Zenefits. Or you can get that person for $120,000 in the Bay Area. Guess what? When you run the math on cost of customer acquisition, that makes a difference.”

The panel came as early data on first half and second quarter startup investments showed activity in the Bay Area continued at six-year lows and most top venture firms have done fewer deals.

Cybersecurity investor Bob Ackerman of Allegis Capital said the market is recalibrating and that has forced founders to take a closer look at costs.

“The last few years have been driven by autopilot and momentum and the ‘greater fool theory,’” he said. “People seemed to believe that things only move up and to the right. Everybody tried to index off of the unicorns. It was a totally distorted valuation environment. The bloom is off that rose and everything is recalibrating.”

Companies are going overseas and to other parts of the country, Ackerman said, not because they want to, but because that is where they are finding large pockets of talent at a reasonable price.

“What we don’t find is entrepreneurial DNA or product management DNA. Never heard of it,” he cautioned. “The challenge is that with that lower cost of doing business there are some compensating expenses. There are some things you have to bring to the table to build a viable company.”

Kristina Shen, vice president at Bessemer Venture Partners, said she hadn’t done a funding deal yet this year. Normally she does between two and four.

“We’ve been talking about a downturn for a really long time,” she said. “VCs encouraged entrepreneurs to raise early and make sure they have extra runway and that is what companies have done. Everyone loaded up the cash chest. So now it has been slow.”

The customers of her portfolio companies haven’t cut their spending and are still purchasing software, Shen said. “Nothing significant has changed, but the fear dynamic has set in with founders.”

Sara Thomas, a principal at Maven Ventures, said funding deals are taking longer today than in recent years.

“There are a lot more meetings to get to a yes,” Thomas said. Deals used to go to a full partner meeting after a couple of preliminary meetings.

“That’s not what is happening any more,” she said. “It is more and more conversations and due diligence before taking it to a partner meeting. It has taken longer to get to a Series A round and because of that we have been reflective of the number of seeds we have invested in.”

Bain Capital Venture’s Guha saw an upside to the new funding climate.

“With growth equity investing and others slowing down a bit, probably for the first time in two years traditional venture capital investors can take a look at doing Series C and Series D rounds. We are quite excited about being able to go back to being stage agnostic,” he said.

“For the better part of the last two years we were pretty much only looking at doing Series A and Series B. Beyond that point, the second a company started to get momentum, the valuations were really high,” he said. “During the last two years anytime somebody had a good idea, you had eight copycat companies that got funded by venture firms that missed out on the first company. That sounds like it is fine when capital is cheap but it prolongs the pain. It makes hiring harder, it makes finding office space harder and salaries go way out of line.”

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