03 1 / 2013
“I tried to put a good game plan together. I wasn’t sure how healthy you were.”
The new year began with a surprising turnaround of traditional NFL team Washington Redskins coming back from 3-6 and going into the postseason with 10-6. We don’t know how far the Redskins will go but this turn around in this year NFL season was something we could learn from. Young rookie quarterback Robert Griffin III lead the team and was promoted captain of the team. An he did lead the team to success. He crashed the news conference of his coach Shanahan after the last game:
“What did you do for New Year’s?” Griffin asked.
“I tried to put a good game plan together. I wasn’t sure how healthy you were, so it was hard without you calling me,” answered Shanahan
It will be similar for startups and investors this year. Everybody will try to put a game plan together but uncertainties are very high to make a fair call. The funding scene as we know it will change and founders need to adapt or leave. Prepare for a different and new way of raising funds. But the real change will be from an investors perspective - so I leave the founders view this time. They will not play the main role in this drive.
We read a lot of Series A crunch and Not a Series A crunch and No crunch at all. The experts talked about tailwinds and headwinds. For 2013 this is not of the essence anymore. Change is imminent and the players will be the investors this time. After four years of a Startup Scene where founders lead the negotiations the coming year will change the rules of the game. Here is how and why:
More money will be injected
First indications of new deals at the end of last year showed massive injection of new cash in successful startup stories. There will be more of this. Why? because investors will select their targets from a whole bunch of startups in a certain trend area. After selecting their target they will go for “All In”. Investors have understood that the bloodbath is around the corner and they need to make winners not just survivors. To win, those companies need cash - a big pile of it. They need the money for hiring the top talents, they will need the cash to drive market making by features and advertising and they will need the options to take over the weaker ones who will not be able to raise big funds. Investors of those survivors will look out for mergers and takeovers rather than going into the fate of a long lasting death and a cheap asset deal. Those investors who will come to their senses early in the year 2013 and push for those deals will be winners at the holiday season this year. Investors injecting those massive rounds will also be winners in their sector. Running a Startup is a marathon, but you need a sprint once in a while to get the advantage over your competitors. You need to get a gap in between you and the peloton to make sure the number of opponents on the finish line will not be a mass sprint. For most of the startups in the promising trend areas it is time for a sprint in 2013. Investors are willing to give this bottle of Gatorade to make sure their targets will stay ahead of the peloton. Investors are prepared for a few but big rounds in real winners. No time for small rounds nor for funding survivors.
Valuations will be reasonable again
Big funding rounds need higher valuations. But valuations will be measured by ratio to the investment sum. This ratio will decline - not necessarily the absolute number. We have seen high cash injections when the lead investor took low percentage in the company. Two digits million $ for single digit percentages in a winner company. Those days are over in 2013. Fighting for the big pots will lead to two digit percentage in a winner for the leading investors while existing investors will pay high for their pro rata. Additionally a lot of early stage investors will leave those deals via a secondary transaction from their investments. It will help their reputation for limited partners and they will be able to raise new early stage funds in 2014. They will not experience IPOs or mega exits, but it will be high multiples to costs for those investors. They will be happy to report high returns and a lot of angel investors from 2010 will have some happy times. Those angel investors from 2011 and 2012 will only see good times if they sign those secondary deals. Most of them won’t in 2013 because they will misinterpret the signals of the market. So watch out angels and have a look on what times are ahead and not what wishful thinking is making you believe.
Investors landscape will change
There will be a fundamental change in who is investing in startup companies. We already know, it will be fewer VCs due to lack of funding by LPs in 2011 and 2012. More and more of medium VC firms will run out of cash for funding new ventures. Also less cash is left to help those survivors. Even if those VC firms will benefit from the secondary transactions they will not be able to reinvest those proceeds. Those proceeds will help to raise new funds but not available for investments in 2013. The rest of those smaller VC firms will pass on the big deals and focus on the next era of startups for 2015 and following. The remaining and cashful VC firms will put big bets on the winners. But with each investment one card is played and betting big pots on two players in the same area have never happened. So three to four players per trend area will get big investments by consortiums of those cashful VC firms. The rest will be survivors and struggle to make a profitable exit - most of them will fail while trying. How does those consortiums look like? Corporates have testing the grounds in 2012 on various occasions. They will be more confident doing more deals especially along with experienced VC firms. Those will be strategic deals but on fair VC terms. Those corporates who haven’t tested grounds will do in first half of 2013. Don’t be surprised who will enter the funding scene. Those corporates will not seek majorities in startups nor is this preventing exits in the future. Those strategic investments will help to build the winners. They will bring cash through orders, product integration and marketing activities. They will be valuable customers in the memorandum when times for exit - trade sale or IPO - arrive. Even after the exit those customer relations will be profitable and have a value for the acquirer or the IPO story. By the time of the exit those strategic investors have found their niche within the company and product line. A complete takeover isn’t necessary to keep this customer role with the former startup.
For investors, journalist, corporate strategists and entrepreneurs:
The funding market will develop in two main segments:
Early stage and pre-seed companies building new startup ideas: They will get their money from various funding sources: crowdfunding, angels, small VC firms, governmental programs and others. None of those young ones will have a major impact in 2013. Keep them growing, nurture them, kill them if needed, merge their talents and products if this will create more value than the separate entities.
The home of the brave winners: The rookie year will make the decision if you are a winner or a survivor. Investors will give classes and they will make the decision which road to take for the startups. Those winners will close huge rounds and will aim for the world in 2014. The dropouts will start over in the early stage companies or seek rest in corporate jobs.
One more thing: For Berlin it will be the year of “make or break” to come. After successful years we see a correction development process starting since some months. It will be important to see how founders, investors and journalists will adapt to the expectations of markets. Important investment have been made by well known VCs into the local ecosystem. But next moves need to be made, promises to be kept and the ecosystem needs to mature. It won’t be just enough to stay on the same level and do what has been done over the last years. Other ecosystems and regions are up to your heels so watch out not losing your advantage versus those locations. They will be happy to take funding, press coverage and talents away from you. Avoid it by any means even if it needs to become friend with your enemies.
For all parties it will be of the essence to make tough decisions early in the year. Go “All In” or “pass” on your cards. There will be no “In-Between’s” in 2013.
For those of the survivors Robert Green III has a quote for you too. When walking off the field that night after defeating the Dallas Cowboys he told Tony Romo, the quarterback trowing this game deciding pass interference at the end of the game: “Hey Tony. I just wanted to say to you, don’t listen to what anybody else is saying about you. You’re a great quarterback, man.” Take his advice, move on and start over in the next season.