Joanna Drake Earl
General Partner, Core Ventures Group
How can one tell when one is facing a “Falling Knife”? Usually the investment or acquisition is presented as a “very special opportunity to get in on a hot deal.” This kind of overture is the quickest indicator that new investors are being sought as investors or acquirers “of last resort.” We know this because truly “hot” deals are closely guarded by existing investors to protect their positions and returns. Other red flags to watch out for include: introductions from boutique venture groups that are not normally in the top VC co-investor ecosystem; early stage start-ups seeking bridge financing rounds that indicate a company is in survival mode vs. solid, sustainable growth; and late stage venture backed companies in which the existing Silicon Valley venture investors are choosing not to invest further.
What can you do to avoid “Falling Knives”? The best advice we have for corporations leaning in to Silicon Valley from other regions, is to develop a trusted, insider human capital network that can act as a market filter and talent connector. There is a tremendous gap between what is the perceived public image of Silicon Valley and the reality of our very insular ecosystem. For example, those Silicon Valley incubators and accelerators with brand recognition in Tokyo also tend to be public marketplaces open to outside investors and partners. What may come as s surprise to outsiders is that experienced, serial entrepreneurs and professional venture investors don’t rely on these incubators for their investment pipelines. Historically, the best Silicon Valley investors succeeded by accessing proprietary flow of deals – not public markets. Not only do many Japanese investors in Silicon Valley source companies in these open marketplaces, we also see their executives commonly choosing to live in the same neighborhoods, frequenting the same Stanford events and sharing the same start-up introductions. This leads to little brand visibility or credibility outside of the Japanese ex-patriot network and minimal access to high quality deals. In fact, the proof that most Japanese companies remain outside of the Silicon Valley ecosystem, despite their recent efforts to penetrate it, is that we rarely see them on lists of potential new investors when startup board of directors and CEOs are preparing to do a new financing.
When will we hit the market bottom? In the public markets there are many quantitative metrics that can be compared to historical averages and used to predict market bottom. Unfortunately in venture investing, especially in early stage, valuation is more art than science and there are fewer metrics to indicate when we have reached the bottom. Those metrics that do exist, like aggregate VC investment reports, are almost all retrospective. Practically speaking, we expect to see market bottom when we see the emergence of Phase III, “Capitulation” on the part of startup founders and existing investors. In the startup world, capitulation is signaled by a growing trend of founders deciding to shut down their companies, often moving back out of Silicon Valley and returning to corporate jobs.
For the hearty founders who stay, capitulation comes in their resolve to do anything to save their companies and worry about valuation another day. In the “Capitulation and Market Bottom” phase, the entrepreneurs that stay are solely focused on saving their companies as quickly as possible. They will often acknowledge from the first meeting with new potential investors that the founders understand that previous valuations may not be sustainable and that they are open to discussing realistic investment proposals. When meetings start like this, we know we are at or near the bottom of the market.
But lest you think we are all doom and gloom on our Silicon Valley start-up prognosis and the opportunity for Japanese companies to participate, please know that we are simply and eagerly awaiting the next phase of “Rebirth.” This is the phase where the best founders, through their passion and grit, will build great companies again by attracting freshly available talent and getting a head start in a reset market. In this cycle there will be tremendous opportunities for Japanese partners to invest and partner with the high-quality Silicon Valley start-ups that survive and that are yet to be born. The key to success in the Rebirth phase for Japanese investors will be to develop their human capital network of Silicon Valley insiders, or risk yet again being relegated to another cycle of investment opportunities that are non-exclusive and not of highest quality.Read on Nikkei Site