How the tech market volatility really impacts SaaS entrepreneurs outside the valley

 

If you’ve spent about 10 minutes on Twitter or Techcrunch over the last two weeks you’ve likely read 10+ opinions about what the hell is going on the tech market and how it impacts entrepreneurs.  Terms like multiple compression, down rounds, cap table clean up, etc. are getting tossed around left and right.  They sound scary and you may not even know what some of them even mean.

It seems like the sky is falling right?

Coming off a full week in SF to attend SaaStr, I can tell you that virtually every conversation I had over the course of 4 days, whether it be with another VC or an entrepreneur, included some negative tone on the market and how bad things are going to get.  You couldn’t escape it.

None of this really surprised me.

What surprised me is the incredible amount of optimism I left the valley with about the opportunity for entrepreneurs outside of it.

I was pretty optimistic going in as Q1 2016 is going to be a great quarter for Arthur Ventures entrepreneurs.  We have multiple companies under term sheet for follow-on financing in good rounds from coastal firms.  So I knew good companies were still getting funded.

But my optimism was really driven up when I heard the specific market concerns and realized almost all of it is stuff that entrepreneurs outside the valley have been dealing with for years!

Follow along here….

What you’re hearing: Seed capital is drying up and more entrepreneurs are going to have to bootstrap to initial traction.
Likely impact to you:  Minimal.
Why: Bootstrapping to initial traction has been the blueprint for the majority of the successful companies outside the valley for years!  The inherent lack of seed capital in most cities outside the valley has forced entrepreneurs to build a business that isn’t dependent on capital.

What you’re hearing: There will be a focus on sustainable business models.
Likely impact to you:  Minimal.
Why: Same vein as the bootstrapping comment above.  Non-sustainable business models typically = pre-revenue.  Pre-revenue companies have been hard to get funded outside the valley for years.  So chances are, you’re building a business that has a real revenue model.

What you’re hearing: The bar is very high to get funded.
Likely impact to you:  Minimal.
Why: Has it ever really been low for you?

What you’re hearing:  Drops in revenue multiples mean that companies will need to grow significantly to raise an up-round.
Likely impact to you:  Medium.
Why: The drop in multiples is very real (great read here) but it is important to understand the key drivers.  The first is the valuation entry point.  Almost all of the analysis here is based on valley-based entry point.  Entry points outside of the valley, even for good companies, have stayed pretty reasonable over the past few years.  The second is growth until the next round.  The reality is that for Series A companies outside the valley that raised at $1M ARR, they’ve needed to grow 3x then 2-3x in their two years post funding to raise a strong B.  If you do that and you get your business to $7M – $10M ARR, you will be able to afford multiple compression.  Your next round might not hit the levels you expected, but it 100% will not be a down round.  If you are unable to hit that sort of revenue growth, you would have had a luckluster B round anyway.

What you’re hearing: It will take longer to raise money
Likely impact to you:  High.
Why: Anytime there is this much dialogue about market uncertainty investors will always be a bit more cautious.  While a lot of the comments above play to your favor, it is definitely prudent to expect a raise to take 2-3 more months that it likely would have over the past few years.

So pulling it all together – in today’s market, entrepreneurs need to build businesses like seed capital won’t be plentifully available, they need to have a sustainable business model, the bar will be high to get funded, they will have to have strong growth to raise an up round and it will probably take longer to get funded.

Sort of sounds like your life for the last 5 years right?

Plan.  Be thoughtful.

But keep building businesses that matter.  Don’t lose that chip on your shoulder.

And don’t let short-term volatility impact your long-term outlook.

get in touch: Arthur Ventures; patrick@arthurventures.com

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