Comparing and contrasting two VC sentiment surveys in early 2016
Every quarter at Visible we survey top Seed and Series A stage investors to gauge their thoughts on the current state of the market and understand what they expect over the coming years on topics like valuations, exit opportunities, and capital availability.
Recently, in conjunction with their hugely popular Upfront Summit, Upfront’s Mark Suster and his team conducted a similar survey, asking 159 VCs their thoughts on where the early stage venture market is heading in 2016.
We’ve embedded both here for your convenience.
Directionally, both the Upfront survey and ours share a similar message:
Investors across the board are less bullish on the market than they have been in the past and are rethinking the way they evaluate companies — placing more importance on line items further down the income statement than in previous periods.
Here is Upfront’s slide on overall sentiment, which indicates that a vast majority of investors have at least a partially negative outlook entering 2016.
And here is our first slide, which indicates a 15% dip in sentiment from Q3 — when negative headwinds were already present — to Q4 of 2015.
Again, both surveys were on the same page directionally. The major difference was the degree to which negative sentiment was present.
Because of differences in the way some questions were asked and answers recorded in both surveys, it is not extremely useful to compare most figures head on. The primary exception to this was on the topic of valuations, which helps illustrate the degree of difference in sentiment between our results.
91% of the investors surveyed by Upfront see valuations going lower in the next year, with 30% indicating that a significant price correction is on the near-term horizon.
In the Visible Sentiment Index only 59% saw valuations heading lower, with 21% forecasting a significant valuation drop. A majority of the rest saw pricing staying relatively the same.
In short, the results from the Upfront survey indicate a far more pessimistic outlook from VCs than the Visible Sentiment Index.
Why the difference?
The venture capital market is small (almost 4x smaller than the PE/Buyout world according to Preqin) so it is tempting to try to paint the industry with a single brush.
After looking back through our data and comparing it with what we were able to parse from Upfront’s it is clear that sentiment from investor to investor differs significantly depending on a number of factors. Fund size, stage, and geography seem to play the most significant role here but things like industry vertical and even the age of of a fund likely contribute.
Fund Size & Stage
In the Visible Sentiment Index, we focus on the seed stage — 75% of respondents primarily participate in seed rounds.
The Upfront survey takes a wider look at the venture market with over a quarter of the investors surveyed likely focusing more on A rounds or later (26.4% of respondents come from funds larger than $300MM).
At the risk of incorrectly imposing narrativity and causality (the disease of “dimension reduction” as Nassim Nicholas Taleb calls it in The Black Swan) and in providing analysis without full insight into which investors said what in Upfront’s survey, it seems possible that the dynamic created by uneven flows of funding into different areas of the “venture stack” may be responsible for some of the difference. Two trends in particular stand out.
- A large amount of “dry powder” is still available at the early stages
2014 was the biggest year ever for sub-$250MM funds while 2013 and 2012 come in at #2 and #3 respectively.
So while the pendulum has started swinging, the fact that most of these funds are not yet fully invested means that seed stage capital availability should remain robust over the coming years with investors still needing to compete (and occasionally make concessions on valuations) to get into the best deals.
As noted, since our survey focuses more on the seed stage, it is likely that this dynamic plays a part in the relative optimism of our results.
2. Late stage valuations are not sustainable
This is, of course, nothing new. Any article that mentions the word “Unicorn” is also likely to make a note of the massive flow of non-VC capital into the later stage private markets; capital that is less likely to stick around in the event of, for example, further interest rate hikes.
That potential capital flight means fewer funding options for companies and an end to firms willing to pay whatever price necessary to get into deals.
Troubles at growth stage companies like Zenefits and Theranos as well as highly publicized markdowns from Fidelity are also likely drags on overall sentiment.
Since a larger proportion of Upfront’s respondents come from larger firms with more exposure to the growth stage, it makes sense that their results would edge pessimistic.
For the last 3 quarters of our survey, sentiment among investors in the Bay Area (what Upfront calls the NorCal region in their survey) has been significantly lower than the global average. Here are a few quotes from our respondents that seem to represent what investors — both in the Bay Area and outside of it — are feeling.
I think the bubble is a Valley issue. It will blow back on the rest of us, but we are not in a bubble outside of a certain, few geographies with a certain few dramatically overvalued companies.
Seeing significant disparity between coastal and Midwest valuation. Valuations on the coasts tend to be about 40–50% higher, while company quality is a wash.
If geographic sentiment in Upfront’s survey mirrored ours, it is very likely that this played a defining role in determining the difference in overall sentiment in our respective findings — almost 50% of respondents in Upfront’s survey are NorCal investors while only 17% of our group is based in the Bay Area.
This brings up a larger point about the efficacy of our surveys (and almost any analysis done in the private markets). The results and analysis from both Upfront and from the Visible Sentiment Index are, in my opinion, extremely useful to both investors and operators.
Both, however, are incomplete looks at the increasingly global world of venture capital.
Fred Wilson recently featured a report (based on 2012 data, unfortunately) noting that the Bay Area accounts for 25% of global venture capital investment activity. So at 50% and 17%, we both missed the mark on accurately representing the world’s most important venture market. And while our survey comes closer to the actual number, you could easily make the case that the “mindshare” Bay Area investors have in the global market is far greater than 25% and should play into the weighting.
Similarly, we both over-indexed for the regions where our networks are strongest — Upfront in SoCal and us in the Midwest.
In Upfront’s survey, 19% of respondents hail from Southern California while about 25% of our respondents come from the Midwest (Chicago, Indy, Detroit, etc.). Both markets represent less than 10% of overall venture activity.
Second Level Thinking in the Venture Market
The lesson in all of this — for investors and for operators — is that second level thinking, as Howard Marks calls it, is crucial in analyzing how market trends and data will actually impact the way you operate day to day.
Instead of looking at a single survey or dataset — ours, Upfront’s, or anyones — and blindly applying it to your situation, try instead to look a step beyond and gauge whether the demographic makeup of the recipients or the source of the data is truly relevant to you.
For example, if you are an executive at a growth stage company in San Francisco or are an angel investor in Santa Monica, Upfront’s survey will be far more relevant to you.
If you just entered a Chicago accelerator or manage a seed fund in Paris — our survey is about 25% international — then the Visible Sentiment Index is going to be more applicable to the way you run your company or fund. It is also worth noting, as Suster points out, that U.S. VC markets tend to correct before international markets, another possible explanation for more optimism in the Visible Sentiment Index.
That said, a full view of the market is still important and we highly recommend checking out both! We are also ready and willing to accept feedback, criticism, and anything else you want to send our way to make our survey more useful to you and everyone else in the early stage markets.