The Steph Curry Fallacy

tl;dr In the same way that Steph Curry is “hurting the game of basketball”, Silicon Valley’s success is “hurting” nascent venture ecosystems around the globe.

Early in the 2015/16 NBA season, ESPN Analyst (and former player and coach) Mark Jackson commented that reigning MVP Stephen Curry was “hurting the game of basketball”, something that seems ridiculous at first glance. Curry was (and is) playing at an unmatched level on a historically great and entertaining team. On top of that, he seems to be a genuinely nice and relatable person.

“Understand what I’m saying when I say this. He’s hurting the game. And what I mean by that is that I go into these high school gyms, I watch these kids, and the first thing they do is they run to the 3-point line. You are not Steph Curry. Work on the other aspects of the game.

While the phrase “hurting the game” is an incorrect way of putting it, I understand the point Jackson was trying to make.

Kids look at Steph Curry — small, skinny, doesn’t dunk on a regular basis — and see themselves in him. They think they can pattern their game after him. The reality? Steph Curry is nothing like 99.999999% of the kids heaving up the long-range 3-pointers Mark Jackson was talking about. He is the son of a former (and very good) NBA player who grew up in arenas learning from the best players in the world. He plays for a coach and on a team that support him to an unprecedented degree — through their style of play and their complementary skill sets. He has unworldly hand eye coordination and matches it with insane quickness.

In a funny way, it reminds me of the how regions who are not Silicon Valley often go about trying to become “the next Silicon Valley”.

To paraphrase Mark Jackson, “Silicon Valley is killing venture ecosystems around the world.” People across the globe are inspired by the innovation, notoriety, and financial success of the Bay Area and think that a copy/paste approach will work in bringing the Silicon Valley secret sauce to their home town.

Building “Deep” Venture Communities

As YCombinator’s Sam Altman points out here, one of the main reasons Silicon Valley succeeds is the extremely high density of people in the region working to build startups. Someone building a venture community in a nascent market could easily take that at face value and think that adding more coworking spaces, throwing more events, or working to attract non-focused capital is the right place to start to get more people working on startups.

It happens all the time. People focus on the superficial traits present in Silicon Valley (or Steph Curry), think they can replicate them, and then wonder what happened when they inevitably fall short of their aim.

The only way for a venture community to leverage the power of Metcalfe’s law and increase the density of people working to build startups is to increase the chances that startups in their region succeed. That is what happened in Silicon Valley, it is what happened in successful venture communities like Seattle, it is the blueprint (I know…building Apples and Amazons is not easy, we’ll get into that). In building product, a good feedback loop is crucial in preventing churn. The same thing goes — on a more long term scale — when building a venture community.

People in the region (and those people the region wants to attract) need to see success from others to know that it is possible for them.

Sourcing “Permanent” Capital

Companies, especially at the early stages, are mobile. They not only go where capital is available — which despite much VC handwringing, still seems to be quite a lot of places around the globe — they go where that capital will provide value that goes beyond just the dollar figure.

For capital to be effective in providing value for companies in a region it has care about being a part of the economy in that region, building companies in that region, and supporting the growth of the talent pool in that region over the long term. People and institutions with economic power in Silicon Valley care more about startups than the powerful people and institutions in every other region in the world. And it isn’t even close.

When a market does not have focused, relevant capital to support the types of companies that should be succeeding in that region, they fall victim to the early exit disease. The best companies leave for greener pastures and the second tier of companies have a hard time finding long term financial partners to support their growth.

Who Powers the Regional Economy?

If we subscribe to the idea that what has worked in Silicon Valley can’t simply be copy/pasted into existence in markets across the world — Black Swans, Steph Currys, true Unicorns can’t be replicated or predicted — then it is possible that the type of capital partners required to make new markets a success don’t look like the traditional Sand Hill Road VC firm.

In January, I wrote a piece on the Mattermark blog and noted that, according to a survey we conducted at Visible, early stage investors in the Midwest were more bullish on the present and future of the venture market in their region than their peers in other geographies.

The main reason cited was the region’s focus on “building upon its strength in historically important industries.” That idea — building on strengths — is core to the way community builders should approach this problem.

“Growth trumps all at this point, but in the Midwest it can’t come with negative gross margins and terrible unit economics. That might raise a couple rounds but doesn’t build a business. As a whole, in the Midwest a rising tide lifts all boats and I think we have a rising tide of entrepreneurs, ideas, funders, and willing + knowledgeable ecosystem partners.”

The Midwest, for example, is home to over a quarter of the Fortune 500 and many, including myself, have at times seen the high density of those multinational companies as a white knight of sorts for the region’s venture communities. The trouble with this, however, is that multinational companies — despite their origins or current headquarters — have no real loyalty to any country, let alone a state or city.

Instead, it makes sense to look beyond the Fortune 500 for capital partners who have not only significant reserves of cash burning a hole in their pockets but also ones who have skin in the game (and power) in the regional economy. In the Midwest, Upper Middle Market businesses — ones with revenues between $100MM and $1B — in those “historically important industries” fit this profile well. Many of their employees and customers come from the regions where they are based and most of these companies have not yet figured out how to take advantage of technology to positively impact their business.

In today’s economy, all industries are rapidly becoming technology industries and every business is being forced to become a technology business. Executives at Middle Market firms understand this — according to the National Center for the Middle Market, 72% of Upper Middle Market companies strongly believe in the importance of digitization to their business. Despite this sentiment, most leaders of these businesses feel that a lack of internal knowledge and difficulty attracting the right talent hinder their ability to thrive going forward.

via the National Center for the Middle Market

Bridging the Gap

As a result of lukewarm management support and lack of internal expertise, an increasing portion of these companies are electing to hold excess cash instead of investing in either internal or external projects to grow their businesses.

Venture Community builders in the Midwest can tap into this uncertainty (as well as these growing cash reserves) to build vehicles that connect startups and established businesses in a mutually beneficial way.

Upper Middle Market businesses have the size and cachet to be key early customers for startups looking to gain traction and social validation. In addition, at the upper bounds of the market, these businesses represent potential acquirers of startups in the region. These would necessarily be small acquisitions and would not be the types of wins that would cure the aforementioned early exit disease. Still, small wins are wins and feed into the virtuous cycle of positive feedback that is required to build a great venture community.

As more people gain experience in companies that see positive outcomes — either through these smaller acquisitions or by seeing businesses grow to sustainability — they “stay in the game”, joining other startups or founding their own. This increases the density of people working on startups in the region, increases the shared learnings, and increases the changes that the next Amazon finds the right mix of factors to start and stay in the region.

On the other side of the table, as this great piece from Ventech explains, startups help “create a window on disruptive innovation by exposing internal resources (R+D, Product Marketing, Sales) to the challenging strategies of portfolio companies”. This is key in helping align everyone in the company behind the idea of the digital future. In addition, by co-investing with VC firms, they gain exposure to companies outside of their market and can glean on the ground insight into how the M&A market is playing out.

Chicago alone has over 5,000 Middle Market businesses — 2nd only to New York — with a significant subset of that group bringing in over $100MM in annual revenue. Without structures in place to allow these companies to deploy capital effectively into the early stage market, everyone misses out on the potential benefit.

If Upper Middle Market businesses in the Midwest can be convinced of the potential in partnering with early stage companies, then the “shortest putt” to getting started is simply making direct investments straight from their own balance sheets with the help (at least initially) of outside parties who can advise the internal team responsible for making investment decisions on the proper way to structure the three pillars of the venture process — deal flow, diligence, and portfolio company support.

This setup would give the internal team direct access to the companies they are vetting and investing in and is the best way to quickly derive learnings from the early stage businesses that can be applied to their own. In order for these types of initiatives to succeed over the long-term, the Middle Market business participating must value strategic and operational insight over financial considerations.

As the practice matures, vehicles that even the balance between strategic and financial returns — like a dedicated internal fund or through participation as an LP in other funds — can be employed.

Whatever form those investment vehicles take, the opportunity exists for the Midwest to double down on its strengths as it searches for the same “new economy” success it had as the driving force behind America’s growth in the first half of the early 20th century.

What remains to be seen — in Chicago, the Midwest and in other venture communities with yet to be exploited competitive advantages — is whether there is a will to back up the way.

The Train, the Tracks, and the Trett

“Trett (or tret) was an allowance made up until the early 19th century, for waste, dust, and other impurity in items in commerce, generally amounting to 4 pounds in each 104 pounds (3.85%).” — Wikipedia

In the second half of 2015, the scare word in the venture market was Unit Economics. Just over a month into 2016, that term has been replaced with another mot du jour that similarly strikes fear into people on both sides of the table: Margin Compression.

Like any occurrence that causes a major psychological or behavioral shakeup, the response by public investors to margin compression among many publicly traded tech companies strikes at core, strongly held beliefs. In this case, as Emergence Capital’s Joseph Floyd noted, that belief was that predictable SaaS business models lead to predictable growth and predictable valuations.

As earnings started coming out in early February, public market investors resoundingly voted that top line growth matters very little if it is not efficiently moved to the bottom line.

via Joseph Floyd

This concept holds true for any activity where you need to balance speed with moving something from one place to another. An example that mirrors the “transportation of revenue” from top line to bottom is train transport.

In this analogy, the train — locomotive and freight cars — is your business, responsible for shepherding the goods (revenue) from the point of origin (top line) to the destination (bottom line) along the tracks (your P&L) without burning up too much fuel (invested capital).

This brings us back to the trett, which was last widely used in the 19th century — coincidentally, this also happens to be the last time profitability was so highly regarded for startup businesses. The trett was an allowance made for any waste that made its way into the goods on the journey.

In our business case, the trett is comprised of different characteristics you build into your business — higher price point, lower cost of servicing customers, a better way of identifying and leveraging profitable distribution channels — to ensure that you end up with the right amount of goods (again, revenue) left over at the end of the trip relative to other companies you are being compared with.

Of course, building a trett into your business is easier said than done. Each of your competitors is trying to raise prices, leverage new distribution channels, and eliminate unnecessary costs. Still, there is major precedent for successfully pulling this off.

What are we already doing?

If your margins — this assumes you have margins…negative gross profit is so 2015 — are coming under pressure, the best reaction may be reinvention. It seems strange to talk about early stage companies disrupting themselves but the shift in what the market values necessitates a new approach.

A great example of this type of reinvention, albeit a much later stage one, is Amazon’s success with AWS.

via Deutsche Bank, who if facing some margin compression or their own…to put it kindly.

By looking at where they could capture value from efforts they were already making, the company has built a multi-billion dollar business that makes an outsize profitability contribution and gives the company leeway continue heavy spending (read: losses) in other business lines as they grab market share.

You, however, are not Amazon. If you were, you wouldn’t be reading this. But that doesn’t mean trett-like expansion options don’t exist in your business. If you have focused on owning a specific customer niche, there is likely an adjacent market you can apply some of your processes or learnings to. If you’ve built technology to scratch your own itch or have a product that can be inexpensively retargeted to different markets or solution, reinvention becomes even easier.

Easier, but certainly not easy. In a market like the one companies are tasked with competing in today, nothing is.

What do VCs Really Think?

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.

2014 Data from Preqin

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.

  1. 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.