The Sentiment Index - Q2 2015 - Visible and Hyde Park Angels

Q2 2015 Sentiment Index Visible.VC | Hyde Park Angels
Q2 2015 Early Stage Investor Sentiment Index
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Introduction
The Sentiment Index leverages insights from
investors to indicate important trends that
meaningfully aﬀect companies, investors, and
anyone actively involved in the early-stage
market. The survey gauges probable future
investment behavior by understanding the
market expectations of top early-stage
investors to help companies and investors
make more informed decisions around
fundraising, hiring, and growth strategies.
Contents
I. Methodology &
Calculations
II. Sentiment Survey
Results & Analysis
III. A Bridge (Round) to
Nowhere
IV. Navigating the Series
A Crunch
V. Recurring Revenue
Rules Again

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I. Survey Methodology and Index
Calculation
The Sentiment Index is an investor confidence report compiled from a
survey conducted among investors actively engaged in the Seed and Series
A markets. We should note that the determination of what exactly qualifies
as Seed and what qualifies as Series A is murky at best and there is
certainly no hard boundary. For the purpose of this analysis we’ll borrow
from Jason Calacanis’ post from earlier this year to help define the
delineation:
• Seed Stage - Companies with a launched product (can be a prototype)
raising capital to build out an initial team and get product traction. These
companies are almost always raising less than $5mm.
• Series A - Companies who have gained initial traction thanks in part to
their Seed Stage fundraise who are now raising funding necessary to
scale their product. Companies at the Series A level are generally raising
somewhere in the range of $5mm - $15mm.
Investors are often active at both stages since, again, the line is not always
clear and because they will often “follow on” (i.e. invest additional capital) in
previous investments that show strong traction.

The index is published quarterly by Visible and Hyde Park Angels and
assesses investor attitudes on the early stage market landscape on factors
like deal and company quality, regional competitiveness and emerging
sectors. The survey itself asks respondents a series of nine questions to
help determine their view on the current state of the early stage market
and their expectations for the near and long term future of the market.
Supplemental demographic and current topic questions are asked as well
to add depth to the analysis.
The Sentiment Index looks at investor sentiment on the current state of the
early-stage market as well as their near (next 12 months) and long-term
(next 3 years) expectations for what is to come. Three primary components
comprise the Sentiment Index.
• Investment Competitiveness Score tracks how competitive is it for
investors to get into the deals they want. If competition is increasing, it
indicates an inﬂux of capital into the system and signals that it is or will
be a good time for companies to be raising money. If it is decreasing,
investors believe that less capital is or will be available within the system
for companies looking to raise their next round of funding.
• Investment Attractiveness Score determines whether investors
believe that valuations are reasonable and that deal terms are aligned
with the quality of companies the are seeing. If investment
attractiveness is on the decline, it could signal an impending correction

or a less than welcoming fundraising environment for companies raising
capital.
• Company Growth Score seeks to understand changes to the traction of
companies investors are seeing. Are their current and prospective
portfolio companies hitting the same revenue and user numbers as they
were last year? Do they expect to see stronger company growth - due to
more receptive markets, stronger products, or better teams - in the
future than they are seeing now?
Responses for every question are categorized as positive, negative or
neutral. For each question, the number of positive responses is divided by
the sum of positive and negative responses. The Overall Early Stage
Investor Sentiment Index is the average of the numbers for the survey's
nine questions. In short, more positive responses means a higher index;
more neutral and/or negative responses means a lower one. 

II. Sentiment Survey Results & Analysis
Current Market Conditions & Near Term Market Expectation
The talk of a bubble in the startup world has been intensifying over the last
few years with many people publicly anticipating a major shakeup. The
doom and gloom outlook that makes headlines and drives clicks doesn't
seem to be shared by our group of survey respondents, at least in the near
term. At the seed stage, investors believe that capital will remain widely
available (Investment Competitiveness Score: 92), primarily due to the fact
that 2014 was a record year for seed fund formation (sub $250MM fund
size).
In 2013, according to Pitchbook data, 143 sub-$250mm funds were raised.
In 2014, that number grew almost 40% to 198 funds. Firms of this size are
most often investing at the Seed and Series A stages. Until these funds are
fully invested (which won't occur in the next 12 months) and need to go
raise again, companies with competitive traction and strong teams should
have no issues raising at the seed stage.

The problem for these companies comes at the Series A level. Investors in
our survey expressed concern about the uphill battle many companies may
face when going out to raise their next rounds. These concerns come
despite the fact that investors surveyed believe that companies will
continue to display strong growth trajectories (Company Quality Score: 92).
In their eyes, the Series A door is just too small to accommodate the seed
stage boom that we have seen over the last couple of years.
Quotes from our Survey Respondents on the current state of the seed
stage market:
“We see a lot of cool companies at the seed stage, but they struggle to get to
the $50-100K in monthly revenue that would enable them to be seriously
considered for Series A rounds.”

“Tweeners (companies with some growth, but not enough) will have problems
raising money. They were able to get seed funding, but will struggle getting
institutional funding in a priced round.”
“There is a glut of Seed funded companies doing well, but not well enough to
grab one of the limited Series A slots. This playing out will shape a lot of what
is to come in the near term."
What others in the market had to say about where we are today:
“If you are a 20-something tech entrepreneur you could be forgiven for
thinking that seed-stage investors, Angellist Syndicates and widely available
angel money always existed" - Mark Suster of Upfront Ventures
“There is an erosion of valuation discipline across all stages of venture capital
right now." - Manu Kumar of K9 Ventures

Long Term Market Expectations
While still edging on the side of optimism (Investment Competitiveness
Score: 65), investors see capital moving away from the Seed Stage over the
long term, making it more difficult for companies to raise but possibly
forcing a return to more reasonable valuations and funding patterns.
Since 2006, the average time between raising funds for VC firms has been
3.8 years.
That pacing will mean that 3 years from now (matching up with this
survey's definition of “long-term”), many of the sub-$250mm firms that
raised funds in 2014 will be back on the road looking to raise their next.

Should the Series A crunch come to pass, as so many seem to think it will,
laggard micro VC funds will find it difficult to raise subsequent funds and
investors who moved down the venture stack may move back up to capture
what could become a more attractive risk/reward equation in the later
stages.
Another long-term focused topic
that was brought up by survey
respondents was the continued
consolidation of LP capital with
fund backers writing larger checks
to fewer firms. In many cases, this
means making a decision
between hands on, operationally
intensive firms and firms with
smaller teams representing less
involved capital.
In the first half of 2014, for example, nearly 50% of the capital raised was
done so by less than 7% of active funds (according to True Bridge Capital
Partners). This consolidation has primarily been occurring in the growth
stage market, as the leading funds consistently product outsize returns
relative to their peers.
Image via True Bridge Capital

As the seed stage market matures and newly minted funds begin to
establish track records, it is likely the same dynamic will emerge. Whether
this will impact the way companies are funded or their ability to remains to
be seen.
III. A Bridge (Round) to Nowhere
The term “Series A Crunch", mentioned here many times already, has been
looming over the market with varying intensity for the last half decade. As
the amount of capital pouring into seed investments continues to rise,
investors in our Q2 survey expressed concern that the availability of follow
on funding will leave a lot of companies without a path forward in spite of
strong traction and a higher level of perceived company quality.
So what will the correction - if there ends up being one - look like and how
will it impact the investors, operators and communities that are active in
the early stage ﬁnancing market?
1. "This time it's different" but that doesn't mean investors will
end up happy.
In our survey, 53% of investors indicated that investment opportunities in
their region were stronger than last year and 95% felt that the traction they

have seen from companies - both within their portfolios and without - is at
the same level or higher than it was 12 months ago.
If it is truly a numbers game, and a vast majority of seed funded companies
in this cycle don't end up ﬁtting through the Series A door, it is possible that
a good portion of the stragglers can weather the storm by working towards
proﬁtability at the expense of pouring money into growth. The fact that so
many of these emerging businesses operate with a SaaS model also plays
into their favor, as those that have hit some level of predictability in their
customer retention rates can begin to manage their burn more intelligently
and extend their runway.

Since private market performance data on individual companies is nearly
impossible to parse in any meaningful way we cannot know for sure to
what extent market participants as a whole are prepared for a squeeze. But
if the the financial metrics of venture-backed IPOs can be used as a loose
proxy for their seed stage siblings, today's companies start on a path to
revenue earlier in their life cycles and, at the very least, understand the
importance of profitable unit economics.
Long term, this sequence of events may be good for companies, forcing
discipline and improving customer success efforts in order to minimize
churn. On the other hand, VCs are tasked by their LPs with exceeding
returns available in other asset classes and the failure to do so means that

the opportunity to raise subsequent funds is not available. If you are one of
the ﬁrms left Unicorn-less at the end of the day, no matter how many of
your companies are still a going concern, then the bubble may as well have
burst, regardless of what happens to the rest of the market.
It is possible that this dynamic, fueled by high valuations with unattainable
growth benchmarks (thanks for explaining that one, Silicon Valley) along
with a less than robust acquisition market at the later stages is what is
causing some of the “sky is falling" talk from investors.
2. The money that has moved into the seed stage from non-
traditional participants (later stage investors and new models)
has caused a lack of discipline among all market participants
that will leave many "swimming naked when the tide goes out”.

The amount of capital being allocated to seed stage investments has risen
dramatically in recent periods. This has many causes - low yields in other
asset classes pushing investors into earlier stage deals and a willingness to
pay up in order to avoid missing the next Slack or Snapchat chief among
them.
In our Q2 survey, investors noted high (and increasing) level of
competitiveness to get access to the best deals and hottest companies.
Almost 40% of investors felt that competitiveness to invest in top deals in
their region had increased in the past year while just 7% felt it had
decreased.

With more than $4 billion raised across over 200 seed stage firms, as well
as platforms like AngelList (through their Syndicates model) pumping
money into the system, seed capital is becoming easier to raise than ever
before, no matter where you may be located. This has led some investors
to lament the lack of discipline shown by many executive teams, throwing
money at inefficient growth channels in the pursuit of vanity metrics and
assuming that their A round will come together as easily as their seed.
If burn rates across the industry are too high, as YCombinator's Sam
Altman suggests, companies may not have enough time to steer the ship in
the right direction in the event of interest rate or risk-appetite changes.
In Altman's words: "It's OK if you want to spend money to be aggressive for
growth or speed. The thing that is not OK is if the plans change or
environment changes, you should be able to reach profitability on the
money you have. What is OK is to spend money for productivity. What is
not OK is just to light money on fire."
3. The traditional venture funding cycle no longer matches up
with the prevailing company building rhythm and a
fundamental shift needs to occur.
While the lack of first party information across the market makes it difficult
to know which, if either, of the first two scenarios will play out, the data
around the third scenario paints a more compelling picture of what might

happen to the early stage landscape over the long term, regardless of how
this speciﬁc business and funding cycle play out.
As USV's Fred Wilson recently noted, labor productivity has been outpacing
gains in employment and wages since the 1980's and one of the outcomes
of this divergence (called The Great Decoupling in this Harvard Business
Review study) has been and will continue to be an increase in
entrepreneurship.

According to the
Babson Global
Entrepreneurship
Monitor, early stage
entrepreneurial
activity across the
globe has increased
steadily over the
past 5 years, with
the percentage of
working-age
individuals involved
in such endeavors jumping from 14.8% to 19.0% in 2014. As independent,
control-driven Millennials move to become the largest generation of
working age, this trend will only continue. According to a recent Bentley
University study, about two thirds of millennial strive to start their own
business.
Obviously, a large majority of these companies won't ever desire or require
venture funding. But with the increased focus of sharing knowledge in the
early stage world in the service of building startup communities, more
regions, teams and individuals hold the knowledge and networks to build
what would have traditionally been considered a company worthy of
venture capital consideration.

In the absence of even more money trickling down into the earliest stages
of the fundraising landscape, the market may begin to bifurcate to a
greater extent than it already has.
Of the three possibilities this seems to be the healthiest for the market
although it certainly won't come to pass without some degree of
handwringing and headache. Companies stuck in the middle may ﬁnd their
cap tables too crowded to take the “Indie" path yet not scalable enough to
continue raising sizable venture rounds.

IV. Navigating the Series A Crunch
Raise Your Round Even in Difficult Circumstances
Over the course of our research, as discussed so far, we have seen that
investors believe there is plenty of funding available for seed rounds, but a
much more limited amount for Series A rounds.
As a company, you might fall into a number of categories: not raising any
capital yet, still gathering your Seed, or raising your Series A. Regardless of
where you are in the early-stage investment cycle, the crunch directly
aﬀects you.
Ultimately, based on our research, the Series A crunch is here to stay for at
least the next few years, so you’ll have to grapple with it sooner or later.
But that doesn’t mean your Series A round is doomed to fail. Here’s what
you can do to prepare.
Take a Fine-Toothed Comb to Your Financials
When you’re dealing with an especially diﬃcult round to raise, it’s crucial for
you to know what your true capital needs are. Look at your budget and
evaluate whether all of your items are correct. It’s critical that you know
how much funding you need to make it through the next 18–24 months.

Going through your financials will also help you understand your burn rate,
revenues, and general expense patterns on a clear enough level that you’ll
be able to have an informed conversation with investors. This automatically
adds to your credibility. Entrepreneurs who present shaky financials they
don’t fully understand raise massive red flags.
Get started with your own customizable dashboard for free on Visible

Understand the Logic Behind Your Numbers
It’s one thing to have data about your company, and another to know how
your business operates. Understanding the elements of your business —
your customers, your revenue streams, your employees, your growth
trajectory, and so much more — allows you to develop a logic for predicting
its patterns, both present and future. This will help you make decisions
about future goals and strategies for growth, catch ineﬃciencies and
opportunities for improvement, and ﬁnally, determine how to best
measure your performance.
Your measuring mechanisms must be rooted in an underlying logic.
Otherwise, the numbers you end up using to track your progress will lack
real meaning. More importantly, if somehow the numbers you review or
present turn out wrong, you can quickly correct them.
Knowing your numbers puts you in a better position to pitch your vision to
investors because they can serve as quick reference points for success.
Knowing the logic behind your numbers establishes you as an expert on
your business, which doesn’t just make it easier to pitch, but demonstrates
you’re investable as a founder.
Here’s a full list of numbers you’ll need to be prepared to understand and
explain.

Be Honest with Yourself About Your Company’s Progress
Once you truly, deeply understand your metrics, you have to ask yourself
an important question. If you were an objective third-party, would you
invest in your company based on its growth, traction in the market, and
potential for success? Have you hit the milestones you said you would hit
when you raised your seed? If the answer is no, you need to take a close
look at your business and ﬁgure out what’s keeping you from achieving
your goals.
You might not be at the right stage for a Series A round, in which case you
need to consider alternatives. Can you charge for your services and ramp
up revenue? Should you consider a bridge round? Too often, getting caught
up in the idea that you need to raise another round prevents
entrepreneurs from honestly evaluating their companies and comparing
options. Don’t fall into that trap.
Cultivate Strong Relationships with Investors
The more eﬀort you put into building meaningful relationships with
investors before you need capital, the more chance you have of
successfully funding your next round. This applies to any round you’re
raising, but will help you when you’re looking for Series A funding.
The investors that know you, the ones who have already dedicated a lot of
time and thought to your business, are more likely to support you
Q2 2015 SENTIMENT INDEX VISIBLE.VC

financially. You have less to prove to them, and they already have skin in
the game. Plus, they can help you find other investors who will invest with
them, reducing the amount of time and energy you spend trying to get
funded.
“The CEO is the investor's user interface into the business” - Dharmesh Shah,
Hubspot Founder
Know How to Sell Your Strengths
What are the key factors that make you investable? Do you have a group of
core power users? What about unique strategic partners that give you the
competitive advantage? Ultimately, you need to be honest and upfront
about your business when you pitch to investors, but you also need to sell
what positively differentiates you.
Don’t get bogged down in explaining the details of your company; start
simple. Articulate the pain the market, and your company’s true value —
how it solves that problem so effectively it actually changes behavior. Then
layer on your other assets.

V. Recurring Revenue Rules Once
Again
Last quarter investors expressed heavy bullishness on the future of
Enterprise SaaS, something that continued this quarter. The chart on the
next page breaks down which industries investors in our survey are most
bullish on over the next 12 months.
As competition to get into notable enterprise SaaS deals continues to heat
up, the companies themselves look strong (high growth, huge markets, etc.)
while the valuation environment has many concerned.
“We see the bubble way more on the enterprise side than on the consumer
side, which is the opposite of the bubble in '99. We see the crazier prices in
terms of revenue multiples on enterprise side than on the consumer side.
Uber and Lyft revenues growing so rapidly that you can at least make an
argument for those prices. We're involved in some enterprise software
companies trading 40, 50 60x, 80x sales." - Paul Martino, Bullpen Capital
“It’s very difficult to switch SaaS vendors once they’re embedded into business
workflow. SaaS customers, by definition, made the decision to have an
outside vendor manage the application. In the perpetual license model, in-
house IT staff managed all software instances and thus could incur the
internal costs to switch vendors if they so chose.” - Andreessen Horowitz

0% 5% 10% 15% 20% 25%
6%
8%
9%
15%
23%
0% 5% 10% 15% 20% 25%
4%
11%
11%
6%
25%
B2B SaaS
Big Data
On-Demand
Health
FinTech
B2B SaaS
Big Data
On-Demand
Health
FinTech
Q1 2015
Q2 2015

On Demand...for everything
Speaking of the Ubers and Lyfts of the world, interest in the On-Demand
market continues to rise and now comes in at #2 in our investor
bullishness ranking, with 11% of investors considering it to be the market
with the most potential.
According to CB Insights, funding in the On-Demand market exploded in
2014, growing 514% to $4.12 billion.
2015 is Projected Investment $ - CBInsights.com

In May, Haystack's Semil Shah hosted the ﬁrst edition of the On Demand
Conference in Palo Alto where investors and operators discussed the
evolution and future of the market in depth. All of this seems to be
speeding up the creation of On-Demand companies.
In a panel on investing in the On-Demand market, Greylock's Simon
Rothman noted that his ﬁrm had met with (not just heard of or seen
present) around 1,000 companies in the market during the last 18 months.
Fellow panelists agreed, stating that they're seeing new companies in the
space - whether focuses on B2B, B2C or market infrastructure - emerge on
a daily basis.
2015 is Projected Investment $ - CBInsights.com

FinTech investment takes off while optimism flatlines
According to Accenture, investment into FinTech ventures tripled from 2013
to 2014 and is expected to keep growing rapidly - from $3 billion globally in
2014 to $8 billion in 2018. Goldman Sachs recently estimated that $4.7
trillion in revenue is at risk of being displaced by new entrants into the
ﬁnancial services space.
In spite of this growth and the potential size of the market investors remain
reserved about their optimism for the FinTech market, with only around 5%
of investors anointing it their favorite in both of our quarterly surveys. The
investor reticence seems to stem from a few key factors, most notably the
strength of incumbents as a result of high ﬁnancial and regulatory barriers
to entry in the market. 

The Sentiment Index Beta,powered by Visible is free and
comes with enhanced charts,supplemental video and audio
analysis on the early stage market.
Access The Sentiment Index Beta

Visible
Visible gives you the power to tell the story around your key performance
data. Visualize your most important metrics, organize capitalization and
keep all of your stakeholders engaged all from a single platform.
Brett Bivens
Visible.VC
brett@visible.vc
Hyde Park Angels
Hyde Park Angels is the largest and most active angel group in the Midwest.
With a membership of over 100 successful entrepreneurs, executives, and
venture capitalists, the organization prides itself on providing critical
strategic expertise to entrepreneurs and the entrepreneurial community.
Alida Miranda-Wolﬀ
Hyde Park Angels
alida@hydeparkangels.com

The Sentiment Index - Q2 2015 - Visible and Hyde Park Angels

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The Sentiment Index - Q2 2015 - Visible and Hyde Park Angels