1Mby1M Virtual Accelerator Investor Forum: With John Frankel of ff Venture Capital (Part 5)

Sramana Mitra: Unicorn mania started to rationalize a little bit in 2016. This year, it has stabilized. But there is still a huge amount of late stage capital out there. Traditional VCs have raised very large funds. As a seed investor, you could get buried under later stage liquidation preferences if valuations run up like that. How do you protect yourself?

John Frankel: When valuations run up, you’re fine. It’s when valuations stall or run back that you have issues.

Sramana Mitra: Both happen. Once valuation runs up, it stalls because fundamentals don’t deliver to valuation.

John Frankel: We look at it this way. Valuation is based on alpha or beta. What I mean by alpha is, with a value-based investor, is that a reasonable valuation? Is it all based on future promise and optionality? Let’s say you have revenues and you’re growing revenue 50% to 100% year over year.

If a round is done at 20 times revenue run rate and you don’t believe that revenues can accelerate but may decelerate, then there’s quite a lot of beta. Let alone with no revenue. Your exposure is on the beta side. It’s also something else which is often not discussed.

Back in the mid-90’s, the large firms like Goldman Sachs would take companies public that were doing $30 million in revenue. They would raise $20 million to $50 million in capital as part of those IPOs. They did that because the fees, 7% of capital raise, was material to them. 20 years have gone by, these firms have grown to be much bigger. Now they don’t want to take a company public unless the market cap is a billion – maybe $700 million.

Companies have to be significantly larger to go public. Not only that, when they go public, they need to have accelerating revenue. We’ve seen companies with decelerating revenues. Because the brokers are so large, they’ve basically taken out of the US economy a really important step of funding for companies that are doing $30 million to $100 million in revenue. What’s happened is, venture funds have raised larger funds to go and fill in that gap.

That’s why we’re seeing the unicorns. They’re staying private longer because, in part, they have to be bigger before they can go public now. I think that’s a disservice to the economy. It serves the business models of the large banks and broker dealers, but I think it’s a disservice to the economy. Thank goodness the venture capitalists have seen the ability to come in and help bridge these companies to the point where they can become significant enough and stable enough to go public.

I actually think the unicorns are an interesting group. Not all of them are going to make it. A lot of them will. If it wasn’t for the private markets, Airbnb wouldn’t be there and the tens of millions of people they touch wouldn’t benefit.

Sramana Mitra: I just wrote an article called, “Will SoftBank own Silicon Valley?” What are your thoughts?

John Frankel: It’s a natural extension. It’s very difficult for SoftBank to cut a $200,000 check into a company.

Sramana Mitra: They want to build a trillion-dollar fund.

John Frankel: Their checks are much larger and they’re coming in and providing for a need to companies.

Sramana Mitra: Wonderful conversation. Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With John Frankel of ff Venture Capital
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