In 2011, the Redpoint family of companies really delivered. We saw five IPOs (BCD Semiconductor, HomeAway, Intermolecular, Qihoo 360 and Responsys) and 11 acquisitions – which translates to some impressive statistics: five of 2011’s 32 venture-backed IPOs and eight of the year’s 35 venture-backed M&A transactions exceeding $100M came from the Redpoint portfolio. We couldn’t be more proud of our portfolio companies’ achievements. Thanks to everyone for all of your hard work.
As we move into the second month of 2012, we expect a continuation of many positive aspects of last year’s environment. However, we also see some increased challenges in macro-economic conditions and the start-up funding climate that could make life this year a bit tougher for all of us. Here’s our best guess for what 2012 will bring in terms of the funding environment and liquidity, and insights on how we can all navigate through it successfully:
It should come as no surprise that 2011 was one of the busiest years in the last decade for new deal activity here at Redpoint, and for the rest of our VC brethren. Encouraged by the string of Internet IPOs and by several compelling innovation drivers in the Internet space – social, mobile, and cloud to name a few – VCs were eager to back new start-ups and aggressive in courting companies with demonstrated market traction.
Valuations were commensurately high (some may say crazy) for companies that were performing well, and entrepreneurs wisely took advantage of the positive environment. In Q4 of 2011, we felt hints of the startup funding climate becoming more rational, as the valuations of newly-public Internet players softened, the global macro-economic health deteriorated (particularly in Europe), and as the pace and psychology of the year’s frenetic startup funding activity finally caught up with all of us.
This year, we can’t ignore the macro-economic environment – both the stubbornly sluggish US economy, and the prospect of further deterioration of Europe’s debt troubles– which will make investors more conservative across the board. Closer to home, the dollars allocated to venture capital continue to shrink as investors concentrate their bets in the top performing firms. All of this means that we can anticipate the funding environment in 2012 to become incrementally more difficult. However, we suspect the highest-performing companies will continue to enjoy tremendous leverage in funding discussions as investors fight to get into the top companies.
In 2011, we saw a fairly strong liquidity environment, with the IPO window open for most of the year. Although not all of the tech IPOs have traded well, it is noteworthy that several companies did go public, and mostly at compelling valuations. As for M&A, 11 acquisitions are the most we’ve seen in the last five years at Redpoint. Buyers came out of hibernation with improved balance sheets, and they made up for having skimped on product investments during the last several years.
As we move into 2012, it’s likely that liquidity will slow somewhat. We still expect the favorable acquisition environment to continue, provided the macro-economic climate holds up, as buyers appear willing to paying up for product innovation and growth. The IPO market is the toughest one to predict. The sentiment among investment bankers right now is pretty mixed, though as we all watch Facebook’s filing proceeding with baited breath, it seems very possible we’ll see a halo effect from their IPO. At a minimum, we’ll get one new public platform company in Facebook, and that should add another interesting participant in the M&A market.
What this means for you, the Redpoint entrepreneurs:
- Be disciplined with your existing cash. The cost of capital is likely going up in 2012, so treat the cash you have with care. Time hiring with revenue if possible. Force yourself to make hard decisions regarding non-critical resources. Serialize growth initiatives if it will be tight to fund all of them with existing capital.
- Execute the model. It’s time to start showing that your business model works or will work with modest capital. Entrepreneurs should expect new investors to be more demanding of proof going forward. The flip-side is that there will continue to be a food fight among investors to be involved with the companies that are clearly working.
- Be opportunistic on fund-raising. In general, we’re encouraging our entrepreneurs to take advantage of financing opportunities when they present themselves, rather than optimize for the absolute perfect dynamics.
The good news
Despite the moderating conditions, it’s an incredible time to be working and investing in tech startups. We’re on the precipice of realizing some very dramatic shifts in both consumer and enterprise technology, which should translate into several new and important companies. We see more foundational growth drivers today than we can remember in a long time, including:
- Social – social is impacting everything. Commerce, media and entertainment, search, sales efficiency, customer service, everything.
- Mobile – the explosion of smartphones has created a new computing platform that is bigger, more powerful, and more valuable than the Web we know and love.
- SaaS & cloud – finally, we are seeing wide-scale acceptance of SaaS by SMBs and enterprises, together with cost-effective sales models. This creates an opportunity to rebuild the business application landscape from the employee inward, and to rebuild the datacenter in the cloud.
- Digital media – media consumption continues to shift to digital as compelling new consumption experiences emerge. This shift in consumption is fueling a reallocation of ad dollars, and reallocation creates opportunity.
- A global market – given the global adoption of mobile, social and computing platforms, startups are increasingly able to address global markets faster and earlier than ever before. In addition, we are seeing tremendous startup opportunities targeting the domestic markets of the fastest growing emerging economies such as Brazil and China.
The bottom line as we move into this new year: we’re excited to see what 2012 holds for the Redpoint family of companies and we look forward to working closely together to make the world a better place via innovation and technology. It is sure to be another interesting year.