Is COVID-19 Undermining Silicon Valley Supremacy?
There's a new trend in town. Some people think that Silicon Valley's domination of the startup business might be coming to an end. Here is the bare truth.
COVID-19 and travel restrictions are affecting the whole worldwide economy, including the startups’ ecosystem. In this “new world,” Silicon Valley makes no exceptions. Thanks to H1 data available from the NVCA and PitchBook reports we know how the pandemic impacts the U.S. venture capital and startups business this year. The good news is that capital invested in startups is growing steadily and will probably be more significant than in 2019 by the end of the year.
In startup land, investment dynamics changed a bit, though. Fewer deals, bigger checks, late-stage companies got more capital than early-stage ones. VCs put more capital in their portfolio companies to sustain them in this unexpected Global Financial Crises (GFC). In general, get access to capital has become harder.
For Seed investors like us, this time has been a good one because valuations decreased. Looking at our portfolio of investments in 2020, 17% of the companies preferred to raise more rapidly, reducing the valuation cap by 25-30%. This strategy turned some VCs to write checks faster and, sometimes, to invest more capital than usual.
Some people decided to sit and watch for a while, waiting for the situation to stabilize. They chose to pass on valuations that 12 months ago seemed pretty standard. In Silicon Valley, it is all about what you show, not what you tell. Traction means a lot at any stage, and, during times like the present one, it probably means a lot more. Even today, companies that showed “good traction” get to raise the round they need, but it can take longer than usual. Startups that close the round in 2 weeks are always rare—and we had the pleasure to invest in some of them recently.
Unfortunately, this situation will keep going for a while, and probably not everything will be back to “normal.” A good outcome from this new reality is that for the next 12 months Seed stage valuations will be more aligned with reality. A 10 to 12 million dollar valuation for companies with less than $10,000 in monthly revenue seemed pretty standard one year ago—especially if your startup came from a top tier accelerator.
For companies raising capital in the Bay Area, I think we might witness two different trends in the Seed stage:
Company valuations will be more aligned with reality, and what was offered at $10M will be proposed between $6M and $8M;
Nothing will change for companies growing in San Francisco. The competitive advantage of being in the area and the chance to move faster might payoff.
Anyways, there is no general rule to determine if a valuation is a fair one or not. Today, investors seem to privilege companies that solve an urgent problem with a big—and right— market. The famous “make something people want” motto suddenly became “make something people want now.”
Some markets are experiencing a slowdown, and others have seen a surge in investment commitments. Look at companies like Spot On or Next Insurance. They got multiple rounds closed in less than a year.
The whole world is now talking about remote-first work strategies, and I love that. Even in my country, Italy, 25% of the population finally discovered the video conference benefits. Plenty of new opportunities are popping up like mushrooms—new markets have been created, new urgent needs have risen in our daily life.
Remote work spread also rumors in the tech community. Recently I’ve read a bunch of articles about the exodus from San Francisco and the Valley. Reading those pieces, I had the feeling that most of those journalists and bloggers don’t grasp what’s happening here. The Bay Area is expensive, so it’s pretty standard that if your company doesn’t require you to be in the office every morning—as it used to be—you can decide to move your family to a different location. It’s not pleasant to pay $6,000 for a two-bedroom apartment every month if you can spend 1/3 of that. Many San Francisco companies decided to adopt a remote work style, at least until June 2021. Some of them moved the term to December 2021. So it’s ok to pack your bags and move to some cheaper place, but you can be sure that most of these people will come back. Eventually, it will happen and for now, lowering your burn rate is ok with everyone.
Still, if I can be honest with you, my gut feeling tells me that as a founder, you better do the opposite. Move to and stay in the very center of the Bay Area now.
With a lot less entropy than usual, there a good chance that you can more likely get a competitive advantage.
VCs are not leaving; most of the people you might want to meet will stay there; customers won’t move. Now is when great things get built, and being at the center of the revolution might be really interesting. Work hard to grow your network, and you won’t regret it in 12 months form today.
A month ago, I read an interesting tweet by Paul Graham—co-founder at YC—which I bookmarked:
I completely agree with Paul. That is very likely to happen. The rhythm of the Valley is something that you can feel and experience only staying in the area. It’s the true advantage of being in San Francisco. Life has changed a lot since March; we all know that. Still, something remained stable and constantly developing in this place: its ability to foster determined local people who never go with the flow. So, when others leave, you need to stay and move faster.
Entering in a remote era doesn’t imply that Silicon Valley—and its unique beneficial mood—will be decentralized. If you read the story of that place, you quickly realize that people keep coming from anywhere in the world because things happen and happen at warp speed.
Margaret O’Mara called this Silicon Valley an entrepreneurial Galapagos in her excellent last book, and it really is. The diversity of thinking and skills, and cultures makes this place unique for chasing changes and be present when they occur. Silicon Valley is not dead. It’s more alive than ever, with thousands of new young companies that emerge thanks to its continuous flow of opportunities. The Valley is responding to the remote-first call faster than anyone else and with hundreds of new companies. The techno-optimism that pervades the area will probably create something unexpected for those who are willing to stay connected to the place.
Also as an investor, you can attend remote demo days and make the entire investment process incredibly more efficient, but building a successful company is a long and tortuose journey. Even if the Valley is crazy expensive, still, it is the most capital-efficient spot on Earth I know. Here you learn, fix, and move things faster than anywhere else in the world.
Hence, pack your bags and move as soon as you can. Maybe five years from now, you will be the one that will beat the incumbent remote company in PG tweet.