Is a VC Market upswing coming? Plus, how to hit the ground running after the summer slow down & how to craft a compelling value proposition.

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September 14, 2023

Welcome back to Innovation w/ Mark Peter Davis. After taking a few months off from the pod, we’re back at it. Here’s what’s covered on this week’s episode:

  • Mike Rogers shares insights on the current market dynamics and data indicating a possible upturn in the venture capital market. The discussion emphasizes the importance of pricing your startup appropriately during different funding rounds.
  • Mike and MPD also discuss the growth stage and IPO market, including Instacart's potential IPO and its impact on the private market.
  • Mike also shares some tips on how entrepreneurs can hit the ground running after the summer slow down.
  • Phuong Ireland talks about the significance of crafting a clear and concise value proposition for startups and provides a tool to help define it.

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Transcript (this is an automated transcript):

MPD: Welcome back, everybody. Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is definitively part of that effort. We just finished up our summer break and are just now recording our first episode of the last stretch of the year.

So thanks for listening. Also appreciate a lot of people were listening to episodes while we weren't producing anything in the summer. That was pretty cool. The last segment we did that we left live in August or sorry, June, July, when we stopped was about how to navigate the summer doldrum as an entrepreneur.

Today we picked back up the show and we've got Mike on. And he's talking about how to get back in the game because it is green light, get moving, emails are flying, deals are starting to happen, be back in the game. And he also takes us through some major market dynamics and some data that's been produced that might be a glimmer of optimism that segments of the market are opening back up.

So here's to some hope that the machine gets a little bit more well oiled by the end of the year. Fong also does a segment today. She covers a really important topic. She runs through essentially how to communicate and message your value proposition, which of all the things entrepreneurs focus on nailing this that they need to operations, customer success, things we talk about commonly, this is one of the most important, but one of the most ignored.

And getting it right is a game changer because it it enables people to more successfully raise capital, recruit team members, and the whole thing. So super important. Check it out. Welcome back. And thanks for listening.

All right, Mikey, welcome back. How's it going?

Mike Rogers: Good, man. I feel like I haven't seen you in a podcast studio in a while.

MPD: Is that good or bad for you?

Mike Rogers: It's been really good. Is this a labor of love? We could talk about it later.

MPD: We left off the summer with you giving everyone advice on how to navigate the summer lull July, August.

Yeah, actually, a bunch of people reach out to me, questions and comments on that segment. So I didn't know anyone listens to our podcast, but apparently people do. And we're now back in the game. And so lights are on. Everyone's at work. Emails are flowing. Any quick tips for folks? Day one of this push in the market?

Mike Rogers: Yeah, I think there's a lot of excitement around doing some deals towards the end of the year right now. And there's, I think, people are back and excited to do deals. Not that it wasn't happening over the summer. There were a lot of deals happening in June, July and August. But I do think there's a nice freshness to coming into September and a little bit more of a an emphasis on getting deals done going into the year.

So I think it's a good time to start reaching out to people. I think it shows a good market knowledge that you're aware of, like, when fundraising cycles happen. And I think it's a good time to start raising. I can back that up with some fun data. I noticed this chart recently that came from Carta and for those of you who can't see it, I will talk a little bit about it, but it seems to me if you look at this chart.

Their data says that total capital rose 26% from Q one to Q two of this year. And I do think that this indicates a bit of a bottom in the capital markets. It looks like it probably happened somewhere towards the end of Q four, last year into Q one this year. And we do look to be bouncing back.

The bars here is total rounds. So while the total rounds are flattish, the amount of capital does seem to be going up, and it does look to me like this will be the market bottom. It also coincides with near the top of the rate hiking cycle and sort of the now general idea that rates pretty much can only go down from here.

Now, we might have 1 more hike up the end of the day. We're pretty much near the top of the rate cycle. I think that will probably also indicate the bottom of the venture market.

MPD: What's interesting too on this. I think you're probably right. Is what happens next? Do we stay in a trough for a bit?

Or does it scale back up like a moonshot? And one of the indicators we know on this is that the large institutional LPs, the universities, endowments, insurance companies are all still very heavily weighted venture. And there is a overhang of uncalled capital that has to get cleared out and return capital has to be returned back to those folks.

For VCs to go successfully raise new, bigger funds. So the market is not, the system is not really flushed out. Even if we've hit a bottom and we've leveled out at a bottom and deployment levels. It's not, there's not a ton of cash coming into the VC market from the LPs. Relative to other periods,

Mike Rogers: but I counter that a little bit because there is a lot of cash sitting in venture funds already.

And I think, that the conversation with the last year was like, oh, this mark these are going to have to deploy money. And I think it was very clear to everyone that they did not that they did not and do not have to deploy money. These funds are very long vehicles. They can sit on cash for a very long time.

Venture capitalists don't call capital. It sits with the LPs. They call it when they need it. So this idea that they have cash sitting in an account burning a hole in their pocket was clearly shown to be false. And I think while you're absolutely right, the LP down to VC cycle is still backed up in terms of needing exits.

And we can get onto IPO window a little bit later in the conversation. There still is a ton of cash sitting out there in these pockets. And I think people are excited to be in an environment where they can start playing capital again. Yeah.

MPD: So hopefully headline is we know the market. It is what it is now and starts to trend up over time.

But my guess is it's not an overnight hockey stick situation

Mike Rogers: for sure. This is not going to rip back, but. If the public market is any indicator, we have seen high growth stocks return to almost record levels in terms of prices once again. I don't think it's out of the question that we'll see a swift movement, but I'm with you.

I don't think we're going to rocket ship back and the private market is going to take more time. The next. Chart that I think is worth showing also from Carta is pretty many valuations in rounds. And I think as founders get back to the market, this is a really good indicator on how you should think about how much capital to raise and where you can expect valuations to land in your business.

And then I think also we're talking about what happens if you price your C that 20 or. Pressure at 50 or or you're not in the vans of what the average is in the market right now. And my view on it is while you can certainly always try for higher valuation, it doesn't necessarily mean that you're going to set yourself up for success.

And we've talked a bit about this on the podcast before, but you can see here what the expected jump. Valuation for the previous investors is, one in two, two x from pre-seed to C. It's 2.7 x from C to series A. It's another two X from A to B, and if you try to price yourself at the high end, so in this chart you see the 75th percentile of series A is close to $70 million and then the median of series B is $85 million.

My point is, if you price yourself on the high end for a earlier round, and then you go out to raise your next round and you have not absolutely crushed it. Then what's going to happen is you compress the pricing between the two rounds and inevitably it becomes even harder for you to raise. I think we're seeing that with a lot of companies right now, and this is really the case to not overpricing you around staying somewhere near the 50th percentile of these bands in order to set yourself up for an easier raise the next time

MPD: around.

And, there's a psychological component to what you're describing. It's important to protect your ownership position as a founder for sure. But it's more important to have a successful outcome, right? If you kill the outcome in the process of protecting your ownership, you own a whole lot of nothing.

Yeah, totally. And there's a nuance, there's a balance to protecting your position, but also setting the company up, de risking the company. And that's the balance I think you're pointing to. A lot of people won't be looking at this on YouTube, so just I'm going to quickly read the valuations here.

So there's a, it shows, the chart shows a 25th, percentile. For all the different stages. Just quickly the 50th percent also mean for pre-seed is a seven and a half million dollars cap. It's 14 and a half million dollars for a seed. Pre-money. Pre-money, $39 million for an A, 85 for a B, and 2 55 for a C.

So if you're on the, if you're not seeing this and you did your last round, way above that, so you should look at this data and try to recalibrate. I think a lot of entrepreneurs have already gotten mark a market cycle. And feedback about where they should reprice. But if that sounds wildly off from where you're sitting you need to be really strategic about how you're using your current capital when you go out to raise and how you position it Totally

Mike Rogers: agree.

Cool I think the next thing we're talking about is what's happening in the growth stage and the ipo market So there's two forces. We are starting to see some of the best companies from the last era of go public instacart is probably the biggest name here they they expect to go public in September and September 8th right now.

So we'll see in the next few weeks if that happens. I think more importantly is really where that's going to price. They brought their private valuation down to 13Billion. So expectations float around there. Maybe if it price is there and then trades much higher really a lot of, I think everyone in the market is sitting and waiting and watching this 1 unsure what will happen, but it could be the door opener that sort of catalyzes this next bull run in the private market.

And I think if it does trade well, and there is appetite from the private from the public market. Then it will be very good for all of the growth stage and even early stage private market companies.

MPD: So it lists and if the price goes up and moves in the right direction, it's going to be signaled to other entrepreneurs.

Hey, not a crazy time to go public and that opens up a lot. Like we talked about downstream that gets money back to LPs, which means they can invest in the B. C. funds. It just. This is 1 of the bottlenecks.

Mike Rogers: Yeah, and there's 1 other thing happening in the growth stage right now. There isn't a lot of investment in growth right now.

And I think 1 of the reasons why that is, if you have this cohort of companies that was either overvalued or price that really can't go out and test the private markets again, because. Their their valuation is too high and relevant to their cash position and their ARR. And because of that, there is no activity in the growth market.

So what we need to see right now is this cohort of companies get to the series B and C in order for the growth market to really reinvigorate and or the IPO market digest some of those companies. So the unlock and growth to me is new companies coming into the growth stage and be IPO market opening up, allowing some of those growth companies to either go public or show a good comp to sell the business to private equity or strategic acquirers.

And we don't have any of those right now, which is why the growth stage is staying so quiet. God, that

MPD: would be awesome. I really hope it crushes it. Yeah. It would put a lot of this machine back on the rails. Totally

Mike Rogers: and there's a line of really great, large SAS businesses that are waiting in the wings right now for this to happen.

And if it goes well, and it looks like interest rates have peaks. I think we could be in for a very nice year of of ideas.

MPD: That's awesome. Very cool. Cool. Thank you,

Mike Rogers: Mike. Thank you, Mark.

MPD: Fong, are we still doing this podcast?

Phuong Ireland: Apparently it's on my calendar. It hasn't been for weeks.

I thought we were done. Probably yours. You have all the good ideas.

MPD: No, that's not true. I think Will's forcing us.

Phuong Ireland: Here we are after a long

MPD: break. Yeah. The break was nice. I saw this on the calendar this week and I was like, all right, we'll get back in the groove.

Phuong Ireland: No, I actually like having a little structure back in my life from the summertime.

So nothing says structure more than a podcast recording.

MPD: That's true. I love your calendar items. All right. What do you, welcome back. What do you have for us this week?

Phuong Ireland: Yeah it's, it feels good to be back. As I said I wanted to kickstart this new season with a subject that I think that is super important to every startup.

It's something that lays the groundwork for everything you do as a company. It's your value proposition. So your value proposition is the basis for how you talk to your investors, how you build your marketing strategy to acquire customers. And even how you inspire your employees. We've had a large number of companies start in our incubator recently, and this is 1 of the 1st things we work with them on because it's often overlooked.

But yet it's the foundation for everything. So 1st, let's define what a value proposition is. A value proposition is a clear and concise statement of the benefits a company brings to its customers. It's basically a description of how a company is going to generate revenue. It's your 20 second pitch, telling people why what you're offering is awesome, why they should care.

So I have a friend who used to love dinner parties, but then once she became a founder, she started dreading them. She felt like every time someone casually asked her what she was doing, she had to immediately start pitching her company. And then the conversation would become a drag because she would go on and on about What she was doing and why it was great, but she didn't have a clear way of saying it.

That was compelling. And if you can't get someone at a dinner party to get excited about your company, you're definitely never going to be able to get an investor or a customer excited. How do you come up with a value proposition? I think a tool that is really powerful. Is called the value proposition canvas.

I'm going to pull this up to show you what it looks like. Give me one

MPD: second. Visuals. Very cool. If you're listening on audio, you got to hit the YouTube to see this.

So

Phuong Ireland: this is this is what we use. This is a tool that we use to work with our companies on the, on their value proposition. And if you can't see this, I have a box on the left side of the page that represents the product and it breaks it up to three components.

Benefits features and experience. Under benefits, it's what you think it is, right? It's what are the benefits of your product? What does your product do? Then there's a box for features, which is a list of how your product works. Then in the last box is experience. What. How does your customer experience a product?

What's the U. S. And then on the right side, I have a circle that represents your target customer. This is broken up into 3 slices. 1st slices needs. What are the problems your customers try to solve? What are they trying to do? But can't then I have a slice for once. Now, these are the emotional factors driving purchase.

Think about if you have a car company, your customer needs might be that they need to get from point A to point B, but their wants must might be that they want to feel cool. They want to feel luxurious or aspirational or fast. Then the last bucket is fears. These are the risks customers associate with switching to your product.

Once you have this laid out, the next step is to look specifically about at how your product connects with your customers. So the connection between these 2 things right here. You want to ensure that the benefits and features of your product solve your customers problems in totality if possible, but most of the problem at least.

Thank you very much. And that your product experience addresses your customers wants and fears. Then you create your value proposition around this connection. And then when you're doing that, keep in mind what makes a value proposition strong. First is to be clear and specific. I'm going to stop sharing right now.

You have to tell people exactly who the product is for and what problem it solves. Second is to be unique and valuable. Tell why your solution is better and different from competitors. And then the last 1, which is really hard to do, you have to make it concise and simple, make it short and sweet and easy for people to remember and share.

That's easier said than done because it takes a lot of thought to boil it down to these key points. To help you get started, let's talk about a couple of examples of great value propositions. The 1st 1, I thought is Shopify is Shopify is a complete commerce platform that lets you start row and manage your business.

Why I think it works is that it's clear that it's for eCommerce store owners of all stages. And it's a complete solution for them to run their business. Very, like very memorable, short, clear to the point. It's awesome. Another good one, I think is slack, make work life simpler, more pleasant and more productive.

Why I think this works is that it's immediately clear that it's a workplace productivity tool, but then that it drives efficiency, but then surprisingly also boosts team morale and satisfaction and happiness. Which I think is amazing in the way that it is cohesive about describing this product.

Yeah, that's what I have for today. Hopefully these steps will help you nail your value proposition. And at the very least, it gives you something to talk about at your next dinner party.

MPD: This is a very useful one, even though I think a bunch of people probably heard what you were talking about and thought it was a snoozer.

There's a lot of really smart people who suck at this. They spent their whole life being trained academically on how to write and do everything else. And it is really hard to create punchy, concise language about something you're too close to. Yeah. I think it's Mark Twain had the quote, if I had more time, this would be shorter.

Exactly. I am constantly working with really highly educated senior executives running companies. That we've invested in or partnered with, and this is one of the main things that they struggle with, like the operations, the customers, all the things we spend time focusing on learning, they know, but this is the thing that everyone thinks is just intuition.

You'll figure it out. But people suck at it. So I love the fact that we've got a framework to give people some guidance on how to think about it. Yeah, it's a game changer to get it right.

Phuong Ireland: Totally. I think, what a lot, I think one of the pitfalls of a lot of founders is that they're for obvious reasons in love with their product and they're so passionate about the product is that all they can do is talk about the product, but they don't make that connection to the customer, right?

They don't think about the customer, whether or not the customer is going to like or buy their product and how well it's solving the problem. So I love that this framework really gives you your deep diving into the product, which you already know, and your customer. And then when you make that connection is when the magic happens.

MPD: Very cool. Welcome back. Thank you. Happy September. Good to be back. Thanks for running through this. Talk soon. All right. Thanks. Thanks for getting back in this. We're warming up here. Hopefully that wasn't too choppy today. And we'll catch you next week.

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