Four years’ time. What’s the world going to look like in 2020? We’re asking people in our network just that, for our new interview series 20/20.
Sixty percent of companies that went public in 2015 are now trading below their IPO price, according to Renaissance Capital. In 2015 tech companies accounted for just 14 percent of US IPOs – the lowest percentage recorded since the mid-90s.
Meanwhile there are signs that venture funds are growing impatient with loss-making startups that have not yet shown how exactly they’ll make money. Questions have been raised on the super-high valuations of a number of tech startups, and people are asking whether we’ll soon see some dead unicorns.
But despite all these indicators, Andy does not feel that the bubble is about to burst.
Andy McLoughlin co-founded Huddle back in 2006, working in a number of roles for the software company before moving into angel investing, primarily in the Saas and B2B industries. He’s now a partner with early-stage seed fund at San Francisco-based SoftTech VC.
Looking ahead, Andy says what is happening is part of the standard economic cycle.
“Yes we are seeing the markets begin to cool off at the later stage, and that will trickle down to earlier stage investors like us. It’s not a bubble bursting: it’s a cooling off; it’s a compression of valuations.
Only great companies will suck up that VC dollar
He says that while the classic “very well-funded VC project” will die out somewhat over the coming years, there are a “tonne of funds” that have recently raised capital and now to need to deploy these funds.
“I think the biggest difference is that in the past, ok companies could raise funding. For the next few years, it’s only going to be really great companies that will be able to suck up that VC dollar and put it to work,” says Andy.
Funds will become increasingly unlikely to invest in startups to go out and acquire market share at a loss, and a greater emphasis will be placed on the fundamentals of a business.
How’s it going to make money?
“They’re going to have to turn a profit, either on an overall or on a unit basis, and have the potential to become really, really big commercial players. What we’re looking for more than ever are real businesses that have the potential to stand on their own feet without needing much more venture capital,” says Andy.
Andy and the SoftTech VC team.
SoftTech doesn’t look for the next Instagram or Snapchat. They think that kind of business generally offers binary outcomes – you’re either a winner or a loser. The firm’s future plans are based on finding “real businesses”.
Andy says that determining a clear route to monetisation is crucial when identifying startups in which to invest with SoftTech. The fund needs to feel confident that founders know how to scale an idea to tens or hundreds of millions of dollars in revenue:
“We’re looking for companies that can take an idea that is based on either consumer desire, or something that will help people run better businesses, and then actually charge real money for that,” he says.
If you’re looking for opportunities, you may find them in developers tools, and trying to help companies build better products or better software.
SoftTech manages a portfolio of 175 companies, and Andy is behind 36 current angel investments. He says that although it’s hard to pick a favourite, he sees one startup enjoying particular success over the coming years: LaunchDarkly.
It’s a software platform that allows product companies launch, measure and control new features inside their app. Using the service provides for the rolling out of new features to subsets of a company’s users and the gathering of feedback from real-world use cases.
Keep an eye out for LaunchDarkly over the next four years, says Andy.
“This is something that players like Google, Facebook, Twitter and Amazon have been doing at scale for years. Most companies want to use a platform like this but have had to build their own rudimentary version.
“It ends up as a chunk of proprietary code that no one wants to maintain, and becomes a real hassle to look after. Now you can have all the power the big boys have, and just buy it on a SaaS basis.
“I feel that these guys have the opportunity to create a market and define a totally new style of building and releasing software” says Andy.
Keep it old fashioned
With a focus on early-stage companies that can clearly define how they intend to make money based on delivering a customer need, Andy says that SoftTech’s tastes could be considered “old fashioned”. And he is very happy with the message: Get back to basics, solve a consumer desire, charge real money for your solution, and you’ll be alright.
Photo credit: Dan Taylor / Heisenberg Media