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The DL - Startup Valuations Post-Crisis, Running Slack, $2.6B Trade of the Week

Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.
March 30 · Issue #41 · View online
The DL
Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.

This week’s issue has data on what happens to startup valuations after a crisis, what it’s like to run Slack right now, the $2.6B trade of the week, and the words people use to describe retirement (or quarantine).

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How COVID-19 Will Impact Startup Valuations
Last week, I shared some opinions on what’s going to happen to the startup market over the next few quarters. But this week, I thought I’d get some data instead of just speculating (breaking all sorts of VC rules 🙃).
Here are some observations on venture deals looking at VC-backed deals before and after the 2000 dot-com crash and the 2008 global financial crisis.
🌱 Early Stage Deals and Valuations
The charts above show the number of Seed and Series A deals (blue bars), as well as their median post-money valuations (red lines), in the years before and after the 2000 and 2008 stock market crashes.
Maybe unsurprisingly, the dot-com crash had a much more significant impact on startup fundraising than the global financial crisis. For example, the number of seed deals increased in both 2009 and 2010, and Series A valuations did not decrease significantly post-2008.
Otherwise, it looks like historically, there has been a 25-30% drop in the number of early stage deals after an economic downtown, and median valuations decrease 10-20% per year for several years post-crisis.

🚀 Later Stage Deals and Valuations
Later stage startups are more sensitive to the public markets because investors use public companies as comparables to set valuations, and that’s reflected in the historical data for Series C and D rounds.
In 2001, the median valuation for later stage rounds dropped 50%, and it continued dropping over 20% in 2002. The number of later stage deals also dropped by 20-40% (seems like a 30% decline in deal count is a magic number for some reason).
The 2008 crash had a smaller impact on Series C and D deals. There was still a 25% decline in median valuations in the following year, but valuations recovered within two years to pre-crisis levels.

🦄 TL;DR: So What About 2020?
  • This crash was not driven by inflated tech valuations (tech stocks have actually outperformed the market), so it will probably look more like 2008 than 2000
  • It will get harder to fundraise - there will probably be a 20-30% decline in the number of deals that get done at all stages
  • Valuations will probably decrease for the next year, with a bigger impact on later stage startups, and a smaller decline for Seed and A rounds
  • The recovery will largely be based on what happens to public tech stocks. Right now things look like they are stabilizing, but we still don’t know the full magnitude of COVID-19’s economic impact

What It's Like To Run Slack Right Now
🤔 What should you tell investors when you only have the chart on the left?
🤔 What should you tell investors when you only have the chart on the left?
Cool thread from Stewart Butterfield (CEO of Slack) on what it’s like to run a public company and make decisions on what to share on an earnings call during a crisis. Long-ish read, so here are some of the highlights:
  • Mon, 3/2 - Fewer than 100 COVID cases in US
  • Thu, 3/5 - Board meeting. Approved fiscal year budget, target, and forecasts. Felt confident for next week’s earnings call
  • Fri, 3/6 - Decided to ask all employees to work from home
  • Mon, 3/9 - After the S&P 500 dropped 7% in six minutes and markets are halted, revised their earnings script and guidance
  • Wed, 3/11 - Prepped again for media interviews and earnings calls. Decided to adjust guidance again.
  • Thu, 3/12 - Earnings call day. Markets plunged again. Metrics looked good, but impact of COVID was still unclear. More customers need Slack than ever before, but enterprises are sure to cut spend, and smaller customers are likely to go out of business
  • Instead of averaging out the best and worst cases to draw a line in the middle, Slack guided to the downside, and the stock dropped 20%
Since then, Slack’s stock has recovered to pre-COVID levels, and they have added nearly as many users in half of Q1 than they did in all of Q3 and Q4 of last year, but wow - it must be quite a roller coaster over there right now!

Trade of the Week 💥
Last week, Bill Ackman, a billionaire hedge fund manager, did an interview where he teared up and warned investors that “hell is coming” if the government doesn’t shut down the country.
Turns out that those were actually tears of joy because he made $2.6B on a $27M investment betting on a market crash. 😂 Read his investor letter here, where he explains what he’s doing with the proceeds.

Other stuff Dan's talking about
💼 Retirement - As millennials wonder if quarantine is what retirement will be like, here’s are the words that people of different ages use to describe retirement. Lonely, boring, and tired? Hope not!
🎓 Graduation videos - Emoji graduation (funniest), Minecraft graduation, another Minecraft graduation, and Roblox graduation (craziest. the HS is actually asking all parents and kids to install Roblox in order to attend)
📈 Superforecasters on COVID-19 - Remember that book Superforecasting? (It’s about ordinary people who make better predictions than the experts in various fields). Turns out that project is still active, and you can go read the superforecasters’ predictions and comments on COVID-19
📺 What to watch - Crowdsourced list of the best TV shows to watch while you’re stuck at home (Tiger King is most recommended). Or 450 Ivy League classes you can take online if you’d rather be productive

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About me: I work as an investor at Madrona Venture Group, a Seattle-based venture capital firm that has been early partners with companies like Amazon, Smartsheet, Apptio, and Redfin.
If you have thoughts, questions, or comments, hit reply! If you’re new, check out some of the DL’s top articles from the last few months:

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