- 3 months ago
Tech Crash 2.0 Where's the Bottom
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00:01Hi everybody, thank you for still being here today for this session entitled TechCrunch 2.0.
00:10So with me, Josh Andoroff, your partner at Accel Partners,
00:14and Edward Kuckerman, founder and managing partner of Catalyst Investments.
00:19And we have Nicolas Dufouque, CEO of BPI France here.
00:24Hi Nicolas.
00:25Hi.
00:26Thank you.
00:26Hello everyone.
00:28Wow, we can hear you.
00:30Yeah, so we're going to start by simple questions.
00:34So 2022 is nothing about, is very different from 2021, you can say.
00:41You know, the public takes us crashing, the valuation of startups are, you know, lowered, etc., etc.
00:49But is it like déjà vu?
00:52Is it déjà vu for you?
00:54Well, every, I've been through five of these recessions, and this is not going to be a good one, but
01:04they're all different.
01:04And I think the single most important message, if I could leave one message today, great entrepreneurs know that the
01:15very best time to start a company is at the bottom, not at the top.
01:21So is, and I think we've still got, we're not at the bottom.
01:25We're still headed down.
01:28There was just an announcement a few hours ago in the United States.
01:32May was the first month that consumer spending went down, which two more months of that, the beginning of recession.
01:42So I look at this opportunity two ways, great opportunity to start a new company, and a great opportunity to
01:54take your portfolio and fix it, meaning take the ones that aren't going to work and do something about it.
02:04Because you've got two choices, you can do it, or you can let the market do it.
02:10It's a lot more painful if you choose the second course.
02:15Hello, thanks for hosting me, and I'm very glad to be here tonight.
02:20Yes, we've seen those recessions in different time horizons, but I have only been exposed to two events where we
02:30had a crisis, the crisis of 2000 and the one of 2008.
02:34And I agree that there are a lot of opportunities during crisis situations, but on the other hand, we are
02:40facing a difficult situation, and the companies better take that into account today.
02:45And I think that we have learned from the experience that we had in the funds that we have established
02:51in the past that we have to be very cautious in the way we deploy the money.
02:56We have seen that price are adjusting, but they are adjusting very slowly.
03:02So we typically deploy during this type of situation our capital, like many other funds, in a much lower way.
03:10Companies take a lot of time in order to adjust valuation.
03:13We see that more in the more mature companies, because the SPAC market has been closed in the last year.
03:22Many of the Israeli companies went public at very high valuation during the period where we could go public last
03:29year.
03:29But we've seen 80 Israeli companies becoming unicorns in a very short period of time.
03:35Just for those who are not familiar, there was only one unicorn in Israel in 2013, and there are 80
03:42today.
03:43So the window is closed, so companies need to adjust prices, and then it's possible to reignite the process of
03:51raising money and investing in good companies.
03:55Nicolas, can we say that it's the first crisis for a French shake?
04:01Can we say that it's the first crisis for a French shake, and are you worried?
04:05I'm not particularly worried.
04:07It's true that...
04:08Can you hear me?
04:10You hear me well or not?
04:14Sorry, but I can't hear Nicolas very well.
04:18Yeah.
04:19I'm here.
04:24Can you just tell me anything, Nicolas, so we can check the sound?
04:29I'm trying to say that it's not the first time it's a crisis in the tech ecosystem of France.
04:36Is it okay or not?
04:37Yeah, yeah, it's quite okay.
04:40But what is true is that because of the snowballing of the ecosystem in the past, let's say, six years,
04:48we have a whole generation of young entrepreneurs and young investors in the venture capital funds, which have never lived
04:56through any crisis.
04:57So for them, it is totally new.
05:05It's totally normal to have a financial crisis in venture capital, and it is less severe than any COVID crisis
05:12that we lived through last year.
05:15It is something that we can manage.
05:17Of course, it's going to be cruel for some of them.
05:20It's going to be Darwinian.
05:22But most of the good tech companies in France have raised so much money in the past, in the past
05:29months, like in Israel, that they have fuel to, you know, get it going in the next semesters.
05:36So I would not be too much worried.
05:38It's a question of stamina, capability to absorb the pressure.
05:44Thank you.
05:45And so as you all experience different crises, as you said, what are maybe the conclusion?
05:51You mentioned a few conclusions.
05:54What are the conclusions we can draw from all this crisis?
06:01I want to repeat again.
06:05The most important thing is to stay alive.
06:09And I hope, you know, one of the key ingredients there is actually who's your board.
06:16Your board plays a super critical role right now.
06:21They've got the money.
06:22And they're all going to be sitting there deciding which of their portfolio they're going to fund and which ones
06:31they're going to let go.
06:33So that's kind of a done deal.
06:35Hopefully, you've got a great board.
06:39There's a lot of lessons to learn in looking back at the last, the last bad one was 2000.
06:49And I went and looked up some numbers today.
06:53If you look at the big five or big six companies today, in 2000, Netflix was two years old and
07:02they were selling DVDs.
07:04Mark Zuckerberg was 12 years old and he was six years away from starting Facebook.
07:11Google was two years old.
07:14Amazon was selling books.
07:16They were a two-year-old company.
07:18And they all weathered the storm.
07:21Apple, Steve Jobs had just come back two years before.
07:26And this isn't well known, but when Steve came back to Apple, they had six months cash in the bank.
07:33Six months.
07:34And he hadn't invented the, what was it, the iPod yet.
07:40So he did that deal with Microsoft that provided cash infusion that kept him going until his ideas could pay
07:50off.
07:51So how you behave for the next year, both from a board point of view and from a CEO point
08:00of view, are critical.
08:03Maybe I would add that obviously there are exceptional companies and exceptional entrepreneurs, but you have to look at the
08:11bulk of the players.
08:13In Israel, we have $25 billion that was deployed last year.
08:18And the pace is continuing to grow.
08:22You're correct that there is money available right now, but you don't know for how long.
08:26And the fact that the markets are closed may be more difficult to raise money in the future.
08:31So one of the recommendations I would have for entrepreneurs is that to raise as much cash as possible in
08:39your round, to have enough cash to support the company.
08:43Typically, we are now very careful to make sure that when we invest in the company, we provide enough cash
08:49to turn the company profitable.
08:51And that's a criteria we especially focus on that during this crisis period.
08:58While the company would need more cash to grow, we need to be able to support the company until they're
09:04profitable.
09:04But what if you can't raise cash?
09:08What if you can't raise more funds?
09:11So that's why a lot of companies have disappeared during those crisis periods.
09:15I remember also many companies, they were raising money at a multiplier of sales, like companies are raising today.
09:24And suddenly, after the crisis of 2000 and 2008, companies were valued as a multiplier of profit.
09:31Many of them have to change their attitude, not to burn cash, but to think how with the cash that
09:39they have, they can turn the company profitable.
09:41So if they don't, you know, that's when a company is closing, not because they have a problem of typically
09:49of technology, of product, of management.
09:51They close their operation when they don't have cash.
09:53So cash is of essence now, and during the crisis period, the company has to adjust.
10:01The smart CEOs that I know right now in Silicon Valley and in Europe are doing two things.
10:10They've got a plan.
10:11What happens if I can't raise cash?
10:15I've got a plan for when my next fundraising is.
10:18Suppose it takes me three months longer.
10:21What am I going to do?
10:24Suppose it takes me six months longer.
10:28What am I going to do?
10:30Suppose I've got to hold on for a year.
10:33What am I going to do?
10:35And if you haven't thought those plans through and you're running a company,
10:43it would be a challenge.
10:46Nicolas, what is going to be your strategy for the next few months, next coming months?
10:54Because you always, BPF France has always been supportive of the French tech.
10:59So what's going to happen in the coming weeks, months?
11:05Are you going to just help the startups in your portfolio or are you going to invest in new startups?
11:14Both.
11:15And we will continue to invest in funds.
11:17As you can remember, we are a massive funds of funds.
11:20We will invest in 2022 1.5, 1.6 billion euros in funds.
11:26The same amount as last year.
11:28And we will certainly not be tempted to reduce our exposure because of the crisis.
11:34Conversely, we will even be tempted to increase it because we are a counter-cyclical actor.
11:42And as far as our direct investments are concerned, I think we have a very good portfolio.
11:48Most of our companies are extremely cash rich because they raised a lot of money in the past rounds.
11:54Some of them are burning too much and we are going to, with our partners, funds, request an extreme discipline
12:04of result.
12:05It's a time of high demand for discipline, I would say.
12:11And you will see very rapidly a distance being created between the excellent CEOs and the CEOs,
12:22which were a little bit inflated, I would say, which is good.
12:26I mean, which is good at the end of the day.
12:28That's the rule of the game.
12:30We should not be worried by that.
12:32So that's where we are.
12:34We commit very significant investments in 2022 and 2023.
12:40BPI France will be there.
12:41This is what I can say.
12:44Edouard, will you be slowing your investments or deploying, you know, a bit slower?
12:50Yeah, we are deploying slowly the capital that we have recently raised because, obviously, it takes time to adjust the
12:58valuation
12:58and people have great expectation if they plan to do a SPAC at $2 billion.
13:05And now there are a few Israeli companies that plan a SPAC at above $1 billion and they're raising at
13:10$200, $300 million.
13:12There is some time for the company to do this type of adjustment.
13:15And also, when we invest, we want to make sure that the company will have enough cash to turn positive,
13:24cash positive.
13:25And therefore, we need to plan to inject money that will be used over a two or three-year period.
13:30I don't recommend entrepreneurs to raise money for a short term.
13:34You don't know if cash will be available in a year from now.
13:37And therefore, it takes also a lot of time.
13:41We have an investment bank that has done about 80 transactions a year.
13:46And we know that, on average, it takes, on average, between six months to one year to raise capital.
13:52So if you raise capital for a year and after you just raise the capital, you start a roadshow to
13:57come up with a new fundraising.
13:59It's a waste of time for the CEO and the key management team.
14:02So if you raise capital, do it for at least two or three years.
14:07What about you?
14:09Well, at Axel, I think we're in a bit of a fortunate position.
14:12We've just raised our 15th fund in the U.S. and I think our sixth fund in Europe.
14:21So we have the luxury of not having to focus on cash.
14:28But we've got to spend the time now, if you will, rationalizing the portfolio.
14:34One of my favorite questions that I ask when I'm with another venture capitalist is,
14:41when you go to a board meeting and you know somebody on the team is not performing,
14:47do you ever act too quickly to fix it?
14:50And we all smile at each other.
14:54You know, a constitutional weakness of venture is we always think,
15:00well, this person's going to get better.
15:03And it doesn't usually work out that way.
15:07So my advice is, this is a great time to start to rationalize the teams.
15:14If you've got a weak player and they've been weak in good times,
15:22they're suddenly not going to turn into strong players in tough times.
15:27So move.
15:30Get the team strong now.
15:34And are you expected to lose any companies in your portfolio?
15:41Well, we never expect to lose, but we will lose.
15:47And the industry will lose.
15:51If I came back here a year from now, or let's say two years from now,
15:56and 40% of the companies that are in business today were no longer in business,
16:04either because they got bought or they went away, I wouldn't be surprised.
16:10Same question for you, Eduard.
16:12You always lose companies over time.
16:14We are investing in more mature companies today,
16:17so the ratio of success is higher.
16:20But in my first fund, I used to invest in very early stage.
16:23And we evolved over time as the market evolved in Israel.
16:27And one thing we've learned is that it takes more and more time to make an exit.
16:32So we'd better invest in more mature companies.
16:36And in such a situation, the number of companies that don't make it is lower.
16:42And Nicolas, in this time, you know,
16:47how ecosystems like the French one, the French tech,
16:50can keep attracting non-European fans?
16:55Because I know it's a very important topic for you.
16:58So do you think it's going to slow these things or not?
17:03I mean, we saw a first move of major U.S. funds in January,
17:10those who had part of their activity on hedge funds,
17:14which were a little bit attacked by the reversal of the markets.
17:20So we used to that.
17:21At the end of the day, what we should say to the people listening to us
17:25is that we have excellent entrepreneurs in France
17:27and also excellent venture capital funds.
17:29So the flow of capital should continue.
17:32What is important in the period is that, and it's good,
17:37the entrepreneurs would probably focus much more on the excellence of execution
17:43and less on valuation.
17:45I mean, we spent through most of the months of 2021 with entrepreneurs
17:50which were literally too much working on the valuation of their companies,
17:54thinking of the next round and so forth and not focusing enough on KPIs.
17:59So that's a good thing that they go back to the reality of the value creation.
18:04And on top of that, we have also to say that it's normal that we have a J-curve in
18:08venture capital.
18:09We tend to forget the J-curve.
18:13It was so flat.
18:14So the J-curve is now being in a reasonable shape,
18:19which is also the announcement of major successes for the future
18:24because we will have to make our choices to be much, much more selective.
18:28And on top of that, I would say something which is important for us.
18:32That's what Joe said before.
18:35In those periods, you will see appearing new entrepreneurs, young entrepreneurs,
18:41mostly we think coming from deep tech,
18:43which will pave the way for the major successes of 2026, 2027.
18:48We must not lose them and miss them.
18:51So we will invest significantly in early stage deep tech in 2022
18:58because something is starting, which is the metamorphosis of the ecosystem.
19:05A new generation is coming.
19:06They will impress us.
19:08So it would be a pity for all of us actors of the venture capital
19:13because we are afraid of losing money on our account portfolio.
19:16who would not finance those emerging geniuses.
19:20They will come.
19:20We will see them.
19:23Question for you, Edouard, for the Israeli ecosystem.
19:28I see that the Israeli market is funded by international investors.
19:34We have no local, really, major local investors
19:38because it's a tiny country.
19:40It's a 9 million people country Israel.
19:42And we've raised quite a lot of money in the U.S., in Europe, but also in Asia.
19:49The portion that relates to Asia has been reduced recently.
19:52In the past, you had a lot of allocation from China,
19:55and it's more and more difficult for Chinese investors to invest in Israel.
19:59But when you look at the funding of Israeli companies,
20:03you have to remember 300 Israeli companies went public in the U.S.
20:07Only last year, there was 20 IPO or D-SPAC on the U.S. market.
20:14In addition to that, you had 100 Israeli companies that went public in Europe.
20:19Actually, my first venture fund that I established back in 1993
20:23was the first Israeli company to go public in continental Europe.
20:28But since then, there is quite a lot of Israeli companies that raise money there.
20:32So, the challenge is not really to attract international investors.
20:37The challenge is really related to the performance.
20:41The ecosystem is very friendly for the foreign investors.
20:45We have a lot of benefit for any investors that come to invest in Israel.
20:51No tax on capital gain.
20:53And it's a very dynamic environment.
20:57If you look at the number of unicorns in Israel,
20:59we've seen things growing very fast in the last 10 years.
21:04And we think that the market will still absorb quite a lot of capital from overseas
21:10as we see more and more lead venture funds are establishing operations in Israel.
21:16So, the name of this session is TechCrash.
21:20But Joe, do you have, I don't know, anything positive to share with us?
21:24Yeah, I'm glad you asked that because I've never been more optimistic
21:30about the long-term future of what we call venture capital.
21:35And here's why.
21:37Venture capital is not about the money.
21:43Never has been.
21:44There has always been more money than there has been opportunity.
21:51Right now, I've never seen a time in the 50 years I've been in Silicon Valley
21:58where there's more opportunity in new technologies,
22:03whether it's 3D printing, whether it's AI, whether it's VR,
22:09whether it's biotech, whether it's self-driving cars,
22:13and I can go right on down the list.
22:15But more importantly than that, if you go to the major universities today,
22:21and for 50 years I lived right on the edge of Stanford campus,
22:26the very best students want to go start a company.
22:32It was a little over a year ago, just before COVID started, really.
22:38I had dinner one night with the CEO, Goldman Sachs,
22:42and he said to me, you know, I used to be able to hire anybody I wanted,
22:48and I can't do that anymore.
22:50They all want to go to work for you.
22:52What he was doing is pointing at me, the venture capitalist.
22:58And that's the good news.
23:00If you look at the best and brightest students from our best universities,
23:06there's been a sea change.
23:09I want to go to work, and I want to start a company,
23:12and I've got a big idea.
23:16Nicolas, do you have anything positive to share?
23:21I would be totally okay with what Joe said.
23:25In France, we did recently a poll with the PhDs out of the French universities.
23:3230% of them want to start a company.
23:35So we have the same cultural shift, which is completely major,
23:40and will inevitably generate extraordinary news as far as new companies are concerned.
23:46On top of that, we also know that in the next 10 years,
23:49we're going to have more innovation than in the past 30 years.
23:52So the mega trend is there.
23:55What we are living through currently is just a blip in that context.
24:01Yes, in Israel, I think the timing is really interesting to invest in Israeli companies
24:08that we've seen the ecosystem evolving very much.
24:11There is a say in French, I think, that we say,
24:14the best time to invest is at the sound of the cannon.
24:17So that's true that we hear a lot of cannon in the area,
24:21but if you look at the best timing, it's when the situation is difficult.
24:25I can look at, for example, one industry in which we started investing above 10 years ago.
24:32It was the auto tech sector.
24:34We invested at the time in Mobileye, which became the most successful high-tech company in Israel,
24:41and where Catalyst was also on the board of Mobileye.
24:44And we saw at the time, we were the first auto tech company.
24:47Today, there are 500 Israeli companies in the auto tech sector backed by venture funds.
24:53We only in the last six months invested in three companies in the field of auto tech.
25:00So we find that there are a lot of more opportunities than ever in a field that was not existing
25:05about 10 years ago.
25:08I want to leave you with a poignant story.
25:12My daughter is a Silicon Valley startup person.
25:16She's on her third company.
25:19She's done very well.
25:20Her first company was sold to Salesforce.
25:23It became Einstein.
25:25Her second company was sold to Snowflake.
25:29And she stayed there.
25:31Snowflake went public.
25:32You all remember the number.
25:34She just accepted a new job a couple of months ago.
25:38And I said to her, honey, why are you leaving Snowflake?
25:43And she said, well, Dad, I'm going to work for Watershed.
25:46And Watershed is working on a very important global warming technology.
25:54And I said, why are you doing that?
25:57And she looked at me and she said, you know, you and mom and your generation really didn't do anything
26:05about global warming.
26:06And it's up to us.
26:09So we're going to go try to fix it.
26:11Meaning her generation.
26:13There wasn't a lot I could say except God bless you.
26:16With that, I'll quit.
26:18Thank you.
26:19Thank you very much.
26:21Thank you.
26:22Thank you.
26:23Thank you.
26:23Thank you very much.
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