Semil Shah On M&A Directions In A Venture Capital Drought
Semil Shah is a seed investor who has invested in more than 70 startups (including Exitround) and he’s also a prolific writer. Previously he worked at mobile audio startup Concept.io/Swell, which was acquired by Apple, along with other operating positions. After a crush of billion-dollar valuation “unicorn” funding deals, Shah recently wrote a blog post about a recent pull-back or “drought” in venture capital in Silicon Valley. We caught up with him for a quick Q&A to ask him about the VC drought as well as M&A.
Exitround: You recently wrote about a new drought in VC–it’s not “RIP Good Times” but “traditional venture capitalists have become significantly more cautious since Labor Day.” How much of the caution is the result of VCs or LPs deciding that prices were out of control? Or is it more that these unicorn companies aren’t exiting? Or both?
Shah: I think it’s more about the exits, or lack thereof. The VC model is predicated on IPOs (which are happening later) and M&A (which seems to be less frequent). An LP described the issue to me to be less about prices that are too high, and to think of it like an engine which needs money to come in and out in order to be “humming.” Right now, the engine feels clogged.
Exitround: Given that, as you noted in your recent post, VC capital is harder to come by these days, should founders be thinking proactively about exit strategies–or thinking more about them than they would otherwise? (Or do you prefer they just focus on building the company?)
Shah: In VC speak, this is taboo, because the traditional VC model is predicated on big outcomes to drive returns. It’s hard for an investor to give generalized advice to a founder, because so much of this is personal. I guess a rule of thumb could be — if venture funding isn’t coming, then what? My point of view is that CEOs/founders hold a responsibility to employees and investors to make sure they are stewards of everyone’s fortunes. In a perfect world.
Exitround: How important is it for your companies to have an idea of potential exit strategies when you invest? Do you like to have an idea of what their exit size could be, who could buy them etc? Or is that too difficult to do given a seed stage investment?
Shah: It’s taboo to discuss, you know? All I care about is that the CEO/founders are responsible stewards, if anything for their themselves and employees. My hope is to find people to back who have this as part of their constitution. On occasion I’ve been asked to help here, and sometimes I’ll gently float it by a company when I hear of an opportunity, but it’s a very sensitive thing to bring up and has to be done with great EQ and care. When someone does enter an M&A process, they often find it is quite draining and grueling in its own way and can take months. It can be all-consuming and hard to unwind, too.
Exitround: Do you have a target metric or size for your exits? EG some investors like Dave McClure are happy with 3x or 5x on a smaller investment, whereas others seem less enthusiastic (if not completely against) these smaller exits.
Shah: I feel like the safe, expected answer here is “of course, we run models!” but the truth is, no. It’s impossible for me to know. I invested a small amount in the seed round of DoorDash. They were pitching ME to invest in them, and I passed 2x before taking a swing on the 3rd pitch. Imagine that. I had no idea. I didn’t really listen, it seems, the first two times and they were patient with me. I didn’t have a target for them and anyone who did is likely making it up.
Exitround: What, if anything, would you like to see your companies doing to be proactive for preparing for a potential exit? EG, getting to know potential acquirers, etc.
Shah: In my experience so far, it seems like a hard thing for the CEO to initiate. That kind of proactive move could actually waste a lot of energy. Yet, this is probably why many companies wind down versus finding a landing — it’s unclear where to start and can be demoralizing, to boot. The only thing that bothers me is when it’s obvious to everyone the next round isn’t happening, and the founders thumb their nose at a decent acquisition offer. Forget the investors — what about employees?