MARTIN OMANDER: Hello, and welcome to "Root Access," the
show for startups on Google Developers Live.
I'm Martin Omander, and I'm joined here by legendary
investor and Googler, Don Dodge.
Welcome, Don.
Today we're going to talk about Demo Day season.
500 Startups and Y Combinator two of the most well known
accelerators just had their Demo Days.
And I know, Don, that you attended both of them.
What trends did you notice in the demos this year?
DON DODGE: More conservative.
More business focused.
In years past, you saw lots of consumer oriented companies,
social kinds of applications, and lots of mobile apps.
This year, it was more focused on business, more
conservative, some might say boring kinds of ideas.
But they make money.
So all of them, you could clearly understand the
business model.
You can connect the dots from where they are to a million or
so of revenue.
And more focused on business as the customer.
MARTIN OMANDER: I see.
Was that a difference between 500 Startups and Y Combinator,
or what was the difference that you noticed?
DON DODGE: No, both of them were more business focused
than in the past.
I think the difference I saw at 500 Startups was a more
international flavor.
So 500 Startups had about 32 companies, 35 companies.
And I would guess that half of them were from countries all
over the world.
So a much more international flavor from the founders, and
even the business ideas were things that you wouldn't
normally think of as being a business
opportunity in the US.
They were focused on those sorts of things.
And generating revenue pretty quickly.
Y Combinator was more Silicon Valley focused.
The founders, who all seem to come from Silicon Valley or
the other tech hubs, but again, more business focused
and that kind of thing.
MARTIN OMANDER: Right, yeah.
I noticed that the Y Combinator, a lot of those
startups, while they were still in the accelerator
program were cash flow positive already.
What's up with that?
DON DODGE: Well, I think when you're focused on a business
to business kind of company, you're selling to business,
businesses are more accustomed to paying money for things.
As opposed to consumer oriented companies, where
you're either generating revenue based on advertising,
or on a subscription freemium kind of thing, where it starts
out free and you pay money later.
Those consumer web app kind of social businesses take longer
to generate revenue.
Whereas business to business type companies generate
revenue very early.
So many of the companies at Y Combinator, they're launching
on stage and already talking about revenue streams that
they have in place.
So I think that's the major difference.
MARTIN OMANDER: I see.
How does all this play into valuations?
Are the valuations higher, lower, the
same as previous years?
DON DODGE: More reasonable, I would say.
MARTIN OMANDER: Reasonable That's good.
DON DODGE: In the past couple of years, we were in a bubble
where companies just launching at Y Combinator were having
valuations in the $8 to $12 million range.
That's pretty rich for a company with three or four
founders, and just launching with negligible revenue to
have $8 to $12 million valuations.
This year I think we saw the valuations come down to more
reasonable levels, like in the $7 to $10 million range.
So that's still pretty rich, but down from the past two
years and a bit more reasonable.
MARTIN OMANDER: Great.
Are these Silicon Valley bubble valuations?
How are valuations in Boston, Austin,
New York, other places?
DON DODGE: I think the valuations in other
locations are lower.
So say more in the $4 to $7 million range than the $7 to
$10 million range that you see in Silicon Valley.
There are, of course, exceptions to that.
Great companies can start anywhere and command very high
valuations.
But in general, Silicon Valley investors are more accustomed
to paying up, and paying higher valuations than in
other parts of the country or in other parts of the world.
MARTIN OMANDER: So does that mean that the good deals are
outside Silicon Valley?
DON DODGE: Well, it depends on how you talk about good deals.
If you're talking about valuation, yes.
Valuations are lower in other parts of the country or
outside of the US.
But from an investor perspective, a lot of times
valuation doesn't matter.
Because if a company hits it big and goes to $800 million
valuation, it really doesn't matter if you paid $5 million
or $8 million on the first investment.
Conversely, if the company fails, you lose 100% of your
money anyway.
So it doesn't matter if you put your money in at $3
million or $8 million.
If you lose it all, you lose it all.
So I think Silicon Valley investors, in general, are
less valuation sensitive, and look more
at what is the upside.
Because they know going in they're going to lose half of
their money anyway.
Meaning half of the investments they make will be
total wipeouts.
And the other half, one of them hopefully will be that
$800 million or billion dollar company.
And that pays for all the mistakes.
MARTIN OMANDER: Ah, I see.
That's quite a bit different way of managing money than I
manage my 401(k), I can tell you that.
DON DODGE: Me too.
MARTIN OMANDER: Good.
That's all for today.
Please leave your comments on the YouTube video, and
questions, and we'll try to get back to
them in future episodes.
Thank you for joining us, and see you next week.
Bye.