In this episode of the Equidam podcast, Dan Gray and Daniel Filippo discuss the evolving landscape of venture capital, particularly in light of recent market conditions. They explore the challenges faced by founders in proving their worth to investors, the criticisms of traditional venture capital dynamics, and the emergence of new investment models. The conversation also delves into the impact of inflation on valuations, the potential for middle-risk ventures, and the importance of understanding risk-return profiles in investment decisions. The episode concludes with a look at future topics related to the financing of digital startups and the changing nature of entrepreneurship.
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Takeaways
Founders are facing increased pressure to prove their value in a challenging market.
The venture capital landscape is shifting towards more traditional competitive models.
Criticism of venture capital may be a temporary reaction to market downturns.
New investment models are emerging to address underserved opportunities.
Inflation is affecting the real increase in startup valuations.
The concept of capital as a competitive advantage is evolving.
Middle-risk ventures present a significant opportunity for investors.
Valuation remains a critical aspect of investment decisions.
The need for a more fluid approach to investment categorization is evident.
Future discussions will focus on financing digital startups and evolving business models.
Chapters
00:00 Introduction to Venture Capital Trends
02:58 The Impact of COVID on Venture Capital
06:01 Shifts in Startup Valuation and Market Dynamics
09:07 Disruption in Venture Capital Models
11:52 Innovative Approaches in Early and Late Stage Investments
15:10 The Future of Venture Capital and Investment Strategies
17:50 Reassessing Risk-Return Profiles in Venture Capital
20:50 The Role of Inflation in Startup Valuations
23:52 The Competitive Landscape of Startups
26:47 The Evolution of Capital as a Competitive Advantage
29:55 Conclusion and Future Discussions
Transcript
Dan Gray (00:01)
Welcome back to the Equidam podcast, the podcast where we talk about startup valuation. Although I think this episode might be more about venture capital. We’ll see. I’m Dan Gray, the head of marketing at Equidam, and I’m here with Daniel Filippo, the CEO and founder.
Daniel Faloppa (00:16)
Nice to be here again.
Dan Gray (00:18)
Yeah, it’s going to be interesting today, I think. I was thinking we were going to talk more about startup valuation, the philosophy and the category. But actually, there’s been some very interesting thoughts shared on venture capital this week. There’s a particular article I know that we’ve both read that we’ll probably discuss a little bit. But I want to start with this trend I’ve been seeing.
You know, as this kind of downturn in venture capital has prolonged, there’s more and more advice I see shared online that is basically along the lines of founders should be prepared to prove more and raise at lower valuations because of the situation. And, you know, my gut response to that is like, why are the founders the ones that have to pay for this situation? You know, shouldn’t it at least be both sides? So what are your thoughts on that?
Daniel Faloppa (01:17)
Well, that’s a good question. mean, like pay is a strong word, right? I it’s just, I think it’s just, you know, leverage, right? And we came out of this hype during COVID and then there was a lot of leverage, maybe for founders, in my opinion, too much leverage in the sense that, you know, we saw…
Incredible rounds like happening super fast with little due diligence and maybe, you know, people even adapting a lot of their plans because of this easiness to raise capital. And that is lower now. Is that a net positive or a net negative that there were these things? That’s a good question, right? Like maybe capital wise, you know, difficult to argue, but, you know, in I think
in the life of all the people that are working in the industry, having these very large swings is not very productive. I think founders do have to, quote-unquote, prove a little bit more right now. But I think we’re still in a very good market for them compared to five, six years ago. We’re getting back to a level where
They need to prove enough, let’s say.
Dan Gray (02:51)
Yeah, that’s true. Most of the more kind of rational takes are comparing this to 2018, 2019. So similar kind of situation. And to be fair, you know, a lot of the criticisms of venture capital that I see kind of remind me of this is like a weird comparison, but maybe an interesting one. At the beginning of COVID, all of the kind of tech conferences started to go online.
Daniel Faloppa (02:58)
Yeah.
Dan Gray (03:16)
And suddenly everybody started criticizing tech conferences, how they’d been done historically. you know, suddenly that was a broken industry and, know, there were all these problems. But then of course, after COVID, everything went right back to normal. So I’m kind of wondering, like, is all this criticism of venture capital a product of the downturn? And actually, it’s just going to go right back to where it was when we come out of this dip.
Daniel Faloppa (03:39)
It’s an interesting thought process, right? I don’t know. I think the criticism is good. And the fact that we had COVID as basically a worldwide pause and moment of reflection. Hopefully, we get more good things out of it. There’s a lot more focus on mental health. There’s a lot more focus on solitude and…
division among people and stuff. So that side is interesting, I think. On the VC side, I think, in my opinion, from where we started, where VC was really underutilized, let’s say, and underdeveloped, there was a lot of alpha, a lot of…
return to be made that was not compensated by the risk, just because the supply of capital for these types of ventures was suboptimal at the beginning. And then we had the whole SaaS wave, right? Where we moved from… Well, one of the theories is that we moved from capex to opex, right? So like large enterprises, instead of like spending a hundred million building their own data center, they…
they outsourced, and then now for like $10 a month, you can have all the music in the world, right? Or you can have the best ERP system and CRM and so on, right? So that huge shift in value shifted a lot of value towards startups because they were the fastest ones to adopt like a SaaS model, let’s say. And the risks of that were not understood, risks in a positive sense in this way because…
The whole subscription model allowed and retention and things allowed companies to be less risky than previously when they had to build a lot of their own things. And this again allowed, I think, profits or like, know, alpha. So profits that were not compensated by the risk of ventures. I think we’re getting to a point where…
Dan Gray (05:43)
Mm-hmm.
Daniel Faloppa (06:01)
I say the game is understood where the alpha is not there anymore, where the normal person, when they’re starting a company, they are thinking also about a digital company. They are thinking about the startup, they are thinking about everything. And the same thing for a traditional quote unquote investor, when they need to deploy their capital, they are thinking about digital, they’re thinking about technology and so on. the game is leveled and
And I think, and that’s why we liked also that article that maybe we should reference, but because this, think, is creating… We’re going back to traditional competition models and things, right? Building modes, building defensiveness against competitors, abnormal returns, because you have better brand, better management, the traditional things, instead of just like…
Dan Gray (06:33)
Mm-hmm.
Daniel Faloppa (06:56)
I’m digital, nobody’s doing photo sharing. I’m going to do photo sharing and become the only company that does photo sharing in the world. I don’t think it works anymore by and large. There’s going to be the single company that’s always going to do that. The same as in other industries, but we go back to a more normal model of VC. And then…
So then I don’t think, I think COVID accelerated this, but I don’t think it’s something that is gonna go back to the way it was, because it was already going in this direction, I think.
Dan Gray (07:34)
Yeah, interesting. Yeah, just for reference, the article is venture capital is right for disruption by Evan Armstrong. It’s a really good read. It’s on all of our social media channels. And I was just going to say that the kind of key example he gives in there is the index ventures investment in Figma, which was a remarkable success by a ton of metrics, except for the one kind of key objective of venture capital, which is that it didn’t,
Daniel Faloppa (07:46)
Yeah, it’s a great treat. Sorry, sorry.
Dan Gray (08:03)
quote unquote, return the fund. And that kind of highlights the problem with that asset class.
Daniel Faloppa (08:10)
Yeah. Yeah. And I think just to, just because we’re going to be talking about this, maybe more, I think that the main point of that article is that the, the sort of one in a million startup that gets to be 50 plus billion when they IPO is oversubscribed, right? That their valuation is too high. They have too many investors after those little, little few startups that are taking huge risks.
And what he was saying is that on the other hand, these companies that are aiming to be maybe like country leaders, maybe like niche leaders, maybe something smaller and sustainable, they cannot receive the funding that they deserve, quote unquote, that they could achieve in an efficient market because nobody wants that type of return because of how incentives in VCs are shaped. And what he’s saying is that there is actually an opportunity there.
for capital to go after this. And we are seeing some, you know, it’s not only him, like we’re seeing funds here and there pitching this idea. It’s developing more and more. And I really think it’s gonna happen. I mean, we joked a few times about the fintech is gonna be like the next barber, right? You’re gonna have as many payment options as you have options for barbers in a city.
I really think we’re going that way.
Dan Gray (09:38)
Yeah, you can kind of distill it into a question that I have written down here, which is based on that article. Mostly like, you know, he talks about how venture capital was, you know, it comes from adventure capital, backing founders doing like risky new ideas and giving them the capital that they need to build them because otherwise they’d have no other option, nobody else would fund them. Like, whereas now it seems more like it’s about there’s a category that exists.
and the venture capitalist’s job is to kind of pick the winner. And then there’s the incentive for everybody to pile into that winner, because the more other firms that get behind it, the more chance of success. So it’s kind of a compounding effect. so a lot of like one thing about venture capital that some people don’t understand is one of the considerations in the investability of a company is, from the VC’s perspective, do other VCs also recognize the potential because the success of that company
relies on other people investing as well. So if they believe like, I’m the only one that can see this opportunity. It sounds like it should be a good thing, but it’s actually a bad thing, because the company is going to need more capital than you can provide on your own.
Daniel Faloppa (10:52)
Yeah, yeah, fair enough. Yeah, so I think there is that factor, right? So we are piling on the winners just because the act of piling makes them winners. And then there is also this other thing of like the… Yeah, the model just got skewed and then it’s ignoring all the rest that is happening at that return that is maybe a little bit lower, but then…
with a much lower risk. And those investments are not happening. And you could argue VC is not… Maybe it’s not the name for that type of things, even though it probably was, but maybe it’s not the right name. But still, there’s a lack of capital for those opportunities. So an opportunity for investors that want to that, take that road.
Dan Gray (11:52)
Interesting. I think there’s… Okay, I mean, like, we’ve talked about the problem, and I think it’s reflected well in the article as well, if you read that. But it’s also interesting to think about some exceptions to that. And there’s two that stand out to me. One, I’m quite neatly one of them is early stage, one of them is later stage. So the early stage one is… And they’re probably not the only firm that does this. It’s just a good example. It’s Hustle Fund.
Because their thesis is they do hilariously early checks. They take hundreds of applications per month. They screen, think they said 700 par and their idea is that they give a very small, very early check to the company, which is full of risk, but it’s a small amount of money. But what it does is it kind of buys them the data on the performance. It gives them access to be in the later rounds.
So it’s like a ticket to participate that is very risky, but then if the company does do well, then they know first and they have a seat at the table, kind of. It’s quite an interesting model.
Daniel Faloppa (13:02)
Yeah, and the other one? And the other one?
Dan Gray (13:02)
And the
other one is Equiam. So they are later stage, like kind of series B and beyond, and their way of operating is completely different. They take 120,000 private companies, look at them through, they say, 60 million data points, and then they invest in the top 30. It’s a very different way of looking at venture capital, which is interesting to me.
Daniel Faloppa (13:34)
Yeah, I think we’re seeing all sorts of…
different things coming up. And I think, yeah, why not? The industry is changing so much and all these things are going to be tried. think, broadly speaking, if we go towards a more traditional competitive… The way I see it is we had gold mining. When gold was discovered or when gold is discovered in a certain place, especially back in the days when it was a lot of little…
little miners, right? Like you would have an amount of people moving there first. The earliest would be the ones with the highest returns, right? And then you would have like later and later commerce, let’s say that would find less and less gold, right? And then at that point you had maybe success in selling the machines to people doing mining, right? Like the drills and stuff. And people argue that that is actually what is happening right now with all people.
Dan Gray (14:34)
Mm-hmm.
Daniel Faloppa (14:40)
selling things for startups. They are basically selling the drills to the miners because the actual gold is not the most profitable thing anymore. And then after that, what do you have? You just have diversification again. Some people are going to go there for mining. Some people are going to open a ski resort in the same area because it’s a mountain. And then if you, as an investor, want to make returns,
You go back to a traditional model of, this company have a competitive advantage? Can I spot it when they are maybe less aware of that competitive advantage? Can I pay a price that allows me to do an extra return just on top of the specific risk of the company? And if I can do that consistently, then my portfolio grows, like in a more traditional investor type of way.
And for startups, I think it’s the same thing. The fact that you do a SaaS invoicing platform doesn’t guarantee you anymore very fast growth to country leadership or something like that. It guarantees you that you are competing against another 15 invoices platforms. And a lot of people are starting to do these things as a…
as a side job or as their own single project, let’s say, they are the only one that work on these things. So we’re really looking at this type of little digital solutions as the new SMEs or SMBs, however you want to call them, small traditional businesses that don’t have a ton of innovation in it, but they are lifestyle, they’re great. And then just above that, you can have maybe little country leaders or things like that.
which again could be very interesting if you spread your bets wide enough and if you manage to buy them at the right price. And then of course you always have a few outliers that maybe build an incredible brand in a competitive industry. Think like Apple, Tesla, like these type of companies, they still manage to get an incredible market share in a very competitive industry because they just did great. So that still happens.
Dan Gray (17:01)
Mm-hmm.
Daniel Faloppa (17:03)
and still can happen, but it’s not just going to be like winner takes all, first that does it takes most industries. Because again, for me, the game is a lot more understood.
Dan Gray (17:21)
Interesting. Yeah, it kind of connects a little bit with Armstrong’s point about the potential need for like another form of capital for startups. You know, it’s something that is less geared towards rocket ships, you know, and more geared towards like, you know, commercial aircraft to stretch that metaphor, you know, something more repeatable and reliable, but still, you know, scalable and still a great investment.
just without that kind of risk. Is venture capital defined in addition to the whole structure of LPs giving funds to GPs who distribute blah blah blah? Is venture capital also defined by that risk-return ratio? If we change that risk-return, do we create something new or is that an opportunity?
Daniel Faloppa (18:15)
Yeah, and that’s really the difficulty, right? Because you had people shouting for the creation of this bucket for the past 20 years. I think for large limited partners like pension funds and endowments and stuff, the idea is buckets, right? They think, okay, I need 30 % equities, 30 % bonds and debt, and then 30 % alternatives, right? Or whatever the ratios are.
And then in that alternative, they have a percentage for crypto, let’s say a percentage for VC. And all these buckets are defined by risk-return ratios. Because again, the job of the fund manager in that case is also to hit the specific risk and return, and then if they can to make alpha on top of that. But job number one is to hit the right risk return. So if we move venture capital,
out of that bucket, do they still get the money? Do they still fit in the budget of their investors, basically? And that’s a good question, right? Because in my opinion, they could. Because if you think about a portfolio, if you have a portfolio that is two winners, that are huge winners and like eight bankruptcies, right?
Overall, you can still make the same return of a portfolio that does 50 % average winners and 50 % bankruptcies or 80 % little niche things and 20 % bankruptcies. So I think it’s possible to reform rather than start calling it something else or do something completely different.
I just think it’s gonna happen to be honest. also now if we come down from the unbelievable amount of money.
Yeah, it’s funny because it’s a long story. Today we have long answers, long-form answers. But the whole sort of money as a competitive advantage that started basically with Uber, right?
like also almost ended with Uber. That’s my feeling, right? I mean, it’s been used maybe in FinTech, but still, for Uber, it didn’t work. And for everybody else, I think it worked even less. Customers are… It’s so easy to switch nowadays between services that even if you buy your way to a large market share,
Dan Gray (20:50)
Yeah.
Daniel Faloppa (21:14)
you can lose it as fast as you bought it, basically. so I don’t think people are still thinking about capital as a competitive advantage that much.
So on the startup side, that thought is kind of gone. On the investor side, I think now that they’re going to start to feel maybe next year or so that they feel the divide from their own investors and maybe they’re going to have a bit more difficulties raising capital themselves, then I think the reforms are going to come.
Because at that point, if you still have everybody going after the same two startups at crazy valuations and not making any returns, yeah, I think change is going to come.
Dan Gray (22:12)
Yeah, the common rebuttal to that might be related to the mountains of dry powder. We’ve read endless articles about that, all this capital that’s waiting to go out there. people shouldn’t underestimate the fact that I think LPs might be quite happy if the VCs took a year off really seriously deploying, if they slowed down a lot after last year especially. And also it’s not unheard of.
for VCs to return money. I you know, I say return, they don’t actually get it, but to technically return the money to LPs. It’s happened before, I think in 2001 or 2002.
Daniel Faloppa (22:53)
Yeah, yeah, indeed. So, don’t know. I think like what we saw in the previous, yeah, after 2008 and 2010 in Europe when we had the government debt crisis was the corporate venture capital was the first to disappear, which I don’t think it has happened yet this time. Like it feels like they’re still very active and, but in general, like the moment, you know,
corporate smells downturn, the first thing to go is the startup division than everything else. So that’s kind of what we saw last time, really disappearing very fast, which this time is not happening. So it’s true that there is a lot of dry powder, but I think also another thing that is very difficult for people to think about is how fast does that erode with inflation as well, right?
Because if we keep on 15 % inflation, even if you have 100 million, that 100 million is going to be representing, I don’t know, 70 million in two years or something like that.
You know, so I think, and also, like all the inflation that we had so far, I feel like it’s difficult for people to price it, right? We saw in our data, like the average seed, the average series A, like pretty much like all across the globe, they went up like what, 30 % against a couple of years ago, even after this downturn, which is we refreshed our data about two months ago. So that was like,
discounting already quite a bit of these new valuations, let’s say. But still, it went up, think, 30 % on average. But if you consider inflation, it’s not that much. The net increase, the real increase of valuations hasn’t been a lot. But I think people still have difficulty adapting to that. And when they see…
When they see a seed round of like 5 million or 10 million, if we talk about the US, they still reference it with like four or five years ago when it was maybe like three and six or three and seven. And they think, well, valuations have gone up. Have they, right? Or has inflation just took over also that space? Because I mean,
Dan Gray (25:37)
Yeah, interesting.
Daniel Faloppa (25:38)
Yeah, 15
% for three years is, know, 50%, 55, what is it? Increase in prices, right? Yeah.
Dan Gray (25:48)
Interesting. And going back to what you were saying before about capital as a kind of competitive advantage. That’s very interesting. I hadn’t thought about that. was focused in my kind of cynical way on whether or not it was more to do with how, how VCs kind of punish themselves. You know, it’s like the biggest black mark of shame to miss out on a hot deal. that, you know, that’s kind of the impression you get.
So is that one of the reasons why there’s such an incentive to pile into deals? But yeah, the capital as a competitive advantage thing, which most recently probably reared its head with the rapid delivery stuff and maybe the micro mobility. They were all kind of like blitz scaling type companies raising a lot of money very quickly. And yeah, they were kind of the first dominoes to fall alongside Klarna and so on.
Daniel Faloppa (26:41)
Yeah.
Yeah. And, and,
Yeah, that’s true. Yeah, they kind of disappear. When I was in Valencia in 2019, right, we had eight different scooter companies, electric scooter companies competing with each other. And yeah, like, you know, I think, yeah, they were sort of adopting this idea of…
of Uber, of being first, being large, buying market share. But the thing is that it takes five seconds to download a new app. Even if you are in 4G, even if you’re not on Wi-Fi, nobody really cares anymore. So you find a scooter, it doesn’t matter which brand it is, you take a… And then, okay, now they… Even driving license validation and…
Dan Gray (27:29)
Mm-hmm.
Daniel Faloppa (27:40)
like payment information validation, it’s so fast that I ended up, and I’m sure a lot of other people, having all the apps and just looking for the first scooter and just opening the right app. I think that advantage was never really good. It was a good pitch for Uber because nobody has proven what was the stickiness of customers in a specific city, but they found out, I think…
fairly quickly that if somebody else already owned that city, it doesn’t matter if you own all the neighboring cities, they are still going to keep the customers in that specific one. The fact that you have more scale doesn’t really help you in winning that specific little battle. It’s a little bit like Coca-Cola versus Pepsi, and the fact that India, the battle is the other way around. It’s Pepsi versus Coca-Cola because nobody is drinking Coca-Cola or some other country.
Yeah, for FinTech, in my opinion, it has been a different story. FinTech, there’s so much money in the financial system that when you tell the financial system, like, hey, look, we’re doing the same thing that you know exactly how it works, but we’re doing it with 3x the margins than you are. Can we raise $5 billion, please? Sure, no problem. Because the pot that this is coming from is so huge.
Dan Gray (29:12)
Mm-hmm.
Daniel Faloppa (29:12)
that maybe not 5 billion, but when we talk about 10, 50, 100 million in that, when it comes from financial markets, from the banking sector, from that type of pots, it’s a different ballgame. VC is very large right now, but it’s like, what, maybe 5 % of the total, not even. don’t have the figures, but…
Like it’s very small compared to…
like tradition, like all the investment that actually happens in the world. So, yeah.
Dan Gray (29:50)
Mm-hmm. Yeah, indeed.
Daniel Faloppa (29:55)
So, yeah, different stories. It’s interesting to see how they play out, right? Because you think, we are seeing maybe something that is not very rational and it’s going to disappear, right? It’s going to disappear in year, in six months or something like that. But it actually takes a very long time. Kind of like, what was it? Warren Buffett that said the market can be…
irrational way longer than you can be solvent. Yeah, and it’s true. It took forever for valuations to erode this investor advantage and then maybe even reverse it during COVID. That’s why I’m happy. Well, I’m happy. mean, you know, things that make me happy that now we are in a level
Dan Gray (30:27)
You
great quote.
Mm-hmm.
Daniel Faloppa (30:54)
what I think is a leveled market for both players. Because we need both players to do great things.
Dan Gray (31:03)
Yeah, absolutely. more rational it is that you have to imagine, the better the outcomes. And those outcomes are good for everybody in the long run.
Daniel Faloppa (31:11)
Yeah, yeah, exactly. And,
Yeah, for example, for me, it’s still… I’m talking a lot today, but the biotech side is still… And now the deep tech, right? We still need to find the right way to finance those opportunities. They were getting financed during the hype because a lot of things were getting financed. But right now, we still need those things and we need to find the right way to finance them.
And it’s the same thing of the buckets, right? If VCs don’t have those buckets the same way that their LPs don’t have those buckets for them, then these ideas get underfunded. And yeah, just because of that. And it can last many years.
Dan Gray (32:00)
Mm-hmm.
Yeah, it’s it’s fascinating to me. I love the idea. You know, I’ve been quite used to the concept of like the VC power law and how they expect you know, one in 10 companies to be a winner, etc. My my eyes were definitely opened by a quote. I think it was an article from higher camps and tech crunch. He said it’s a sentiment that he’d heard expressed like a couple of times that a VC would rather see a company blow itself up.
than give like a 1.5 return. And like, it’s kind of insane, but you understand why and like, okay, fair enough. But surely there is an opportunity for this kind of sliding scale where depending on the environment or depending on, you know, the kind of industry focus that makes sense or whatever it may be, a VC, or if you want to call it something else, not VC, might say, okay, for this fund, we’re going to like move the dial a little bit and instead of
trying to find one winner, we’re going to try and find three winners and have an overall lower risk profile and expect a little less from those winners. Rather than this constant need to try and find the one unicorn or beyond unicorn, which it just seems like a kind of an arbitrary and limiting idea.
Daniel Faloppa (33:28)
Yeah, I don’t know. think, you know.
They’re after alpha, right? So for me in Europe, for example, for many, many years, it was the other way around, right? There were huge opportunities for the people that had that mentality, that had that mentality of like, we don’t want to do 1.5 % return, we want to do huge things. Why the opportunities were good was because nobody was doing them.
Dan Gray (33:37)
Mm-hmm.
Mm-hmm.
Daniel Faloppa (34:04)
Because
everybody was afraid or everybody was used to the fact that the startup would maybe become a national leader, maybe, and then it would get sold to an American company for 20 million max or something. And so that reflected all the calculations. And that for me actually stifled the development of those companies that could have…
Could have done, could have been. Think about SoundCloud. I don’t know, nothing else comes to mind. Spotify luckily managed, even though with a lot of help from the US still. A company that was doing that on the investor side was Rocket Internet, which despite the bad fame, and they did a lot of things that I think are not good.
Dan Gray (34:49)
Mm-hmm.
Daniel Faloppa (35:00)
either for them, for the environment, for the startups, for anybody, as it turned out afterwards. But one thing that I always thought was very good was they were the only ones in Europe that were really daring. They were really taking a startup and putting like 100 million in and trying to make it go head to head against the US counterpart, trying to do that bigger role. And it worked out okay for them on a few ventures.
And then, you know, like those are the problems caught up. But yeah, it seems like right now we are reversing the conversation, right? There’s so much capital for incredible risk, for like going after the high risk side, but there’s not enough capital for the middle risk, right? And the capital for the low risk is there because it’s like, it’s the banking industry, you you mortgage your home to open a restaurant, that’s still there.
Dan Gray (35:49)
Mm-hmm.
Daniel Faloppa (35:59)
with all its flaws as well. So the middle risk is, yeah, it’s maybe underserved. So I think, yeah, in the same way, yeah, I agree. There is now an opportunity on that, especially in the US. But also, yeah, in Europe, it depends, I think. It depends a little bit on the country. Some places are still on the conservative side, maybe.
But yeah, interesting, right? How it reversed.
Dan Gray (36:32)
It reminds me of a quote. I wish I’d written it down or made a note of it. You might know it. You might be familiar. I think it was from some famous hedge fund manager. he was basically saying, like every year when they got a fresh batch of associates, he would ask all of them, like, tell me, you know, a sector or an industry that is, like, grossly underpriced. And if they couldn’t give him a clear answer, he would say, like, you know, maybe this isn’t the opportunity for you. You know, maybe you should go somewhere else. because
Daniel Faloppa (36:59)
Okay.
Dan Gray (37:01)
And if you believe that the markets are efficient, then you will have no problem finding a job elsewhere. You have to believe that there is opportunity out there and it doesn’t have to be some wild startup idea. There are markets that are underpriced and that is an opportunity and it’s like a mid-risk opportunity.
Daniel Faloppa (37:17)
Yeah. Yeah.
Interesting. Yeah, I never heard that quote, but it sounds like a good model for their purpose, right? For their hiring targets. No, but indeed, that’s exactly right. So I think it’s going to correct.
But again, it could be that it gets corrected in five years. And the people that are focusing on that sector during these five years are the first ones to get to the gold mines. And they are the ones that make the abnormal returns. yeah, interesting.
Dan Gray (37:46)
Mm-hmm.
Sounds like there’s a very good case for starting middle risk ventures.
Daniel Faloppa (38:10)
Yeah, could be. It would require more data. I think for us, like… Well, for us, it’s interesting, right? Because we are really trying to make those conversations happen at any valuation. And hopefully, if the valuation is right for that risk profile of that company…
then it gets the investment that it deserves. hopefully we try to, or hopefully we manage to reduce this categorization and this investment in buckets towards a more fluid approach, a more alpha and data-driven approach. Yeah.
Dan Gray (38:57)
Interesting
yeah a nice way to bring this all the way back around to valuation right at the end. You know back to back to home turf
Daniel Faloppa (39:05)
Well, the reason why, for example, Biotech, I think, didn’t get a lot of the investment money that there was in VC is because for a long time, the whole SaaS startups were underpriced. When we say like…
like biotech doesn’t have the required returns that a VC needs. Well, if the VC cannot find those returns anywhere else, at some point it’s going to spread the resources. And maybe VC, again, we are creating buckets, but let’s just say investment money available. But of course, if the returns are skewed because they are irrational, if software…
Dan Gray (39:40)
Mm-hmm.
Daniel Faloppa (40:02)
is underpriced or was underpriced for a long time, then it just creates less opportunity for all the other industries. If we want to use the gold mine thing, if you have this gold rush, people that are really good at carving wood, they’re still going to go and mine gold because that’s more convenient, but then you’re going to end up under supplied of wood.
Again, it gets corrected, but it takes a long time.
Dan Gray (40:36)
Interesting. Yeah, I like tying tying that whole conversation about the kind of risk return profile the the middle risk opportunities Back to valuation is like the the kind of pivot that all of that moves around
Daniel Faloppa (40:51)
Yeah, that’s the really interesting type of conversation I think that we can have because the…
And yeah, the specific valuation of each specific opportunity is very interesting, right? And it’s extremely important for the players around that opportunity. But if we manage to have also a broader understanding of where are we right now pricing the whole startup sector and where are we pricing different subcategories in terms of industry, of course, but also in terms of stage and in terms of risk buckets as well.
What are we mispricing? Yeah, super interesting.
Dan Gray (41:39)
Yeah, it’s kind of how I’ve defaulted to explaining kind of the purpose of Equidam to people who aren’t particularly familiar. know, it’s a very difficult conversation to have, the easiest way to explain it is that we help people understand like the risk return of companies, I think.
Daniel Faloppa (41:59)
Yeah, yeah, yeah, not not your your six year old birthday party conversation type of. That’s true.
Dan Gray (42:06)
No, but it comes up more often than you think, which is a weird connection
to our last, our first episode where we were talking about how nobody likes talking about valuation. But maybe I’m maybe I’ve just reached the point now where I’m talking about valuation at people, whether they want to listen or not.
Daniel Faloppa (42:17)
You
You
No, no, think to some extent is what everybody’s talking about. When they talk about this type of shifts, this type of changes that are happening and this type of currents and trends, think a lot of them can be explained. Like when they talk about gaining power for founders, for investors and…
and so on. It’s just a discussion about valuation that doesn’t have enough data to happen. So hopefully we can, yeah, we managed to do that more.
Dan Gray (43:07)
Yeah, that’s the ball game for us.
Perfect. Well, I think we’ve covered just about everything we wanted to talk about today. Anything you think we might be talking about next time, anything you see on the horizon might be interesting.
Daniel Faloppa (43:13)
Nice.
I think this topic of how are startups changing, how is digital getting accepted and normalized, quote unquote, how is starting a digital company versus a startup versus a traditional company evolving over time and has been sped up incredibly with COVID. I think it’s a super interesting topic. And then
Dan Gray (43:32)
Mm-hmm.
Daniel Faloppa (43:55)
Ancillary to that is how do we finance these opportunities? I think today we did a great deal of talking about some of the solutions, but the idea is still out there. The right solution is still needs to be found.
Dan Gray (44:10)
Yeah, definitely
worth spending a little bit more time on definitely. I look forward to talking about that next time.
Daniel Faloppa (44:18)
Yeah. Awesome.
Dan Gray (44:20)
Perfect. Thanks a lot, Daniel. Talk to you soon.
Daniel Faloppa (44:23)
Thanks, Dan. Have a good one.