New York is getting awfully crowded these days. Accel has opened an office in the Big Apple this year. So has Canaan Partners, Matrix Partners, and, now, New Enterprise Associates, which already has a handful of investments in local startups and wants to demonstrate its “continued commitment to the area,” as NEA partner Tony Florence told VentureWire yesterday.
What do longtime New York-based VCs think of their enthusiastic new neighbors? Hoping to find out, I called Alan Patricof yesterday afternoon. After all, Patricof was among a small group of investors who had the scene to themselves in 2006, when he founded Greycroft Partners, an early-stage digital media-focused venture firm. It’s hard to remember now, but at the time, many big-league VCs still complained that nascent Web startups couldn’t move the needle enough.
That was just fine with Greycroft, which scored an early stake in the parent company of paidContent.org, for example, and the Huffington Post. The former sold for a reported $30 million to The Guardian Group in 2008 after raising just $3.3 million in Series A financing from Greycroft. Earlier this year, the Huffington Post sold to AOL for $315 million. It had raised just $37 million. (Greycroft — which has raised two funds totaling $205 million — participated in the juggernaut’s Series A and B rounds.)
What a difference five years have made, suggests Patricof, who spoke with me from Greycroft’s Madison Avenue offices. Our conversation, edited for length, follows.
How much harder is your business today, given how many firms have flocked to New York and how seemingly overheated it has grown?
Well, our business hasn’t become harder. Just the opposite is true; the concept I had when I started Greycroft has been confirmed in spades. What’s happened is the market is much harder. It’s getting increasingly hard to find companies at an A round with pre-money valuations of $10 million, [where the firm feels most comfortable]. I don’t want to say it’s irrational exuberance, but there’s certainly an excitement level that’s evolved over the last six to 12 months that’s created a level of interest around companies we focus on, and that’s influenced the expectations of young entrepreneurs.
How have you adjusted?
We’ve [funded companies with higher than] $10 million [pre-money valuations] in several cases. We’ve also reached earlier in the development cycle, making a series of seed investments at earlier stages and lower valuations.
Are you at all concerned that valuations are too high or that they won’t hold up?
How far will they spread and how long will it last? It’s a big unknown at this point, but we have to be realistic about valuations going in and exit valuations and not get carried away by the euphoria at the moment. The reality is that something like 95 percent of deals in the digital media world over the last seven or eight years have [sold] for less than $100 million. We certainly hope and expect that some of our companies will be valued at well over $100 million. We have three or four companies in our portfolio right now that are in excess of that number, and of course, Huffington Post sold for [roughly] $300 million. But we try to be realistic about the environment and where transactions are taking place.
Which deals did you participate in at a $10 million plus pre-money valuation, and which companies in your portfolio are worth multiple hundreds of millions of dollars in your view? I’m guessing Glam Media is one?
Pulse and Klout were both above $10 million pre-money valuation levels, but I believe both are the kinds of companies with exit potentials well in excess of $100 million if they continue on the trajectories they are on right now. [Pulse is a visual news reader for the iPad, iPhone and Android that raised $9 million from Greylock and Lerer Ventures last month. Klout, which measures social influence online, has raised $10 million; Greycroft participated in its $8.5 million Series B in January.]
As for [your other question], I won’t comment on specifics. You’ll have to take your own guesses, though to a certain extent, no one knows. Several companies have been in our portfolio for a while and have grown in terms of revenue. We’ll see if they go public or get acquired at large prices. None of us expected to see an exit from Huffington Post when we did, but conditions change and you have to go with the flow.
Speaking of which, have you had to slow your pace with the landscape shifting as it has?
Not at all. I just got out of a Monday partners meeting that started at 11 o’clock and ended at a quarter to five. It’s a very active time, and businesses have never looked better. I think we’ll do 12 full-size investments this year and three to six seed investments. So we’re full out.
So you don’t think there’s a bubble in New York, I take it.
I didn’t say that. I am concerned that pre-money valuations are growing, and that people are [looking at] the public valuations that are in the paper every day and…concluding that the world has changed dramatically. And I don’t think it really has. The companies that can potentially go public are a very limited subset of the overall venture market. VCs invest in a couple thousand new companies every year, and according to one study that I saw recently, only one percent of them grow to exceed $100 million [in valuation] companies. So what’s that? Twenty companies each year can be potentially eligible [for that club]. You’ve got to be realistic about the marketplace.