Demo Day Blues

At Indie Bio’s Winter 2017 Demo Day, the badges for investors who registered to attend covered two long tables.  Thirteen companies presented.

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Simple microeconomics explains why investors should avoid events like this.  There might be excellent companies presenting, but there are very unlikely to be excellent investments on offer.  There are simply too many investors chasing too few companies.  Excess demand + limited supply = high prices; i.e. lots of early stage companies raising too much money at unreasonably high valuations.  Investors – especially funds with a duty to provide adequate returns to LPs – will not find attractive opportunities in such an environment.

I write this knowing full well that many investors will still attend events like this, because FOMO.  People prize their ability to get into the hot deals, and the hot deals are the ones that are oversubscribed, in the news, the ones that everyone knows about. 

On the flip side, these demo days are an amazing opportunity for companies that want to raise money.  By bringing lots of investors into the room, and creating a sense of urgency, Demo Days are a catalyst for remarkably large “seed” rounds (a $5M seed round???).  Y Combinator is the pioneer here, and still the master.

This, of course, is a recipe for overshoot.  Companies that successfully raise at demo days will raise too much money at too high a valuation.  They will increase their burn rate, which will lead to raising more money at higher valuations.  This is not a sustainable path – they eventually either collapse (because they can’t raise the next round) or they sell for less than they raised, returning some money to investors (with no ROI) and nothing to founders.

Disciplined investors avoid hot deals, and find the undervalued gems that everyone else thinks are just rocks.  Disciplined entrepreneurs raise conservatively, prioritize revenue over equity as a source of financing, and don’t get out over their skis on valuation.