Inside View Of State Of The VC Market From Rosecliff Ventures Founder

by: Michael P. Murphy

Michael Murphy is the founder and CEO of Rosecliff Ventures, a venture capital firm.

So first things first, to address the elephant (or is it unicorn) in the room – is the VC market in a bubble? How does this market compare to the dot-com bubble?

The VC market is NOT in a bubble. This is something that is discussed a lot - so I'd like to get it out of the way. There may be companies that are overvalued - this is a certainty - but there is no bubble. Technology continues to have a huge impact on the startup community. Because of technology, we can do things we never dreamed possible... and we can do them faster and cheaper than anyone could have imagined.

I believe that we are in the very early stages of a Technological Revolution. This will change the way we work, eat, learn, travel, live, build, and communicate. Not every startup will be successful. There will be "unicorns" that go out of business - which is fine. The market will dictate which companies survive and which companies fail. This is what I love about the current state of the Venture Capital market. There are enormous opportunities to have a positive impact on our communities and make a lot of money in the process.

I'll age myself here - I lived through the Tech Bubble - and there is no comparison with today's VC market. Back then, you had euphoria. It is so easy, in hindsight, to identify the bubble. Today, you have companies winning and losing, thriving and dying, on a daily basis.

And one last thing on the bubble topic... all of the people calling for a "bubble" are actually helping to keep valuations in check. I'll start to get concerned when all of the headlines are saying "You Must Invest in VC Today."

On a related note – what do you think about the valuation of WeWork – is it justified? A lot of investors compare WeWork to publicly-traded peers like Regus and find there's no value there.

WeWork is an amazing company. We focus on early stage companies at Rosecliff Ventures, so we don't invest in companies at this part of the cycle. However, I know firsthand that WeWork is changing the way we think of office space. Some of our portfolio companies in our Venture Fund actually use WeWork offices. Adam Neumann and his team are doing a great job.

Now, here is the kicker. I do NOT know if WeWork is worth their recent valuation of $16 billion. I know that comparing them to Regus is not an "apples-to-apples" comparison. That is equivalent to saying that Amazon (NASDAQ:AMZN) is expensive when compared to Wal-Mart (NYSE:WMT). They are doing the same thing, but they are doing it very differently. Only time will tell if WeWork is valued correctly at $16 billion... but they are revolutionizing an entire industry right now.

You recently talked with AOL co-founder Steve Case about the “third wave” of the internet evolution – could you provide some of the background of that discussion and what implications it has for both you as a VC investor and investors in publicly traded companies?

Steve Case is an amazing part of American business history. It was an honor to talk with him recently. His book, The Third Wave, is a must read for anyone investing in the Venture Capital markets. Steve talks about the current state of the startup landscape and what he sees as the next step - the third wave of the technology/internet cycle. Without spoiling the book, Steve's view is that we are just beginning to see how much technology can change our lives for the better.

Where are you seeing value right now in the market – from a vertical or even a geographical standpoint?

We're seeing value in great founders everywhere. As a VC, I'm really investing in the founders. I need to be as sure as possible that the founders that we invest in share the same vision that we do. The areas we're seeing a lot of great deals in currently are Healthcare and EdTech.

We're currently invested in several companies in NY & California, obviously. However, we're also invested in companies from Detroit, DC, and New Orleans. And we're in discussions with companies from Oklahoma and Oregon.

Can you provide a brief overview of your investment decision-making process – what stage/verticals do you focus in, how do you source deals, what is your exit strategy, how do you limit overall portfolio risk, etc.?

We're early stage investors. We want to be in the first round whenever possible. This enables us to really get to know the founders and the business. It also allows us to help the founders as the business starts to grow.

Are we going to look back at 2016/2017 and say that was when virtual reality broke out from hype to reality? Which companies stand to benefit the most from it? Which could be hurt?

Virtual Reality is definitely having its moment right now. Honestly, I'm still trying to figure the whole space out. Obviously, you have Facebook's (NASDAQ:FB) Oculus. I'm not sure if the sector is going to be just a small niche or a huge part of our daily lives. I'm seeing a lot of companies in the VR space, but we haven't partnered with any yet. Valuations seem high to me. I think VR will be part of our future, but I'll wait for the right company at the right valuation. I see the biggest upside for the gaming industry.

What were some of your most successful portfolio companies and why do you think they were? On the flip side, what were some of your not so successful ones and what lessons did you learn?

One of our most successful investments has been JuicePress. We invested about 3 years ago at a $2 million valuation. Last raise valued the company at $110 million post money. And they've recently signed a deal with Equinox that will get revenues up to $100 million annually. The healthy living segment is booming - and it's only getting bigger. I think JuicePress has a lot more runway in the next 6-12 months. The management team has done a phenomenal job.

On the flip side, the mistakes are too long to list! There is a long list of great companies that we passed on... too painful to get into details! However, I believe we've learned a lot from past mistakes.

I noticed you're starting an incubator program – what are you trying to do with this?

I love the idea of helping founders with more than just money. Our incubator is designed to help founders with all aspects of building a company, from programmers to coders to sales help. To be clear, we are investing in these companies to generate profits. However, it is a lot more rewarding when we can say we had a small part in helping a company succeed

Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.