Why the Coming Correction Will Be a Good Thing

By Staff | April 12, 2016 | Rally Health

Unicorn illustration

Zaw Thet of Signia Venture Partners stopped by the Rally office recently to share some insights into the year ahead during one of our bi-monthly All Hands meetings. Even if you don’t follow tech blogsVC posts, or the business press, you’ve probably heard the warnings — stocks are fluctuating, certain tech and internet companies failed to reach their private valuations in 2015, and some startups are struggling or selling. And that’s making things rough not just for unicorns, the nickname for private companies valued at a whopping $1 billion or more, but other companies as well. Even Apple Chief Executive Tim Cook is talking about “extreme conditions” unlike anything he’s ever seen, according to the New York Times.

But Zaw, a serial entrepreneur and investor best known for founding the mobile messaging shop 4INFO and early stage venture firm Signia, was downright upbeat. "A correction is a really good thing,” he told the Rally team. “We need it to happen."

Zaw’s central message, which we were very happy to hear, is that companies with strong fundamentals are the ones that survive downturns. In fact, many of them come out stronger, as downturns allows them to more easily dominate the market and give them a bit more time to prove out their model.

Which companies will do well? According to Zaw, the ones that have:

  • A strong product/market fit. This is usually shown by strong adoption numbers or early user feedback.
  • Great growth. Real users and high retention rates are better than inflated MAUs.
  • A profitable business, and money in the bank. This is especially true for companies that don’t just have it but actually manage it well.
  • A reasonable burn rate. They spend their money wisely, and project what’s needed versus what’s wanted.

Which companies will struggle? Companies with:

  • Unrealistic growth targets. “Ambitious goals are OK, but companies need to be realistic,” says Zaw.
  • Hiring too quickly. “It leads to a broken culture.”
  • Premature valuations. “The list of unicorns is long, and most raised valuations they needed to grow into.”
  • Careless spending. “This usually isn’t parties or perks. Instead, it’s creating long-term liabilities like excess headcount or office space that would dramatically affect the company’s culture if it downsized.”

Zaw is an interesting guy, and Signia is an interesting venture capital firm. He grew up in Madison, Wisconsin, and came to Silicon Valley as a Stanford freshman, just in time for the first dotcom boom. He left to co-found GetInventory, a search engine and retailer exchange, and when the bubble popped, he went back to school to finish his undergraduate degree and then attend business school, becoming the youngest person to receive a Stanford MBA at the ripe old age of 23.

He co-founded Signia in 2012 — their first fund was $77 million, and their second one is a similar size. That may sound like a lot of money but it’s not huge by Silicon Valley standards. However, its partners have personally contributed over 25% of the fund’s capital out of their own money, which means they all have serious skin in the game.

While Signia is not a Rally investor, it has backed other digital health companies, including Kurbo Health, which helps fight childhood obesity. Digital health has been a white-hot sector the past few years, accounting for about 7 percent of investments in 2015, or $4.5 billion, according to Zaw.

But now, health investors expect the so-called “tourist VCs” to flee from the digital health space. As a Fast Company headline put it last month: “Dumb Money for Digital Health Will Vanish As Quickly As It Came In.”

“There’s so much sizzle, but very few companies have the steak,” said Zaw.” As the sizzle goes away, it will put more focus on companies who do have the steak.”

At Rally, this means being smarter and more disciplined than ever. While we’re growing fast, we’re careful to not expand too quickly, and we are focused on maintaining our culture and sense of urgency, while onboarding millions of new users and building tools that drove a 347 percent increase in engagement for one client.

“Our company is only five years old, but even though we’ve had tremendous success quickly, we want to stay hungry,” says Rally president David Ko. “We are definitely in it for the long term.”


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