Xconomist of the Week: Habib Kairouz Foresees a Valuation Correction

8/16/12Follow @jpruth

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because they met a very charismatic entrepreneur with an interesting idea. I worry that many angel investors will lose money. Some of them have been very successful because they are connected to networks of entrepreneurs. But many of these companies are not going to get the follow-on, institutional rounds. I don’t worry about that as much because the seed category represents less than 5 percent of venture capital dollars.

X: Do you see any long-term repercussions of this valuation correction?

K: I think we’re going to an environment that is much more positive for the asset class, entrepreneurs, and innovation than in decades. Venture capital as a category is rebounding very nicely. You have fewer competitors going at it in terms of the number of firms investing, and returns have been picking up in the last couple of years. From an innovation standpoint, we see an incredible amount of exciting new ideas in Internet, wireless data, connected TV, video, social media, and e-commerce. The last decade has been about digesting and sifting through the survivors of the last bubble. The quality of entrepreneurs is getting better every year. In New York back in the late 1990s, 90 percent of the entrepreneurs we met were first-timers trying to jump on the gold rush bandwagon. Now maybe 20 percent of those entrepreneurs are still in the game. They came back, were successful with their second ventures, and then moved onto their third and fourth ventures.

X: Are there other parts of the country where new innovation hubs are emerging?

K: New York is becoming our second major market [after Silicon Valley]. Our portfolio here continues to grow. We’re doing less in markets like Texas and Boston than we did in the 1990s. We’re doing more in emerging technology markets like Canada. We opened a dedicated office and fund in Montreal. We’ve raised two funds there so far. We’ve also invested opportunistically in companies overseas in Israel, Paris, and London. We’ve looked at companies in Brazil. Typically, those companies want a path into the U.S. market. Even if they keep their engineering and early-stage operations overseas they ultimately end up opening a front office in the U.S.

X: What trends and sectors will you watch in this latter part of the year?

K: My focus right now is connected TVs: the applications and innovations that are going to come out from that wave of disruption. We’re spending quite a bit of time on wireless data and applications. We had a big investment in Tapjoy, which is a platform for the discovery of social and mobile games. We’re not chasing companies that have already been declared winners in their sectors. We focus on the ones that need to achieve some milestones before they hit their inflection points.

João-Pierre S. Ruth is the editor of Xconomy New York. He can be reached at jpruth@xconomy.com and followed on Twitter @jpruth. Follow @jpruth

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