Xconomist of the Week: Habib Kairouz Foresees a Valuation Correction

A perhaps overused idiom in technology news is to proclaim that the latest bubble is about to burst. While there have been flashy stories about the rise and stumblings of some high profile startups, Habib Kairouz, a managing partner with venture capital firm Rho Ventures in New York, says he believes the market is entering a valuation correction phase, rather than the doom and gloom blowup scenario others see in their digital tea leaves.

Rho makes seed stage and growth equity investments in companies across the country and abroad. Some of the firm’s recent investments include Totsy, Mersana Therapeutics, and JustFab. Kairouz spoke to Xconomy about Rho’s investment strategy and activity in the market he is a bit leery of.

Xconomy: What trends from the innovation scene have you been watching closely this year?

Kairouz: From a capital markets standpoint, we’ve been concerned for a couple of years—most specifically in 2012—about some of the valuations we’ve seen in social media and to a lesser extent software-as-a-service companies. We’ve been concerned about the late-stage valuations for some of the rising stars that have been done with large rounds.

Even though we’ve seen interesting IPOs from companies like Facebook, Zynga, Groupon, and Pandora, there’s been some disconnect with the prices paid for some of these companies in the private market prior to the IPOs. Who’s right and who’s wrong, I have no idea. We’ve been focused on where we’ve seen a gap in the marketplace in the Series B to C stage. We think there’s been a flood of capital at the seed level with too many companies getting funded, which is healthy in terms of innovation but not necessarily promising as to the number of companies getting follow-on capital.

It is more interesting for us as investors to come in during the Series A or Series B rounds before they are proclaimed to be stars and the valuations rise to very high levels.

We’ve had a recent exit with OMGPOP, which is in the gaming space. We’ve made … Next Page »

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