Skip to content
More
Share
Explore
All Things VC - August 23' Edition
Summary
Valuations & Performance
)
)
)Fundraising, M&A & Exits:
)
)
). Why We’re Heading Into the “Perfect Storm” of Startup Closures (
)
). Most secondary sales in venture won’t look like Tiger’s Flipkart deal (
)VC as a sector:
)
)
)What’s happening in the EU:
) VC investment volume is up and number of deals stable.Special Topics:
). Yes, You Can Still Invest In Diverse Entrepreneurs: Here’s How (
)
). New rules will inflict costs for the industry (
).
Tweets
On power law in VC - data on 11,350 companies backed by 259 funds from 1986 to 2018
So what's the takeaway from this data? It again reinforces just how much of a power law business venture capital is. It's the top 1% of companies that ultimately drive the majority of VC returns.
‘what good/great TVPI and DPI look like before fund term’
Meghan Reynolds - VP LPs voices
Nik Milanovic - Private companies are valued lower than public companies for the first time in a decade.
The Investments Lawyer - LP issues and softness in the market
Carta - Which startups are being acquired in 2023
Startups being acquired in 2023
Startup funding in 2023 is tough. Acquisitions are low with Series A startups being acquired most.
Martin Tobias - on down rounds and recapitalizations
Simon - on VCs adding value (pun)
Articles & Posts
Gokul Rajaram on implications of focus on profitable growth
Every Internet / software company I've spoken with, is aiming for profitability much faster / earlier than they would have 1-2 years ago. In many cases, this means getting to cash flow (CF) neutral with $25-50M raised, versus $250-500M earlier.
FT - Venture capital funds are mostly just wasting their time and your money
Any investor lucky enough to pick a top-performing VC was awarded with an IRR 'off the scale' relative to all other strategies. Mostly, though, the few big winners were funds that either backed tech giants pre float or caught 2021’s Spac boom
Trohan - Raise Less, Build More
The average startup today has 5x more VC capital available than its counterpart did in 2013 and there is no conclusive proof that 5x more money is required to build a successful business.
- Raise a seed round with the primary aim of becoming profitable (as opposed to the primary aim of raising a Series A) - Raise a venture round from a top fund, gaining one top board member, but from there, opt out of raising a series of rounds - Raise smaller, disciplined amounts of capital, or delay raises if the company is profitable and growing well
The Information - Asset manager Yieldstreet is in talks to buy Cadre, a real estate tech firm whose valuation has fallen sharply.
Ryan Denehy wrote a tweet on the news
Lots of startups caught in no-mans land at the moment. It's really *not* a bad idea to sell to another larger, stronger startup. All stock and at a big discount is still MUCH better for everyone than dying a slow, delusional death over the next 24-36 months.
Aileen Lee - Revisiting the Dot Com Era — What’s Similar, and Will Tech’s Recovery Be As Slow and Painful?
A summary of some parallels between dot com and now:
— The promise of exciting new technology innovation (and of riches) attracted lots of talent to found, join and invest in startups
— Unprecedented dollars flocked to VC. This drove up valuations, causing “” — over capitalization and speculative investing.
— To survive the long winter, companies figured out how to do more with less. They got back to basics (the new “B2B”?) — carefully managing burn rates, cash, revenue quality, customer retention and margins, becoming more capital efficient
— Layoffs, bankruptcies, scandals and lawsuits unfolded over years, not all at once
VC isn't about predictions or patterns anymore — here's how it's changing
— VC is no longer a game of prediction and pattern matching. "VC by CRM" is dead. For funds to really stand the test of time, investors need to generate insights.
— One huge differentiation in this era is the number of founders who are coming from academia rather than industry.
— The pace of innovation also means that VCs are having to radically change their methods of assessment for new deals.
— Fundamentally we need to think differently about what purpose data collection is serving, which will enable us to move from producing predictions to producing insights. Prediction is entirely a function of data, there is no subjectivity involved.
Ryan Hoover - You owe your LPs good updates
takeaways on writing LP updates:
Samir Kaji - VC vs Private Equity data by the numbers
— A VC fund portfolio needs 10-20% of the portfolio to be top decile (with 10 funds, 1-2x) to fully justify risk/return. From a DPI standpoint, this is likely through smaller funds, but not necessarily on Net IRR
— Top Quartile VC vs. PE is essentially very similar when taking into account timing of cash flows (only 2% delta in Net IRR, TVPI multiple difference of .3x). Slight outperformance in VC.
1) Persistence of returns is present, but fairly weak these days relative to the past. VC has shifted so much with fund sizes, management team transitions, competition, etc. Very hard to predict performance simply based on the past.
4) Benchmarks treat VC as a monolith, and typically include funds of all types in a sample set.
5) Survivorship bias: Sample sizes are often limited, and often include only self-reported numbers. This often skews benchmarks and results in survivorship biases being present
Jamie Rhode - Reflecting on the first 20 commitments in our seed portfolio:
— Curating, not selection, is a helpful tactic when sourcing investments. Of the 35 unicorns in our first seed portfolio, 14 unicorns came from first time funds.
— Managers with the skill to understand probabilities and how to play the venture odds in their favor have shown to capture more outliers in our first seed portfolio. Funds that captured 5 or more outliers in our portfolio invested in north of 70 deals.
— Staying grounded in first-check investing is challenging and I think this is due to behavioral biases, agency issues and duration.
— Consistently investing in every vintage year, taking your time to do proper due diligence, holding your opinions loosely and spending time to make sure your long-term mandate aligns with the GPs long-term vision can help lead to a successful venture program.
James Heath - on VC performance and DPI
VC performance comes in small packages
Fund size matters. It is much easier to have fund-returning exits in smaller funds.
Access matters. If you aren't accessing the best performing funds, the asset class isn't worth the risk.
The best-performing funds stick to the same strategy and don't try to become giant AUM machines.
DPI - the elephant in the room for emerging VCs.
Fund managers are feeling the pressure to provide cash on cash returns to LPs to A) show realised performance and B) support the raise of future funds.
But DPI takes time. The power law takes time.
TechCrunch - Fund of funds could be the perfect vehicle for backing diverse, emerging fund managers
— If the problem is that diverse fund managers are riskier, for whatever reason, then the FoF model should give an added layer of protection should everything go astray. Typically, FOFs do good diligence, meaning the level of diligence will be lower for the LPs looking to invest in the funds backed by the FoFs. This might be a plus for some investors.
— “We’ve seen firsthand that it can take diverse-led venture firms over twice as long to raise their funds.”
LP Strategy – Why You Should Take an Index Approach to Startup Investing
LPs portfolio strategy in VC syndicates plays a much larger factor in determining LP returns than realized.
In layman – the odds are you’re not picking a fund (or multi-fund) returner with only 10 early stage investments. You should be highly diversified to better ensure exposure to the fund returning outlier/s.
Despite a common understanding of power law in VC, we still very frequently see LPs make a small number of concentrated investments in early stage companies – they invest too much too early and into too few companies.
Richard Abrahams - on doing an analysis on funds and LPs could be better off charging 0% management fees and a higher carry.
For the LP, they're remarkably similar. They are slightly better off with lower management fees and a higher carry; however, it's negligible in comparison to the impact on the fund manager, who is materially worse with the higher management fee, lower carry scenario.
Potential impact of lower management fees: — Lower management fees leads to a lower budget and could make it more difficult to hire the right people (whether due to quality of experience).
Impact of higher management fees:
— The higher the management fee, the more you incentivise larger funds, or quicker deployment and raising of new funds. If you're an LP in the fund, you want to ensure that the fund managers are not just deploying into opportunities but into the *right* opportunities.
TechCrunch - VCs should give up on the winner-takes-all approach to investing
If you think about it, most established categories look more like a handful of winners than just one. In the travel sector, there is Booking.com, Trivago and Kayak. Even established categories like credit cards see both Visa and Mastercard dominating the market.
But I do get why venture clings to its winner-take-all mentality. VC funds can’t exactly invest in their favorite four companies in a category that are all competing directly against each other. That is not only bad practice, but it also risks leaking proprietary information.
“You have to bet on a single company or a single theme or subsector or thesis that you believe is going to break out. That is where the art and science in investing comes out,”
she wouldn’t be surprised if this notion of investing in markets where a number of players can exist and thrive may become an even bigger part of the venture conversation, given how antitrust and competition regulation in the U.S. is developing.
WSJ - Startups Are Dying, and Venture Investors Aren’t Saving Them
Investors are becoming more selective, threatening hundreds of startups that raised cash during the recent boom
According to Jenny Fielding: Good news: Strong companies will survive and suck up even more market share, capital and talent! As the stock market rebounds, inflation eases, interest rates stabilize, the macro will improve. This will bring more M&A and IPO activity and therefore much needed liquidity into the system.
- Why We’re Heading Into the “Perfect Storm” of Startup Closures.
There are three distinct cohorts of shutdowns occurring
Startups Past: ....we’ve got startups shutting down in 2022-24 that shouldn’t necessarily have made it this far – they’re 2017-2021’s normal failures clustered into current times.
Startups Current: Companies funded during the last few years that didn’t accomplish their necessary milestones for incremental capital....
Startups Future: These companies have capital left but not necessarily a clear path forward, or enough team/executive/investor momentum to continue together...
PitchBook - Investors deal out tough love to founders at secondary auctions
What we've heard from some investors [is] that buying private secondaries in 2023 is like buying real estate in 2009
On the seller's side, traditional VCs are under pressure from their LPs to return some liquidity and are taking to the secondary market to sell shares in record numbers.
Even with severe discounts, sellers are still finding it difficult to find buyers with appetite.
A new phenomenon has emerged in secondary trading. One quirk of the secondary market is that many private companies have the right of refusal over secondary share sales. Now some founders of struggling startups have actually started to block share sales. Founders refusing to accept their valuation discounts have stifled the secondary market in some segments
VC strategies
Jan Voss - The VC Strategy “Goldilocks” Problem: Be innovative - but not TOO innovative?
Marc Penkala - How do VC's generate outsized returns? VC needs to be right and non-concensus.
News & Reports
SVB - State of the Markets H2 2023
$182B US VC investment in trailing 12 months. After 18 months of decline, VC investment levels show signs of stabilization in line with 2019-2020 levels.
Cautious optimism: Historically, 12-18 months into a down cycle VC investment reaches a floor. While US VC investment levels may still fall, they are showing signs of stabilizing.
Dwindling runway across the industry: In the next 12 months, only 46% of US VC-backed tech companies must raise — which is lower than historical pre-pandemic levels.
CBInsights - Tech Valuations Q2’23 Report
A few key takeaways from the tech valuation landscape in Q2’23 include:
Business Insider: Union Square Ventures slashed the value of 7 of its funds by 26%
— This year, the firm marked down the value of seven of its funds by nearly 26%, a far steeper writedown than many other firms
— USV's markdowns should not be read as a knock on the firm. That 2012 vintage has already returned more than $592 million from a $25 million UTIMCO investment
— VC is a long game where it can take upwards of a decade for bets to pay off
The Information - The Unicorn Fire Sales Ahead
— Hopin, one of the most iconic startups of the pandemic era, said this week itits virtual event and webinar hosting business to RingCentral.
— These kinds of emergency M&A deals are the new normal. It’s a painful scenario for all parties involved. In Clutter’s case, its sale is also an example of how startups struggle to raise more VC —as well as immense challenges facing capital-intensive startups, a story foreshadowed last year by the orof several instant-delivery companies starting last year.
— Hundreds of other unicorn startups will likely wrestle with a similar fate: They must find a shot-gun marriage or face collapse.
New VC areas of activity
TechCrunch - Dan Gwak of Point72 Ventures on why defense tech is becoming the next big thing for investors
PitchBook - Why VCs are suddenly flocking to mining deals
Want to print your doc?
This is not the way.
This is not the way.
Try clicking the ⋯ next to your doc name or using a keyboard shortcut (
CtrlP
) instead.