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Summary
). More than 80% SAFEs have a cap (
). Investors are telling some startups to close shops (
). How sector plays a role in pre-seed valuation (
). While it is easy to draw comparisons to the 2001 dot-com bubble, things are different (
).
). VCs are returning money to LPs (
) As there is no analog to beta, VCs incline more towards intangibles (
). How to raise capital for your Fund (
).
). 36% drop in exit count from 2021 to 2022 and a 91% drop in exit values over the same period (
).
). Promising early-stage deeptech founders increasingly feel they can’t build something big in Europe (
).
). Next, for some reason, VCs were bashing TAM - that too all at once (
).
This month's ‘All Things VC’ edition focuses on topics relevant to VC GPs & LPs on a strategic level, i.e., valuations, market dynamics, fundraising, D&I, portfolio construction & more. Individual investment areas like ClimateTech are not covered in this collection.
Tweets
Elizabeth Yin
2) So much so that @ericbahn and I did 700+ mtgs to raise our $11.5m fund. We asked *EVERYONE*. We asked my eye dr. Our lawyers. Our bankers. Ppl we met at friends’ houses and at parties.
We didn’t try to convince ppl who were not really bought in. We moved on & found new leads.
Samir Kaji on ‘the right VC model’
When I am talking to a GP, I'm also trying to assess how they make me "feel"? If I feel inspired or excited, it's easy to draw a line to this feeling passing to founders, other LPs, and co-investors. This does map back to authenticity.
VCs on biases
Tweets on market sentiment, valuations & startup fundraising
VC meme’s
Reports
AngelList live valuation tracker
ChartMogul - SaaS Retention Report
Research on ‘Maneuvering the odds: The dynamics of venture capital decision-making’
Each year venture capitalists receive hundreds of investment proposals, but is every proposal received by a venture capitalist processed equally? In this study, we show how the source of a proposal and the available amount of investment capital, factors that are not contained within the pages of a proposal, may influence the investment decision-making process. Our results highlight the impact of being referred to a venture capitalist by a trusted source, as more time is spent evaluating these proposals and they proceed further along in the process. We also find that venture capitalists process proposals more quickly as the capital in the fund is invested over the life of the fund.
NFX - Founder Sentiment Report: The Post-SVB Edition
NVCA - 2023 Yearbook
Highlights of the U.S. Venture Industry in 2022
- 4,825 companies raised first-time funding (the first round of equity funding in a startup by an institutional venture investor) and attracted $23.7 billion, with both metrics comparing favorably to 2021 records.
- First-time deals accounted for 31% of the total deal count and nearly 10% of the total deal value.
- Median fund size of $40.6 million was at a 13-year high and total AUM was at $1.1 trillion.
- Exits decreased precipitously, with a 36% drop in exit count from 2021 to 2022 and a 91% drop in exit values over the same period.
Articles
Their argument is that some startups simply raised too much, at valuations into which they will never grow, and that clean, well-planned exits are better for everyone than messy ones. After all, the money could be invested in something more impactful. Importantly, the founders’ time could also be focused on more productive endeavors, greatly improving their mental and emotional well-being.
Economist on ‘tech slump encouraging VC to rediscover old ways’
The downturn inevitably draws comparisons to the dotcom crash of 2000-01, when deep winter set in and vc investments froze. Luckily for both founders and their backers, conditions are not so frosty today. Startups’ balance-sheets are stronger than they were 20 years ago; valuations are not quite so detached from revenues. In America alone, venture capitalists have about . Nonetheless, the industry that is emerging from the and into an era of dearer money looks different from the one that went into it. In many respects, vc is returning to the ways of decades past.
Kauffman Fellows - The Hard Questions Venture Capital GPs Need to Be Prepared For
In evaluating a manager, LPs are thinking about the job of a VC: e.g. sourcing, picking, winning, and helping. A few questions LPs might ask are:
- Do you have interesting and unique deal flow?
- Do you have a thoughtful and differentiated point of view or thesis?
- Do you have a strong reputation for treating founders well and being able to add value?
- Are you an expert in a certain industry or business model?
- Are you able to win deals in a competitive market?
- Does the portfolio construction make sense for the strategy? Do you have sufficient bandwidth to support the strategy? How do you get leverage?
- How will this be at least a 3-5x fund?
WSJ article - Tiger Global Writes Down Venture Funds’ Bets by 33% in 2022
The disconnect is partly explained by the tricky process of valuing private companies. Managers have wide discretion; they typically rely on recent transactions, fundamentals like revenue and the performance of comparable companies. They also often hold preferred stock, which gives investors protections if a company sells at a discount and often decreases in value at a slower rate than common stock.
Managers generally say they hew to consistent valuation processes, regardless of market cycles, that involve independent assessments of companies’ worth. Some question if public markets are a valid benchmark, contrasting the volatility of public markets with the longer-term nature of their investments in private companies.
Chamath Palihapitiya - Advice to Startup Founders and Employees
Measuring risk and correlation in VC
In the public markets, one commonly used method of interpreting risk is a stock’s “beta” – which is the measure of the stock’s volatility relative to its underlying index. Stocks with higher beta are riskier, but investors will underwrite a higher return.
In venture, there is no meaningful analog to beta. The absence of publicly available data makes assessing risk much less clear cut, which is why we tend to place greater weight on intangibles like founder quality, product-market fit, and cyclicality, to name a few.
However, in this new economic regime where broader markets are no longer always trending up and to the right, we believe that portfolio correlation is an important component of risk management, as well as a decent analog to public market beta.
HBR - Geopolitics Are Changing. Venture Capital Must, Too.
A New Era of Investment
Over the last 30 years, venture capital has been both a contributor to, and beneficiary of, the rapid pace of innovation that defined the era of ‘economics over politics’. Participants across the industry have come to expect a broadly favorable risk/reward trade-off defined by high returns on relatively short-duration investments that require limited governance. In the era of re-globalization and global resilience, however, these models will no longer suffice. The complexity of today’s challenges and the gravity of the implications of innovation will necessitate a new paradigm for investment — one that prioritizes greater collaboration and a longer-term mindset to build enduring companies.
Sifted - The other funding gap: it’s not just unicorns that are leaving Europe
Launching a deeptech venture in Europe can feel like deliberately choosing an uphill battle. Policymakers are uncooperative and unapproachable and regulation overly burdensome — so going international is a way for founders to hedge their risk.
News & Podcasts & Videos
Peter Walker - on various VC & startup topics
1. 88% of SAFEs raised so far in 2023 have a valuation cap
2. 51% of them have a discount
3. 41% have both a val cap and a discount
• Biotech companies raise the most money at the highest valuation caps - but not a lot of them actually get funded.
• SaaS is middle of the pack in val cap and total raised, but by far the biggest category. • Investors seem less enthused about food startups lately.
Michael Jackson’s post on EIC funding and structure
There are several €1B+ European government connected deeptech funds being raised, or which have recently raised, and none have been properly built. No one at the top of these initiatives understand entrepreneurship, startups, or funds. None seem like serious endeavors. They get money allocated before having a team, then cobble together a team as if they're making a band haphazardly.
TechCrunch : Investors propose struggling founders to close shop
Their argument is that some startups simply raised too much, at valuations into which they will never grow, and that clean, well-planned exits are better for everyone than messy ones. After all, the money could be invested in something more impactful. Importantly, the founders’ time could also be focused on more productive endeavors, greatly improving their mental and emotional well-being.
Africa VC news: Naspers Limited shut down
Podcast: Diversified VC Portfolios Find Big Winners (Verdis Investment Management)
Podcast: Upfront Ventures
Podcast: The future of venture capital and private markets with Allocate Co-Founder & CEO Samir Kaji
What is covered:
- Where is venture now and what the future looks like.
- Alpha vs. Beta in venture.
- Why VC should be included in many investors’ allocations.
- How LPs can approach venture in this dynamic market.
- How VC funds have turned into platforms, much like private equity, and what this means for the industry.
Special Collections
Silicon Valley Bank
An increase in startup mortality rate, which has been , is not necessarily bad for the ecosystem, according to the university endowment LP. If SVB's collapse accelerates the weeding out process, it only benefits the tech industry. "The sooner entrepreneurs and employees realize that they are working hard to build something that isn't viable, the sooner they can put their skills to use in better companies," the university endowment LP said.
VCs voicing against TAM - all at once
Feedback
Do you have feedback, or an important article/ tweet /report to share - reach out 👉🏼
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