All Things VC - August Rundown

‘All Things VC’ focuses on topics relevant to Founders, GPs, and LPs in the venture capital world on a strategic level, i.e., valuations, market dynamics, fundraising, D&I, portfolio construction, and more. Individual investment areas (ClimateTech, SaaS, HealthTech, etc.) and their dynamics are not covered.

For an extended version of this newsletter, check out Coda Link.

Valuations & Performance

Silicon Valley Bank report (Link) highlights that we may be reaching the investment floor of the down cycle - Historically, 12-18 months into a down cycle, VC investment reaches a floor and is currently in the month 16th. Plus, there is a dwindling runway across the industry - in the next 12 months, only 46% of US VC-backed tech companies must raise.

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. Article from Terrence Rohan . According to him - there is an influential tide of founders on the rise that is opting out of the age-old path (Seed, Series A, B, C, D, E, etc, all the way to exit via IPO) and quietly plotting a new one that leads to building generational companies.

Every Internet / software company is aiming for profitability much faster / earlier than they would have 1-2 years ago. Post from Gokul Rajaram . As he mentions - Implications of this focus: (a)Top line growth is naturally slower than earlier; (b) It will take longer to exit; (c) Companies might only raise 3-4 rounds.

Private companies are valued lower than public companies for the first time in a decade compared on EV/Sales basis, with private-premium disappearing. The last that happened was around March 2014. Tweet from Nik Milanović with data from Morgan Stanley

James Heath wrote on VC performance and DPI. VC performance (Link) comes in small packages, i.e., it is much easier to have fund-returning exits in smaller funds, and the best-performing funds stick to the same strategy and don't try to become giant AUM machines. DPI (Link) - the elephant in the room for emerging VCs. LPs want it but also want outsized returns. But DPI takes time.

Fundraising, M&A & Exits

Startups are getting acquired on discount Yieldstreet on deal to acquire Cadre (Link). As Ryan Denehy tweeted (Link) - Lots of startups are caught in no-man's land at the moment. It's 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.

Startups are closing: The Wall Street Journal writes (Link) that investors are becoming more selective, threatening hundreds of startups that raised cash during the recent boom. Hunter Walk takes it further in his article and explains - Why We’re Heading Into the “Perfect Storm” of Startup Closures. As it turns out 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...

Fire sales are pending (Link). With all startups getting acquired and getting closed, we also have fire sales pending/happening. Hopin was acquired by Ring Central (Link). Immense challenges are facing capital-intensive startups, as seen by the collapse or retreat of several instant-delivery companies starting last year. Storage startup Clutter ran out of cash and sold at a deep discount (Link)

Secondaries news:

• Investors deal out tough love to founders at secondary auctions PitchBook Link). Investors compare buying private secondaries in 2023 to real estate in 2009. Despite discounts, sellers struggle to find buyers. Founders of flailing startups have begun blocking sales, refusing to accept valuation discounts and impeding the secondary market in individual sectors.
• TechCrunch wrote an article - Most secondary sales in venture won’t look like Tiger’s Flipkart deal. Tiger Global’s recent secondary deal, in which it sold its stake in Indian e-commerce giant Flipkart to Walmart for $1.4 billion, shows that the market has started moving. But this transaction shouldn’t be taken as a bellwether of what’s ahead for venture’s secondary market this year.

VC as a sector

VCs are finding newer investment areas - Fusion, Mining (PitchBook Link), and Defense (TechCrunch Link).

VC vs. Private Equity Excellent analysis of both asset classes. A must-read from Samir Kaji , as always.

• Article 1 - Look at the historical returns of Private Equity versus Venture Capital (Top decile/top quartile/bottom quartile). Takeaways: (a) Top Decile VC is the holy grail of alts at 3x+ Net TVPI and 40%+ Net IRR. (b) PE on average has a 3-4 year headstart on liquidity (4 years on average vs. 7 years) (c) Top Quartile VC vs. PE is essentially very similar when taking into account timing of cash flows
• Article 2 - One highlight/takeway - 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.

Can the past predict the future? The performance of a general partner's previous private investment funds can predict future fund performance to a degree, but that's only with at least eight years of hindsight. Article from PitchBook

Jamie Rhode, CFA (post link) on 'Reflecting on the first 20 commitments in our seed portfolio'. Of the many takeaways, two highlights caught the eye

• 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.
• 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.

Great posts on VC strategy and round-up current environment

Felix Haas 's post (Link) on the state of VC. He wrote on VCs - 'VCs take advantage of the new normal: Enjoying new normalized (not necessarily cheap) entry valuations and leveraging multiple Liq prefs and other financial techniques to extract more value off the table.' On startups - 'Growth rates of most startups are normalizing and slowing down. Brutal polarization between winners and losers in a major shakeup of startups. More rounds of layoffs are on the horizon.'

Jan Voss 's post (Link) - The VC Strategy “Goldilocks” Problem: Be innovative - but not TOO innovative. "The only way to compete is through differentiation in strategy."

Marc Penkala 's post (Link) How do VC's generate outsized returns? VC needs to be right and non-concensus.

Europe focus

Another U.S. VC jumping onto London bandwagon. This time it is IVP (Link)

Party's over for European unicorns as valuation dips (PitchBook Link). As written - "Muted deal activity among European unicorns has contributed to the contracting valuation of the overall group...The lack of new unicorns being minted—only five in the first six months of the year"

Could things be different in German startup scene? Axel Nitsch wrote a post covering KfW 's report - "VC investment volume is 25% up QoQ, Seed stage is as stable as ever, Q2 2023 likewise stable in terms of number of successful exits"

Special Topics

Diversity: Ilya Strebulaev 's post (Link) makes a strong case for diversity - '33% of all VC deals have founder and investor who studied in the same university'.

Samantha Katz 's post (Link) If companies and funds statistically do better under diverse management, it could be considered a furtherance of fiduciary duty to consider the diversity of leadership in the usual course of due diligence and in compliance with legal rules. Combine this with Forbes article (Link) on how we can still invest in diverse founders.

New SEC private fund rules

New rules to inflict some major costs on the industry, to the tune of $5.6 billion per year as Chris Harvey wrote on it (Link). Plus checkout his another long version article on the topic - here.

New SEC rules could arm LPs with more negotiating power (PitchBook Link)

YC’s new batch and their valuations

Garry Tan writes (Link) a post arguing for the valuation point.

45% of YC companies get to Series A and median ARR is $1M+, trending up. YC does have higher valuation caps but to me, this quality justifies it.

Erik Bruckner posted an excellent analysis (Link) based on 30 startups he met. Few highlights:

Valuations starting to reflect market conditions; $15M Post-Money Cap most frequent valuation · Despite pullback in valuations, rounds are not filling fast - the average round is ~35% committed · Founders prioritizing roadmap to Series A raising for~18-24 months runway · Lots of traction - 40% of startups are post-Revenue · 77% of startups are raising below $20M Post-Money Cap

Jeff Weinstein 's critical view on the YC startups' valuations.

YC startups that would have raised at $8M cap in 2017-2020 are today raising at $20M cap. In part this is due to the larger YC investment and MFN, but it also feels like these companies are being given bad advice and remain in denial that we’re not in 2021 anymore.

Podcasts and Videos

1. Venture Unlocked Podcast: The art of raising from LPs in an economic downturn with Mark Suster, Upfront Ventures (Link)
2. Nikhil Kamath ’s podcast episode on ‘WTF is VC’ (Link)
3. The essential podcast from S&P Global - Reset & Rethink: Assessing Venture Capital (Link)
4. Chris Douvos' Guide to Investing in Venture Capital in 2023 (Link)
5. 20VC Roundtable: Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses (Link)
6. AngelList ’s Dr. Abe Othman - Quantitative Investing in Venture Capital (Link)

The End