Category: risk
November 19, 2024 SaaStr : The Arguments For Not Raising at a Unicorn Valuation
There are significant downsides to raising at $1B. Especially today: #1. It’s Going to Be Very Hard to Make Those Unicorn Investors Money Today. #2. You’ll Start Attracting The Wrong People to Join You #3. Internal Inflation Will Accelerate. Everything Will Get More Expensive. (read more…)
CATEGORY: capital, resilience, risk, valuation
January 17, 2024 Sifted : M&A activity is likely to skyrocket in 2024 — how is financing changing?
“[Venture debt works for companies] looking at M&A as an option for bolting on additional solutions or expanding into new markets where there’s a certain level of predictability around payback periods [...] having debt to just sit on the balance sheet doesn’t always make sense. Debt can be useful when there are key drivers, identifiable roadblocks or cash requirements that you need in the future.
(read more…)May 17, 2023 Inside Venture Capital : VC Fundraising for first-time fund managers
Last year, VCs slowed their fund deployment into startups. However, they were able to raise funds worth $170.8B in 2022, surpassing the previous year's total of $158.5B. As a result, U.S.-based VC firms had $289B in dry powder available at the end of last year. LPs were making commitments to new VC funds until the end of last year. However, most of the new capital was being raked in by experienced fund managers. On the other hand, first-time fund managers found the fundraising environment very challenging. Debut VC funds secured $10.2B in 2022, less than half of the $22.2B secured in the previous year. Pitchbook expects the environment to remain challenging this year for emerging fund managers, who may witness an even steeper drop in funding. S2G Ventures senior managing director Sanjeev Krishnan believes that "A lot of investors would probably prefer the new Sequoia fund to a new emerging fund manager right now." (read more…)
October 6, 2021 Institutional Investor : Insurance CIOs Move Further into Alternative Assets
In a survey of its top 50 insurance clients, global investment firm KKR found that respondents moved more money to alternative assets over the period from 2017 to 2021. Allocations to non-traditional investments increased from 20.4 percent in 2017 to 31.8 percent in 2021, according to the survey. Respondents made these changes largely by shifting their portfolios away from investment-grade fixed income, which fell 12.2 percentage points since 2017, and liquid equities, which fell 3.6 percentage points during the same time period. The beneficiaries included non-traditional investments like private credit, real estate credit, infrastructure, and private equity, which collectively increased from 12.1 percent of portfolios in 2017 to 19.2 percent in 2021. (read more…)
April 21, 2021 European Straits : Bill Janeway on Who Should Be in Control
It’s about how you address what Hyman Minsky always referred to as the “survival constraint”, that is, when you have obligations that you have to meet in cash: you can pay those obligations out of operating revenues, out of the sale of assets, or out of the issuance of new securities. And when you run out of those three alternatives, that’s when you call in the lawyers! And so this is my concern with the entrenchment of founders: in my experience, unless they have previously been through a failed startup or at least the near-death experience of an established business (that is, flirted with bankruptcy), they are insensitive to those stressors. And that’s the problem in the current environment: there’s no need for them to be sensitive! But I find it extraordinarily unlikely that the current environment will last indefinitely. (read more…)
CATEGORY: leadership, resilience, risk
February 5, 2021 Semil Shah via Twitter : 2021 Venture Capital Market Dislocation – “WTF Is Going On?”
Adam Nash tweeted this earlier, paraphrased: "The VC industry went from looking for $1 billion-dollar outcomes to $10 billion-dollar outcomes to $100 billion-dollar outcomes in less than 24 months. This end-market acceleration has occurred during a time of zero-interest rates (not being touched until 2023, per Fed), high IPO liquidity, huge chip stacks at various VC funds, and making investments via Zoom. Investing in technology feels like the only game in town now in a pandemic world. Public investors are now full in privates; growth investors are doing As and Bs like they're seeds; traditional VC firms are straddling seed and Series A (tho many have multi-stage arms); and seed investors, angels, rolling funds, syndicates, accelerators are conducting massive experimentation to unearth the next great thin. (read more…)
CATEGORY: capital, risk, VC, winner take all
November 23, 2020 Charles Duhigg via the New Yorker : How Venture Capitalists Are Deforming Capitalism
Whereas venture capitalists like Tom Perkins once prided themselves on installing good governance and closely monitoring companies, V.C.s today are more likely to encourage entrepreneurs’ undisciplined eccentricities. Masayoshi Son, the SoftBank venture capitalist who promised WeWork $4.4 billion after less than twenty minutes, embodies this approach. In 2016, he began raising a hundred-billion-dollar Vision Fund, the largest pool of money ever devoted to venture-capital investment. “Masa decided to deliberately inject cocaine into the bloodstream of these young companies,” a former SoftBank senior executive said. “You approach an entrepreneur and say, ‘Hey, either take a billion dollars from me right now, or I’ll give it to your competitor and you’ll go out of business.’ ” This strategy might sound reckless, but it has paid off handsomely for Son. (read more…)
CATEGORY: leadership, risk, VC
October 5, 2020 Seth Levine : VC Fund Returns Are More Skewed Than You Think
I thought about this a couple of years ago when I wrote about the optimal venture fund strategy and my conclusion was that venture firms should place more bets and have more exposure across a larger set of businesses. Obviously, those inside the industry argue that managers who are good at picking businesses would do better to own more of fewer businesses if they can show that they have the aptitude to invest in those that become true outliers. But given how rare they are, I wonder if that is arguably the optimal strategy. As David Cohen replied once years ago when I asked him what the key to being a successful venture capitalist was: “Luck”. (read more…)
CATEGORY: risk, VC, winner take all
September 29, 2020 Institutional Investor : The Pervasive, Head-Scratching, Risk- Exploding Problem With Venture Capital
Is venture capital a risky asset class? No. Most VC funds choose to act in a risky manner by not diversifying, but that does not make the asset class risky. To de-risk venture capital, CIOs simply need to acknowledge that VC math is different from public markets math. The importance of low-probability, excess-return-generating investments means that proper diversification requires a portfolio of at least 500 startups. It will take work to assemble such a portfolio. It is hard to do by investing directly. Current funds and funds-of-funds are rarely designed with diversification in mind. Instead, they concentrate funding in a small subset of ultra-popular entrepreneurs, sectors, and geographies, which risks driving down returns on capital, leaving higher-return strategies underfunded. So why are funds reluctant to offer such diversification? There are no rewards for diversification as a venture GP. Today’s investors flock to top-quartile managers, who must act in a risky manner to overachieve. Such GPs often insist that their portfolios must stay small to “not dilute their winners.” In other words, they rely on picking winners, but inadvertently admit to not being able to do so consistently. Managers who reduce risk by diversifying will, by definition, at best achieve second-quartile returns. Only the top quartile is rewarded, through performance and management fees on larger follow-on funds. Given the ten-plus-year life of each fund, and the way capital floods to proven winners, it is economically rational for a GP to take a risk at getting lucky with an undiversified fund rather than diversifying — knowing that diversifying would result in fewer if any rewards. This is especially true since most GPs show signs of overconfidence about their abilities, and trust that they will outperform, believing it will happen through skill, not luck. (read more…)
August 4, 2020 Morgan Stanley : Public to Private Equity in the United States: A Long-Term Look
The dispersion between the best and worst funds is very high in venture capital relative to other asset classes (see exhibit 43). As we reviewed earlier, median returns to investors have been lackluster since 2000, but this hides the fact that top performing funds have generated very good returns. Identifying which funds are in the top quartile can be tricky. Indeed, more than one-quarter of all funds claim to be in the top quartile. The reason is that there are different ways to measure results, including various benchmarks, performance measures, and data sources. Outlook. The outlook for returns from U.S. venture capital in the aggregate, given investor commitments and fund investments, appears to be consistent with the recent past. The dispersion of returns within the asset class suggests that investors who have access to top tier funds will continue to earn very attractve returns. It also stands to reason that the large swell of investment in late-stage venture will earn lower returns than the smaller sum invested in early stage. (read more…)