November 15, 2021 Fred Wilson : Seed Rounds At $100mm Post Money
So, in a world where we are seeing more and more $100mm valued seed rounds, one has to ask the question what are the investors expecting? A $100 billion outcome? Doubtful. Less dilution, maybe. A different power-law distribution? Don’t count on it. I think they are being delusional, comforted by the likelihood that someone will come along and pay a higher price in the next round. But it seems that person may also be delusional. Because when you model things out, the numbers just don’t add up. The exit values in VC have increased significantly over the last decade leading to escalating entry values. That makes sense. But the two things that have not changed materially over the last decade are the dilution from seed to exit and the power-law distribution of outcomes in an early stage portfolio. (read more…)
CATEGORY: capital, VC, winner take all
November 14, 2021 The Generalist : Tiger Global: How to Win
Tiger's current approach is to invest in the top decile of tech startups. If the tech sector continues to grow and the fund picks reasonably well, Tiger's returns should be strong — but it's less likely to drive the radically anomalous performance that traditional venture funds are seeking. Classic VCs are often looking to clear a 30% internal rate of return (IRR) on investments; Tiger is likely hoping for something closer to 20%. A prospectus for Tiger XV, an upcoming $10 billion vehicle shared by a private source, revealed that the fund is outperforming this threshold. IRR across 14 private entities is 34% gross and 27% net of fees. In essence, traditional venture capitalists are looking to get the best return possible within a specific time frame. Meanwhile, Tiger is looking to put as much money to work as possible at a reasonable IRR. LinkedIn tells us 188 people work at the fund, effectively managing $93 billion. That comes out to almost $500 million in assets per employee. Other leading venture funds can't come near this kind of efficiency. (read more…)
CATEGORY: alternative financing, capital, VC
November 7, 2021 Becker Friedman Institute for Economics at University of Chicago : Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds
It has long been conventional wisdom for investors in private equity to choose funds run by managers who have performed well in the past, particularly, so-called top-quartile funds, while avoiding first-time funds. This conventional wisdom is based on the belief that performance in private equity persists across successive funds – typically organized as limited partnerships – with the same manager (the general partner or GP). For buyout funds with post-2000 vintages, performance persistence based on fund quartiles disappears. When funds are sorted by the performance quartile of the GP’s previous fund at the time of fundraising, performance of the current buyout fund is statistically indistinguishable regardless of quartile. First-time funds perform at least as well as any of the groups based on prior fund quartile rankings. Moreover, returns for buyout funds in all previous fund quartiles as well as first-time funds exceed those of public markets as measured by the S&P 500. For VC funds, in contrast, performance persistence still exists, when measured by the final (or most recent) performance of funds: top quartiles tend to repeat such performance nearly 45% of the time. VC funds with previous performance in both the top and second quartiles outperform the S&P 500. This is not consistent with the view that only very few VC funds outperform. In fact, previous funds that are above median appear to do so. (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…)
August 4, 2021 The Information : The End of Venture Capital as We Know It
The net takeaway is that in the last several years, as software investing has gone from fringe to mainstream, enormous flows of global capital have been unlocked to finance software and the internet at increasingly competitive rates. What this means for investors who focus on Series A investment rounds and beyond is that the market should become more and more efficient while investing becomes less and less profitable. However, if you want to be a venture capitalist leading the next era, you should look for opportunities no one else is funding because they are too weird, too crazy or too small—at least today. There is a truism that as startups mature, they eventually look pretty much exactly like the companies they set out to disrupt. Today’s prominent VC firms will follow the same trajectory. And the boutique investors will move on. (read more…)
May 26, 2021 Sammy Abdullah via Medium : Autopsy of a dead venture backed company
Build a product for one market. Build a real product, focus on one market and use case, and don’t move to a new market until you’ve successfully established your company in that original market. Watch your sales cycle and customer set up. Although we signed contracts with big names like Facebook and Yahoo, it was always a custom project which took up team resources and had a very long sales cycle. Cash is king. If the revenue to burn ratio is too high and growth rate too low, if you’re lucky you’ll end up with a down round. If you’re unlucky, you’ll die. Know your limitations. At the early stages of any business, the founder will do most of the selling, but professionalize this function as soon as you can afford it by bringing on real sales talent. Know when it’s time to exit. Knowing when it’s time to walk away is valuable. Don’t drink too much of the Kool-Aid. Believing in your product and potential is wonderful, but don’t let it blind you. Stay heads down. Basically spend more time building the business and less time on everything else.
(read more…)CATEGORY: leadership, product-market fit
May 6, 2021 Aaron Dinin via Medium : I Sacrificed a $50 Million Company to Chase a Billion Dollar Business, and It Didn’t End Well
I didn’t know it at the time, but, once I took venture capital, it meant I had to start operating like a venture-style company regardless of whether it was appropriate for the type of company I needed to build. That meant operating at a loss. That meant pumping tons of money into growth at the expense of creating a stable and maintainable infrastructure. That meant hiring lots of people. That meant scaling as fast as possible. That meant getting on the VC merry-go-round and never being able to get off.
There was a consequence to those decisions. As the VCs who rejected me recognized, the market I was chasing couldn’t support the type of venture-backed, billion dollar company I needed to build. As a result, the company that should have been a successful $50 million dollar company that I would have been thrilled to own never materialized. Instead, I had a company that failed to become a billion dollar company.
While not ideal for my investors, the outcome certainly wasn’t devastating. They expect most of their investments to fail, and, when one does, they get to focus their attention on other investments. But it was a much worse outcome for me. I only had one company, and, when it failed, I didn’t have anything else.
(read more…)CATEGORY: growth, leadership, resilience
April 30, 2021 Jason Lemkin : Maybe Every SaaS Contract Should Have An Automatic Out Clause
In the long run in SaaS, any customer that churns was never really a customer at all — unless you get them back later. Maybe make onboarding, and buying, as simple as possible. Maybe just let the customer buy, at a given price point, however they want to buy. Drive up your NPS, close the deal even faster. And maybe just let them cancel and leave whenever they want. Just give them a pro-rated refund, and move on. And say thank you for trying us. And let them know they can have this refund whenever they want, no questions (or not too many at least) asked. (read more…)
CATEGORY: product-market fit, SaaS
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
April 1, 2021 Battery Ventures : Software 2021: The Rise of the Cloud
The median valuation for a public software-as-a-service (SaaS) company in 2010 was three times forward revenue; now the figure is 15 times forward revenue, according to CapIQ data, with many companies trading above 30 times next-12-months revenue. (read more…)