Welcome to the 14th issue of The Up Round. As a reminder, this is a "round-up" of relevant news and resources for fund managers building a best-in-class firm. Expect us to land in your inbox every other weekend.
Welcome to the final weeks of 2023! This will be the final Up Round for the year.
It’s been a long year in the world of startups and venture. I think many will look back on 2023 as the year where the venture bubble was popped. The caveat is that we won’t know till mid-2024 if this is the case given that year-end 2023 fund valuations take time to flow-through to the publicly available datasets and reports. As I was thinking about this, I was reminded of a LP conversation I had with a FO investor earlier this fall who said that they expect all of their funds to have a reduction in NAV if the GPs are doing their job properly.
Looking ahead, I’m not so sure 2024 will be any rosier in terms of NAV performance or liquidity. Founders and LPs who know my stance (and my firm’s) know that we are pessimistic given our belief that we’ll see a higher rate environment persist longer than most others. That said, the Fed suggesting they’re done with their rate hikes could counter our assertion as can loose fiscal policy that continues to pump money into the system in various ways. All said, I don’t have a crystal ball and really my job is to invest in companies that are durable and withstand multiple cycles.
Please have a Happy Holiday and enjoy time with loved ones. See ya in 2024!
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Why VC Does Not Scale (link). From Sante Ventures- “a smaller fund is roughly 50 percent more likely to return more than 2.5-times TVPI than a large one.” This is an interesting, data-driven report incorporating both Pitchbook and Sante’s own datasets. The report interestingly also calls out that venture-backed exit values tend to sit below $350M so as people do the RtF math, it becomes obvious that a fund <$100M might be advantaged in consistently putting up quality returns (3x net).
Deep Dive on VC Return Profiles (link). “Patience is a virtue, especially in venture. One of the biggest mistakes an investor can make is to let go of an outlier investment too early. Expect DPI to look dramatically different in year 10 than in year 5 - and get those few extra years of compounding in if you can”
Understanding NAV Loans (link). While this is PE-centric, the capital strategies found in buyout tend to make their way into the world of venture over-time. NAV loans are backed by a fund’s assets/investments and can range in tenor from three to five years. It can be used to help provide partial liquidity to LPs and then retired as portfolio company gains are realized.
2023 JPM Alts Review (link). In their biennial report, JPM points out that >50% of VC returns in vintages that are eight to ten years old remain illiquid and purely on paper (page 8) and whilst the exit markets remain damped, this is likely not to change in 2024 (page 7). Lastly, it’s interesting to see that the time between rounds appears to be reverting back to the “24 month” cycle that was commonplace in 2015/2016 timeframe.
HBS: Catching Outliers: Committee Voting and the Limits of Consensus When Financing Innovation (link via Jon Bradford). The study explores the value of “champion” voting where one Partner pounds their first on the table to do a deal (often times unilaterally) vs structures with a consensus approach.
Zelda Ventures Closes $33M for Pre-seed Serial Entrepreneurs (link). Zelda is led by Suzanne Fletcher formrly of Stanford StartX and a GP at Prime Movers Lab who will only invest in founders she’s invested in previously. For context, Fletcher has made >350 investments including Sourcegraph, Hive, Alation, Turing, Dexterity and Orca Bio with 30 of them exiting already. As an aside, this might be the best name for a venture fund out there.
Climactic Raises $65M Inaugaral Fund (link). The new climate-focused seed fund is led by Josh Fesler (formerly of Freestyle) and Raj Kapoor who was at Lyft and Mayfield Fund, previously. The fund has 13 portfolio companies thus far (been investing personally since 2020) and counts several SV luminaries as LPs including Reid Hoffman, Chris Sacca, and Ev Williams. Institutional backers include Stepstone, MIO Partners, NfX, and Mayfield.
Hugo Boss Backs Collateral Good with €100M Sustainability Fund (link). The fund will invest in efforts to make the global fashion and textile industry more sustainable. Investing across 20-25 startups across the fashion value chain, the fund will write €1-3M first checks. Areas of interest include recycling of textiles, upcycled raw materials, novel dyeing materials and processes, and supply chain transparency.
Partech Closes €150M of €300M Growth Impact Fund I (link). The fund will invest in 15 B2B companies with at least €10M in sales that focus on creating an impact in areas including industrial, agri-food and the environment. LPs include Bpifrance, EIF, Legrand, LCL and Société Générale.