“What’s one factor you stress to new VCs now that wasn’t as essential, say, 10 years in the past?” That was the query put to me final week by a senior chief at a big college endowment throughout Screendoor’s yearly Convening [part annual meeting for our LPs, part community event, part strategy session]. My reply was one thing like,
“That figuring out when, and the way, to promote out of an organization is not simply opportunistic, however a part of your job.”
It was once as a seed investor that you simply’d largely simply maintain on and wait till the corporate exited by way of acquisition or the general public markets. Whereas this may nonetheless be the default posture for many of a portfolio, if its your solely mechanism for liquidity you’re not pondering strategically. Right here’s why:
It was once that each one enterprise buyers had largely the identical objectives and incentives, up till perhaps the expansion spherical pre-IPO. Now even the Sequence A investor is usually taking part in a distinct recreation than the seed VCs. Most seed outlets are smaller AUM companies, the place the companions personal/share the economics. They’re prone to personal the many of the firm with their first examine, and take substantial dilution pre-exit. Most multistage companies have a number of ranges of companions, with many needing to show themselves to get momentum inside a fund cycle. Whereas in fact the outcomes in the end might be remaining phrase on their efficiency, 3, 5, 8 years of ‘scorching offers’ and buzz, is what makes many careers. Mix this with early and multistage companies who are actually routinely $1b+ in measurement, and also you’ve bought a recipe for *very* totally different incentives. We used to speak about outdoors led rounds as being ‘the market’ setting a good worth by independently minded companies. Now we’ve increasingly consensus auctions the place the value is an consequence of a VC’s ballooned enterprise mannequin and FOMO. These results in each larger valuations earlier -AND- totally different underwriting targets for the bigger fund (that’s, $1b AUM fund is attempting to get to 3x web, $60m seed fund is attempting to get to 5x web). So ‘taking part in the sport on the sector’ means contemplating promoting parts of your stake to different buyers sooner than ever with the intention to lock in some features and recycle capital.
It was once that firms would get acquired or go public in “7 to 10 years,” however now many are staying personal longer. Both as a result of the founders don’t wish to go public (or consider they should get additional earlier than doing so) or as a result of acquisitions have dried up as a mix of valuation mismatches and regulatory strain, every thing is taking longer. Whether or not it’s the multibillion greenback AUM VCs with the ability to go deeper and later into their firms, or new sources of capital (sovereign wealth, crossover funds, and so forth), the financings or tender gives relieve the strain earlier startups confronted, and which the general public markets may uniquely remedy. (Extra firms ought to go public earlier however that’s a distinct publish). So seed people, usually first in from a most popular share standpoint, are sitting there for an extended time period, buried underneath a bigger desire stack, and taking extra dilution. Repeating from above, ‘taking part in the sport on the sector’ means contemplating promoting parts of your stake.
It was once tougher to seek out secondary patrons. Now there are lots of extra people on startup cap tables with entry to incremental capital to buy slugs of inventory, plus many fund LPs are on the lookout for direct funding entry. There are additionally a rise in market makers/secondary outlets, though it’s nonetheless very a lot YMMV – there are people we’ve labored with on either side of transactions who we belief, and there are different tales we’ve heard that didn’t go as nicely.
Moreover these three elements you’ve gotten different extra particular conditions, such because the liquidity of tokens/crypto currencies, that may impression particular seed VCs. On the finish of the day, should you’ve backed nice firms, ‘maintain and wait’ is definitely an affordable technique however it’s not clear it’s nonetheless the optimum one.
