“What’s one factor you stress to new VCs now that wasn’t as vital, 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 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 that every one enterprise buyers had largely the identical targets and incentives, up till perhaps the expansion spherical pre-IPO. Now even the Collection A investor is usually taking part in a unique sport than the seed VCs. Most seed retailers are smaller AUM corporations, the place the companions personal/share the economics. They’re prone to personal the many of the firm with their first verify, and take substantial dilution pre-exit. Most multistage corporations 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 ultimate phrase on their efficiency, 3, 5, 8 years of ‘scorching offers’ and buzz, is what makes many careers. Mix this with early and multistage corporations who at the moment are routinely $1b+ in measurement, and also you’ve acquired a recipe for *very* completely different incentives. We used to speak about outdoors led rounds as being ‘the market’ setting a good value by independently minded corporations. Now we have now increasingly more consensus auctions the place the worth is an end result of a VC’s ballooned enterprise mannequin and FOMO. These results in each larger valuations earlier -AND- completely different underwriting targets for the bigger fund (that’s, $1b AUM fund is attempting to get to 3x internet, $60m seed fund is attempting to get to 5x internet). So ‘taking part in the sport on the sector’ means contemplating promoting parts of your stake to different buyers sooner than ever with a view to lock in some good points and recycle capital.
It was that corporations would get acquired or go public in “7 to 10 years,” however now many are staying non-public 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 mixture of valuation mismatches and regulatory stress, every part is taking longer. Whether or not it’s the multibillion greenback AUM VCs having the ability to go deeper and later into their corporations, or new sources of capital (sovereign wealth, crossover funds, and many others), the financings or tender presents relieve the stress earlier startups confronted, and which the general public markets might uniquely resolve. (Extra corporations ought to go public earlier however that’s a unique put up). So seed people, typically first in from a most popular share standpoint, are sitting there for an extended time period, buried beneath a bigger choice 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 tougher to seek out secondary consumers. 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 in search of direct funding entry. There are additionally a rise in market makers/secondary retailers, 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 effectively.
Moreover these three elements you’ve different extra particular conditions, such because the liquidity of tokens/crypto currencies, which may influence particular seed VCs. On the finish of the day, if you happen to’ve backed nice corporations, ‘maintain and wait’ is actually an affordable technique however it’s not clear it’s nonetheless the optimum one.
