“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 realizing 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 just’d largely simply maintain on and wait till the corporate exited through acquisition or the general public markets. Whereas this would possibly 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 each one enterprise traders had largely the identical objectives and incentives, up till perhaps the expansion spherical pre-IPO. Now even the Sequence A investor is commonly enjoying a special recreation than the seed VCs. Most seed retailers are smaller AUM companies, the place the companions personal/share the economics. They’re more likely to personal the a lot 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 shall be remaining phrase on their efficiency, 3, 5, 8 years of ‘sizzling offers’ and buzz, is what makes many careers. Mix this with early and multistage companies who are actually routinely $1b+ in dimension, and also you’ve received 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 companies. Now we have now increasingly more consensus auctions the place the value 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 making an attempt to get to 3x internet, $60m seed fund is making an attempt to get to 5x internet). So ‘enjoying the sport on the sphere’ means contemplating promoting parts of your stake to different traders sooner than ever so as to lock in some positive aspects and recycle capital.
It was 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 need 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 strain, every thing is taking longer. Whether or not it’s the multibillion greenback AUM VCs having 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 clear up. (Extra firms ought to go public earlier however that’s a special submit). So seed of us, typically first in from a most well-liked share standpoint, are sitting there for an extended time period, buried beneath a bigger choice stack, and taking extra dilution. Repeating from above, ‘enjoying the sport on the sphere’ means contemplating promoting parts of your stake.
It was tougher to seek out secondary consumers. Now there are numerous extra of us on startup cap tables with entry to incremental capital to buy slugs of inventory, plus many fund LPs are searching for direct funding entry. There are additionally a rise in market makers/secondary retailers, though it’s nonetheless very a lot YMMV – there are of us we’ve labored with on each side of transactions who we belief, and there are different tales we’ve heard that didn’t go as properly.
Moreover these three elements you may have different extra particular conditions, such because the liquidity of tokens/crypto currencies, which may affect particular seed VCs. On the finish of the day, if you happen to’ve backed nice firms, ‘maintain and wait’ is actually an affordable technique but it surely’s not clear it’s nonetheless the optimum one.
