Venture Capital Deep Dive

By Keith Teare • Issue #274 • View online

This week a far deeper dive into the changing world of venture capital, and a video essay by @kteare to accompany a great selection of writers from across the venture ecosystem



Let’s go on a journey into the obscure world of venture capital. This has been bubbling under for quite some time now in That Was The Week. With Andrew Keen traveling it seemed like a perfect week to pull things together and do a face to camera video essay on the topic. The catalyst was the wide range of exceptional writing by Jack Abromowitz from NextView Ventures, Mark Suster from Upfront (a re-print of a story in last week’s newsletter because it really belongs oil this collection), Alex Wilhelm formerly of Crunchbase, now at TechCrunch, Berber Jin and Martin Peers from The Information, Natascha Mascerenhas of TechCrunch and Dror Poleg.

So let us take that deep dive. A good starting point is this broad set of statements:

  • There has never been more venture capital placed into startups than is the case in 2021
  • The pace of deals has never been faster
  • The structure of the investing landscape has changed significantly as shown by these two slides from Mark Suster’s piece


How it used to be


How it is

I wrote about the same trend in my “This is Not Silicon Valley” essay in 2013, by which time the trend to multiple seed rounds was beginning. I even did a joke cartoon about it in 2015:

How much seed can one bird take ;-) — Archimedes studio

Visit the post for more. • Share

But Mark has nailed the current situation very well. This is not the same “Silicon Valley” as before. So let’s continue with the statements:

  • The number of companies making unicorn status in 2021 is now over 400.
  • The pace of unicorn creation is accelerating — both in terms of how many companies are graduating to the status and how fast they achieve it.
  • The majority of unicorns are still private companies. This creates liquidity issues that are covered well in Jack Abromowitz’s essay where he reviews the gap between largely illiquid TVPI (total value to paid-in capital) and liquid DPI (distributions to paid-in capital) in leading VC funds. He does a great job of differentiating the top 5% of funds from the top 25% and then the rest while showing the vast ocean of illiquidity in the ecosystem.
  • Venture funds have two challenges. Finding future unicorns and becoming liquid in them. Neither has an obvious solution. Forge Global announced a SPAC merger this week and claims to have a partial solution to liquidity. Alex Wilhelm — who is consistently excellent — unpacks that.
  • The Venture Model surely has to change. Dror Poleg writes a wonderful piece about Andressen Horowitz’s transformation from a Venture Fund into a Venture Corporation:

The firm is on a hiring spree, recruiting new partners and former government officials, writers, editors, and more. A16Z is no longer building a venture capital firm; it is building a new type of company with a thick management layer that helps support its multiple portfolio companies with marketing, legal, lobbying, and technical resources. It’s no longer venture capital; it’s a venture corporation.

He stops short of seeing this also as a liquidity solution, but it seems clear that publicly traded venture funds will emerge as a solution in this area of need. When there are valuable private assets, a public stock that owns those assets will clearly be beneficial.

That leads to the final statement:

  • Venture Capital will seek to combine strategies that can allocate capital into the best startups while at the same time enabling liquidity methods for their LPs to benefit from the TVPI of their portfolio.

My interest in this is not a secret. SignalRank Co, where I am CEO and one of the founding team, is combining large-scale capital allocation into early-stage venture, data-driven decision making about where to place that capital, and a publicly listed “venturetech” company bringing Fintech, Data Science, and liquidity to the venture ecosystem. Our seed round is close to being announced.

More when it is…

The Pitchbook Q2 2021 US VC report amplifies all of these trends.

Meanwhile, enjoy this week’s video essay.


Venture Capital Deep Dive

State of VC 2.0

Jack Abramowitz, September 14, 2021

This post is inspired by some of the earliest conversations I have had with the team here at NextView and since the beginning of my VC journey. Back in 2018, my colleague Rob wrote a blog post about how the VC asset class is doing. Given that a lot has transpired in that time, I thought it would be fascinating to take another look at some of the ideas of that post and see what has changed in the ensuing 3 years. Warning — this assumes some basic knowledge of VC performance metrics. For a primer, I would recommend refreshing yourself here. Ok, let’s jump in.

State of VC

How are the top 5% VC funds performing versus the top 25% and median funds?

Next, I looked at how the very best funds have performed (top 5%) relative to the good funds (top 25%) and the median. This is particularly relevant for VC funds because they do not follow a normal distribution, they follow the power-law curve. The power-law curve is when the distribution of returns is heavily skewed. Or simply put, a small % of VC funds take home a large % of venture return.

What I decided to look at is the % difference in performance between the best funds and the good and median funds. For this analysis, both TVPI and DPI are relevant to varying degrees based on the maturity of the funds. The chart below illustrates this delta by vintage year.

Note: not including vintages > 2012 because they have not been fully baked and there is some noise.

What’s interesting is that it seems the delta between the top 25% fund and the median fund has held pretty steady over time. This looks more or less true for both TVPI and DPI.

But the delta between the top 5% funds and the others seems to be increasing. This is more pronounced for TVPI but is true in terms of distributions, as well. This trend is also persisting for more recent vintages, although the effect seems greater for DPI vs. TVPI. My hypothesis is that one of the biggest drivers of extreme outperformance for less mature funds is outlier acquisitions that happen early in a fund’s life.

The key takeaway is that it seems like the top of the pack is moving further away from the rest, and the power law is increasing. Even though it seems like everyone in the industry is thriving, it’s actually a relatively small number of companies that are really accumulating massive value, and the owners of those companies are the ones that are really outperforming. Even though the number of unicorns has grown from 80 to 800 in recent years, it’s still a tiny percentage of all VC-backed companies. And only a couple dozen of them are “Dragons” as Dan Primack is now calling them. State of VC 2.0 appeared first on NextView Ventures. • Share

The Changing Venture Landscape. The world around us is being disrupted…

The market today would barely be recognizable by a time traveler from 2011. For starters, a16z was only 2 years old then (as was Bitcoin). Today you have funders focused exclusively on “Day 0” startups or ones that aren’t even created yet. They might be ideas they hatch internally (via a Foundry) or a founder who just left SpaceX and raises money to search for an idea. The legends of Silicon Valley — two founders in a garage — (HP Style) are dead. The most connected and high-potential founders start with wads of cash. And they need it because nobody senior at Stripe, Discord, Coinbase or for that matter Facebook, Google or Snap is leaving without a ton of incentives to do so.

What used to be an “A” round in 2011 is now routinely called a Seed round and this has been so engrained that founders would rather take less money than to have to put the words “A round” in their legal documents. You have seed rounds but you now have “pre-seed rounds.” Pre-seed is just a narrower segment where you might raise $1–3 million on a SAFE note and not give out any board seats.

A seed round these days is $3–5 million or more! And there is so much money around being thrown at so many entrepreneurs that many firms don’t even care about board seats, governance rights or heaven forbid doing work with the company because that would eat into the VCs time needed to chase 5 more deals. Seed has become an option factory for many. And the truth is that several entrepreneurs prefer it this way.

There are of course many Seed VCs who take board seats, don’t over-commit to too many deals and try to help with “company building” activities to help at a company’s vulnerable foundations. So in a way it’s self selecting.

A-Rounds used to be $3–7 million with the best companies able to skip this smaller amount and raise $10 million on a $40 million pre-money valuation (20% dilution). These days $10 million is quaint for the best A-Rounds and many are raising $20 million at $60–80 million pre-money valuations (or greater).

Many of the best exits are now routinely 12–14 years from inception because there is just so much private-market capital available at very attractive prices and without public market scrutiny. And as a result of this there are now very robust secondary markets where founders and seed-funds alike are selling down their ownership long before an ultimate exit.

Our fund (Upfront Ventures) recently returned >1x an entire $200 million fund just selling small minatory in secondary sales while still holding most of our stock for an ultimate public market exits. If we wanted to we could have sold > 2x the fund easily in the secondary markets with significant upside remaining. That never would have happened 10 years ago. • Share

Dragons (or 12x Unicorns)

Dan Primack — Axios

When Aileen Lee originally coined the term “unicorn” in late 2013, she was describing the 39 “U.S.-based software companies started since 2003 and valued at over $1 billion by public or private market investors.”

  • Then it got redefined in early 2015 by yours truly and Erin Griffith, in a cover story for Fortune, as any privately-held startup valued at $1 billion or more. At the time, we counted 80 of them.
  • Ours was the definition that stuck. And, last week, the number of such companies last week topped 800, per CB Insights, with a cumulative valuation of around $2.6 trillion.

With apologies to Justin Timberlake Parker, $1 billion just isn’t that cool anymore. It’s not rare if there are over 800 of them, and certainly not mythical.

  • Plus, there’s been a flurry of startups whose valuations have been inflated by investment dollars. Isn’t it more impressive to be worth $500 million on $50 million of venture capital than $1 billion on $500 million of venture capital?

We need a new word: Dragons.

  • Dragons are much bigger, stronger and more awe-inspiring than unicorns. They destroy whatever’s in their path, and their own destruction is viewed as catastrophic (at least if “GOT” is any guide).
  • To qualify, a company must be valued at $12 billion or more, net of venture funding. Yes, it’s a somewhat arbitrary figure. But it reflects the >10x “unicorn” growth since the Fortune piece, and the rapidly ascending private funding trajectory.

By the numbers: Currently, there would be 19 dragons. Of those, nine are based in the U.S.

  • That’s an even more exclusive club than Lee’s original framing, although this is the sort of thing where less means more.
  • The U.S. dragons are: Stripe, SpaceX, Instacart, Epic Games, Databricks, Rivian, Chime, Fanatics and Plaid.

The bottom line: Welcome to the age of dragons.

Forge’s SPAC deal is a bet on unicorn illiquidity

The total addressable market that Forge serves is growing by the day, with more and more unicorns being born and a steady drumbeat of unicorn IPOs doing little to clear the decks.

One of my favorite long-term issues with the late-stage startup market is that it is far better at creating value than it is at finding an exit point for that accreted value. More simply, the startup market is excellent at creating unicorns but somewhat poor at taking them public.

That antitrust regulatory concerns have made it harder for wealthy tech companies to snap up promising startups that could challenge them is only part of the matter. There just aren’t enough IPOs, even this year, to counterbalance the growth in the number of global unicorns.

That pressure is a good bit of why Forge is an interesting firm. The more unexited unicorns there are in the world, the more demand, presumably, there is for marketplaces like the one it operates, which allows existing shareholders in valuable private companies to drive liquidity for themselves ahead of eventual public-market debuts.

Forge agrees, as the following slides from its investor deck make clear. The first details just how much value is locked up in private unicorns, along with their numerical growth: • Share

Startup Founders Use Record-High Valuations to Cash Out Earlier — The Information

Earlier this year, Pipe raised a new round of funding led by investment firm Greenspring Associates that valued the financial software startup at $2 billion. As part of the round, Pipe co-CEO Harry Hurst also sold an undisclosed number of his own shares in the company, which he had co-founded … • Share

Andreessen Pulls a Bezos

Cheap money and power-law profits are killing venture funds and birthing venture firms.

How do you compete in such a world? You think strategically. In the case of venture capital, that means doing things your competitors aren’t doing. And that’s exactly what Andreessen Horowitz (A16Z) is doing. The firm is on a hiring spree, recruiting new partners and former government officials, writers, editors, and more. A16Z is no longer building a venture capital firm; it is building a new type of company with a thick management layer that helps support its multiple portfolio companies with marketing, legal, lobbying, and technical resources. It’s no longer venture capital; it’s a venture corporation.

By doing more things, A16Z becomes dramatically more attractive and valuable to entrepreneurs, increasing the likelihood it won’t miss out on the biggest winners.

The only problem is it costs a lot of money. Doing all these new things and staffing all these new departments is expensive. Does this mean A16Z will soon go bust?

Not at all. Andreessen is taking a page out of Amazon’s book. Jeff Bezos famously said, “Your margin is my opportunity,” highlighting his willingness to minimize his short- and medium-term profits for the sake of massive long-term ones. For years, Amazon operated at a loss or near-loss, investing its free cash into infrastructure, new business lines, and various other things that looked like a distraction for a “website that sells stuff.” Over the long term, these investments did not just enable Amazon to ultimately become profitable; they enabled Amazon to become the biggest winner in several giant markets with strong winner-take-all dynamics (online commerce, cloud computing, and, soon, 3rd party logistics). • Share

500 Startups Closes Largest Fund Raised To Date, Announces Rebrand to “500 Global” — Yahoo Finance

SAN FRANCISCO, September 15, 2021–(BUSINESS WIRE)–500 Startups, one of the world’s most active venture capital firms, today announced the closing of a $140M global flagship fund–the firm’s largest fund to date–bringing assets under management to $1.8B.* Now rebranded as 500 Global, the firm has been expanding its investment strategy beyond the accelerator and seed stage.

The eleven-year-old firm’s global thesis has paid off: 500 Global’s first global flagship fund is a top decile performer with a net TVPI of 11x^. Overall, the firm’s portfolio has yielded 33 companies valued over $1B and more than 120 companies valued over $100M including Talkdesk, Canva, Bukalapak, Grab, Shippo, and more. 500 Global has backed more than 6,000 entrepreneurs across 77 countries.

“From the very beginning, our mission and investment thesis were anchored in the conviction that exceptional founders exist in all corners of the world. That led us to start investing in companies not just in Silicon Valley, but also in Latin America and East Asia in 2011, the Middle East in 2012, Africa in 2013, and Southeast Asia in 2014. That early conviction has resulted in an expansive, diversified global portfolio across many countries, sectors, and stages, with 46% of the companies based outside of the U.S.,” says Christine Tsai, CEO and Founding Partner of 500 Global. • Share

The next big startup may just help venture back more startups — TechCrunch

Oper8r, built by Winter Mead and Welly Sculley, wants to help new entrants in the VC world scale. The accelerator launched last year as a “Y Combinator for emerging fund managers,” built to help solo capitalists and people launching rolling funds grow up.

The idea was that a well-networked, smart individual may be able to raise their first $10 million in a debut fund off of connections, but when it comes time to scale to a $50 million or $200 million fund, managers need to have a sophisticated understanding of how the LP world works.

Now, Mead claims that all 18 graduates within his first cohort, which include Stellation capital, Maple VC, Interlace Ventures and Supply Change Capital, have successfully closed funds. Its second cohort is still in the fundraising process, but across both cohorts, over $500 million has been closed. Oper8r is launching its third cohort next week and soon will announce the launch of Cr8r, an early-stage program to help talented angel investors grow their investment cadence.

Oper8r’s expansion comes as the rate of first-time venture fundraising grows as well. The Wall Street Journal’s Yuliya Chernova wrote a story this week about how, after years of being on the decline, the rate of first-time venture fundraising in the United States is “on track to reverse course.” The story, pulling analysis from advisory firm Different Funds, statesthat “in the second quarter of this year, some 40% of venture-fund announcements, which includes funds just setting out to raise capital, were made by debut funds, whereas they represented between roughly 20% and 30% of fund announcements in each quarter over the past two years.”

@nmasc_ • Share

Mammoth Funding Deal Signals Frothiness of VC Funding Market

If only Michael Crichton had lived to see this day. The author of “Jurassic Park,” the 1990 novel that became a monster hit movie, would be pleased to see his fiction become reality in the biotech firm Colossal, which revealed today that it has raised $15 million in venture funding to bring back to life the woolly mammoth. That creature has been extinct for 4,000 years, according to Colossal, which dubs itself the “de-extinction company”.

Colossal isn’t looking to create a theme park for prehistoric animals, as was the setup for the Crichton novel, but to save the world by reversing the extinction of animals, which seems an admirable goal. Still, that investors like Tim Draper (a big winner in bitcoin but a loser on Theranos, ouch) and Winklevoss Capital put money into this rather ambitious venture seems symbolic of the frothy stage of the private tech investing cycle. Not that we need symbols, given the never-ending stream of stories about startups raising money at eye-popping valuations. (Examples from the past couple of weeks include Snyk and Melio.) • Share

China versus Billionaires… continued

Beijing to break up Ant’s Alipay and force creation of separate loans app

Beijing wants to break up Alipay, the superapp owned by Jack Ma’s Ant Group which has more than 1bn users, and create a separate app for the company’s highly profitable loans business, as it intensifies a crackdown on China’s big tech groups.

Chinese regulators have already ordered Ant to separate from its main business the company’s two lending units — Huabei, which is similar to a traditional credit card, and Jiebei, which makes small unsecured loans — into a new entity and bring in outside shareholders.

Officials now want these lending businesses to have their own independent app as well. The plan would also require Ant to turn over the user data that underpins its lending decisions to a new and separate credit scoring joint-venture that would be partly state-owned, according to two people briefed on the process. • Share

Apple in Focus

Did Apple’s iPhone 13 ‘Cinematic Mode’ just revolutionize mobile cinematography?

Apple has just announced its iPhone 13 lineup, and one of the stand out features is the new ‘Cinematic Mode’. On the iPhone 13 Pro and iPhone 13 Pro Max models, Cinematic Mode allows you to adjust the aperture, or f-stop, to change the depth-of-field after you’ve shot your video. It also allows you change what’s in focus, or rack focus from one subject to another, after-the-fact.

Remember the Lytro Cinema camera the size of a small car that promised the same thing? Think that… but in your pocket.

With the iPhone 13/mini and iPhone 13 Pro/Pro Max, you can adjust the focus and f-stop in video after the fact. The interface appears to be similar to the one for Portrait Mode for stills. • Share

The Apple v. Epic Decision

The vast majority of Judge Yvonne Gonzalez Rogers decision in Epic v. Apple is both straight-forward and predictable; I wrote that the iPhone company would likely win when the lawsuit was filed, and argued that the law was firmly on Apple’s side in App Store Arguments. That is indeed what happened: Apple won, and it wasn’t particularly close; Epic has already filed an appeal, but I doubt it will succeed.

What was surprising, though — and, frankly, a much more interesting question for the Court of Appeals — is that Judge Gonzalez Rogers also issued an injunction banning Apple’s anti-steering provision; while I do think Apple’s anti-steering provision is anti-competitive, this injunction is an odd outcome of this specific case, and a source of much confusion about what this decision was actually about. • Share

The future of the App Store depends on the difference between a ‘button’ and an ‘external link’

Is it about features or appearances?

Today the judge in Epic v. Apple issued a lengthy ruling holding that Epic failed to prove that Apple has a monopoly in mobile gaming transactions. Importantly, the court also held that Apple’s rules preventing other payment options in the App Store are anti-competitive, and issued an injunction telling Apple to cut it out.

Specifically, the court said that “Apple is engaging in anticompetitive conduct,” and that “Apple’s anti-steering provisions hide critical information from consumers and illegally stifle consumer choice.”

To fix that, the court issued the following permanent injunction barring Apple from having rules against other payment systems. I’ve bolded the most relevant bit:

Apple Inc. and its officers, agents, servants, employees, and any person in active concert or participation with them (“Apple”), are hereby permanently restrained and enjoined from prohibiting developers from (i) including in their apps and their metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms, in addition to In-App Purchasing and (ii) communicating with customers through points of contact obtained voluntarily from customers through account registration within the app.

This specific wording is lifted directly from Apple’s App Store rule 3.1.1, which says “Apps and their metadata may not include buttons, external links, or other calls to action that direct customers to purchasing mechanisms other than in-app purchase,” so it’s tempting to think that the judge just declared that rule anti-competitive and crossed it out. • Share

Apple still reliant on one core product as it nudges $3tn hurdle | Apple | The Guardian

The iPhone maker may be set to break market records, but it’s starting to look more and more like a one-gadget pony

If Apple is to become the world’s first three-trillion-dollar company, the iPhone will play a key role in that feat. The tech firm unveils the latest iteration of its signature product on Tuesday, and the success of the iPhone 13 will determine how quickly Apple goes from its current market capitalisation of just under $2.5tn (£1.8tn) to $3tn.

“We believe Apple is on a trajectory to hit $3tn by early 2022 and the iPhone 13 will be a linchpin of growth,” says Dan Ives of investment firm Wedbush Securities. • Share

Startup of the Week

GPT-4 Will Have 100 Trillion Parameters — 500x the Size of GPT-3

ARTIFICIAL INTELLIGENCE | NEWSGPT-4 Will Have 100 Trillion Parameters — 500x the Size of GPT-3Are there any limits to large neural networks?Photo by Sandro Katalina on Unsplash

OpenAI was born to tackle the challenge of achieving artificial general intelligence (AGI) — an AI capable of doing anything a human can do.

Such a technology would change the world as we know it. It could benefit us all if used adequately but could become the most devastating weapon in the wrong hands. That’s why OpenAI took over this quest. To ensure it’d benefit everyone evenly: “Our goal is to advance digital intelligence in the way that is most likely to benefit humanity as a whole.”

However, the magnitude of this problem makes it arguably the single biggest scientific enterprise humanity has put its hands upon. Despite all the advances in computer science and artificial intelligence, no one knows how to solve it or when it’ll happen. • Share

Tweet of the Week

9 Ideation Frameworks of Top Founders

NFX and dozens of top Founders share their stories of where great startup ideas really come from

As VCs dedicated to seed-stage investing, we are among the earliest believers in companies when they are still in their beginning phases.

We get to see what many later-stage investors do not: where great startup ideas really come from and how, exactly, companies are born. Rarely is there a moment of divine epiphany. Rather, most top Founders go through a rigorous ideation process to come up with the ideas we know them for today.

We’ve previously shared 5 frameworks to help Founders refine their startup ideas. Over the last year of our NFX podcast, we’ve also interviewed dozens of the world’s leading Founders and CEOs from the U.S., Europe and Israel, and we’ve gotten to hear their ideation frameworks as well.

We ask them about the genesis of the company, the earliest sparks: How did you come up with the idea? What cultural and technological shifts had to happen to make your idea possible? And the big one: How did you decide it was worth spending an enormous amount of your time on?

This essay is a curation of just some of the often unheard founding stories from the best of the best — including Craig Newmark of craigslist, Jeff Lawson of Twilio, Manish Chandra of Poshmark, Heather Fernandez of SolvHealth, Micha Kaufman of Fiverr, Elad Gil about Color Genomics, Ben Rubin of Houseparty, Assaf Wand of Hippo, and Austen Allred of Lambda School.

It’s our hope that future Founders can use this to best determine what their next startups should be. • Share