Uneasy Bedfellows: Seed Investors and Late Stage Venture Capital

By Keith Teare • Issue #297 • View online

This week The Generalist covered Coatue while Paul Graham Tweeted that he has never read a business plan or a balance sheet. The contrast between the investment stages could not be starker. Are seed and growth investors partners, enemies, or frenemies?



When Paul Graham tweeted that he has never read a business plan or balance sheet we can assume there is some poetic license. But we can also assume he is making a point. And when he follows up by saying that the valuation of a company at the seed stage is not a primary focus when compared to the decision to invest or not it’s clear he has a different point of view to later-stage investors. He quotes potential returns of 1,000x whereas late-stage investors focus on returns above 2–3x.

The Generalist’s profile of Coatue, founded by Phillipe Laffont, emphasizes how disciplined, analytical, and data-driven Coatue is in determining what to invest in, and at what stage. Not Paul Graham’s world.

These two contrasts are typical of the differences between two asset classes that need each other but barely recognize each other.

Looking at the source of unicorns, SignalRank’s GPRank™ data shows that the top 30 seed managers have equity in 265 of them. A total of 429 individual investments. This compares very favorably with larger growth stage allocators like Tiger Global, Andreessen Horowitz, and Sequoia.

Not only do the top GPRank™ seed managers collectively over-produce unicorns compared to their peers. They invest earlier and so enjoy much higher multiples of invested capital (MOIC).

This is the bedrock on which growth investors sit. Like a relay race, the seed managers had over the baton to the next stage investors for the next part of the journey. Without the seed managers, the growth opportunities would be significantly different.

And just like the best artists or musicians or teachers are simply good at what they do, so too are the best seed managers unusually good at filtering through large numbers of companies and finding their way to an outsized group of winners.

But seed managers are often under-appreciated. Institutional allocators often cannot allocate to seed due to the fact that the fund sizes are too small for the institutions.

Later stage investors are prone to resist the participation of seed managers in later rounds or seek to lower their right to maintain their investments in a company. This sets up a win-lose dynamic between two stages of the venture ecosystem. It leads to bad sentiment and poorer outcomes for the seed managers.

This bad sentiment is a mistake.

Seed managers need growth investors to help maintain the momentum of their fastest-growing companies and clearly should welcome these investors into their portfolio companies. The asset value embedded in the cap tables of the companies Coatue and others invest in is a big part of the seed managers’ upside. And institutions should be able to allocate to seed as an asset class.

So how can seed managers and later-stage investors work together better? And how can institutions place capital into the fastest-growing seed-funded companies? More in this week’s video.


Profile of the Week

Coatue: An Agile Colossus

The megafund might look like Tiger Global, but it’s operating a very different playbook. Coatue’s performance has been built around strong in-house research, astute data analysis, and a stellar network. It’s greatest weakness may be its own culture.

Actionable insights

If you only have a couple of minutes to spare, here’s what investors, operators, and founders should know about Coatue.

  • Coatue ≠ Tiger. Though they are frequently compared, the two mammoth crossover funds run very different playbooks. Tiger looks to index the private markets and relies on outsourced diligence. Coatue is a more selective picker and leans on its internal research abilities.
  • Large organizations can still evolve. Though Coatue is one the biggest funds in the world, it has continued to experiment with its structure. Almost a quarter of a century into its lifecycle, the fund shows no signs of curbing its adventurousness.
  • Data science offers an edge in private markets. In 2014, Coatue began investing in data science capabilities. In the years since, it has built a robust platform called “Mosaic” that surfaces credit card data, customer lists, and company comparisons. Though some question its utility, it is favorably received by founders.
  • A global outlook can surface new lessons. Coatue was quick to recognize the potential of investing in Chinese tech. It has applied lessons from that geography to Western businesses and visa-versa. Coatue founded a splashy conference to facilitate cross-cultural exchange: “East Meets West.”
  • Hedge fund norms are an uneasy fit with VC. Though it has a fully-fledged private market practice, Coatue’s internal culture has been lifted from Wall Street, circa 1985. It is notoriously cutthroat and aggressive. The compensation structure is also non-standard and may partially explain critical departures.


Paul Graham’s Week

Venture Change

Do we HAVE to Sell this Great Company? PE and VC Funds Increasingly Utilizing ‘Continuation Funds’

What to do when a fund has a great portfolio company, but the ten-year limit on the fund is fast approaching? More and more, private equity and venture capital funds are moving these companies into continuation funds. This phenomenon was recently detailed in an article from Pitchbook.com: “The secondaries market is seeing a resurgence of activity as more GPs hold onto their investments for longer by rolling them into new funds. The practice of rolling portfolio assets into so-called continuation funds has been the main feature of a GP-led secondaries surge that has in turn been a major driver behind secondaries activity as a whole. The trend, which offers GPs a lot more flexibility on hold periods, is unlikely to reverse any time soon.”

The ten-year cycle of a Private Equity or Venture Capital fund is an artificial construct created decades ago. A primary (but not only) purpose of the ten-year fund structure was to help large institutions — like insurance companies and endowments — create investment performance projections over a ten year horizon. These large pools of institutional capital need to run models that incorporate investment return projections out decades in advance. It was deemed beneficial to incorporate a fund structure to satisfy those institutional needs.


SEC Proposes New Rules to Protect Private Fund Investors — Lexology

On February 9, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed new rules and amendments to enhance private fund investor protection. While the proposed new and amended rules would amend the Investment Advisers Act of 1940 (the “Investment Advisers Act”), several are also applicable to private fund advisers exempt from registration under the Investment Advisors Act. The SEC defines “private funds” as pooled investment vehicles excluded from the definition of “investment company” under sections 3©(1) and 3© (7) of the Investment Company Act of 1940 (the “Investment Company Act”) and therefore exempt from registration under it; private equity and hedge funds are generally exempt. However, the Dodd-Frank Act of 2010 tightened up the definition of “Investment Advisers” exempt from registration under the Investment Advisers Act to those exclusively advising venture funds and exclusively advising private funds with less than $150 million in assets under management in the U.S., and as a result, many investment advisers have been required to register with the SEC under the Investment Advisers Act even though their funds are exempt from registration under the Investment Company Act. The SEC’s proposed new rules and amendments are therefore of concern to advisers and their affiliates, both registered and unregistered, of many private equity, hedge funds, venture funds and other private funds as well as advisers to registered investment companies like large mutual funds.


SEC.gov | How to Submit Comments

The SEC invites comments on Proposed Rules, Concept Releases, Self-Regulatory Organization filings, Public Company Accounting Oversight Board Rulemaking, Rulemaking Petitions, and Other Releases. Less frequently, comments are invited for Final Rules, Interpretive Releases, and Policy Statements.


Sequoia Capital is launching a $500–600 million crypto fund to invest in tokens

Sequoia Capital is launching a new crypto fund worth $500–600 million — its first-ever sector-specific fund since its founding in 1972.

As for its crypto investment thesis, Sequoia is particularly interested in cross-chain interoperability and GameFi projects, said Maguire, adding that multi-chain is the future.

For interest in specific blockchain protocols, Bailhe said Sequoia is monitoring developer activity across networks, including Terra, Avalanche, NEAR, Polkadot and Cosmos, but there still isn’t a clear signal yet which network could witness success like Solana.

The Sequoia Crypto Fund will have the flexibility to invest in projects, but its check sizes could range in the $100,000 to $50 million range, said Maguire.

The fund looks to get fully deployed in under a year if the crypto market enters a bear phase and in more than a year if it enters a bull phase, said Maguire. “And it really just depends on the quality of investments,” he added.

The Sequoia Crypto Fund is the first sub-fund of the Sequoia Capital Fund. The firm plans to launch two more general funds — the expansion and ecosystem funds. Proceeds from these sub-funds then go back into the Sequoia Capital Fund.


Gambling is Big

Sports betting in America is exploding

In early february Jim McIngvale, a businessman from Houston, crossed Texas’s border with Louisiana to place a $4.53m bet on his phone. In making America’s biggest-ever online bet, Mr McIngvale is pinning his hopes on the victory of the Cincinnati Bengals, the underdogs, in the Super Bowl on February 13th. He is the boldest among tens of millions of Americans who will place bets this weekend. His staggering wager reflects a broader trend: the market for legal betting is surging in America — along with attendant risks.

Since the Supreme Court struck down a law that banned sports gambling outside Nevada in 2018, 33 states as well as Washington, DC have legalised it. Seven more states have legislation in the works. The betting landscape is rapidly changing: 45m more Americans than last year can now legally bet on the 2022 Super Bowl in their home state. Many more, like Mr McIngvale, can travel to a neighbouring state to do so.

In less than four years, $97bn has been wagered in legal bets across America, yielding over $7bn in revenue for gambling operators and $923m in taxes. In October 2021 alone, Americans put down a record $7.5bn, 87% of it online. That was an eight-fold increase on the same month in 2018. Experts anticipate that the sports-betting market will keep growing. By 2028 it is expected to be worth $140bn.


Facebook in Decline

Apple broke Facebook’s ad machine. Who’s going to fix it?

But the idea that Apple has hurt Facebook’s revenue in a direct and meaningful way seems the truest: Facebook says changes Apple made that affect how ads work on iOS apps — namely, that it’s now much harder for app-makers and advertisers to track user behavior — will cost it $10 billion in revenue this year. Another way of putting it, via Alex Austin, the CEO of Branch, a company that helps advertisers figure out how their campaigns are working: After Apple introduced its anti-tracking changes in the spring of 2021, advertisers who used Branch’s services to measure paid ads on iOS dropped by 20 percent.


Mark Zuckerberg’s metaverse will require computing tech no one knows how to build

The technology necessary to power the metaverse doesn’t exist.

It will not exist next year. It will not exist in 2026. The technology might not exist in 2032, though it’s likely we will have a few ideas as to how we might eventually design and manufacture chips that could turn Mark Zuckerberg’s fever dreams into reality by then.

Over the past six months, a disconnect has formed between the way corporate America is talking about the dawning concept of the metaverse and its plausibility, based on the nature of the computing power that will be necessary to achieve it. To get there will require immense innovation, similar to the multi-decade effort to shrink personal computers to the size of an iPhone.


Meta’s (FB) Nick Clegg Promoted as Zuckerberg Steps Back From Policy — Bloomberg

Meta Platforms Inc. Chief Executive Officer Mark Zuckerberg has promoted his top policy executive, Nick Clegg, to an even greater role inside the company — a move that will mean less involvement in future policy decisions for the CEO and Chief Operating Officer Sheryl Sandberg.


Essays of the Week

Framing and Self-Sovereignty in Web3

Self-sovereign identity must be the foundational of Web3 because it is the means for framing ourselves in the digital world and taking action with our peers.

…… Self-sovereign identity implies autonomy and inalienability. If our identity is inalienable, then it’s not transferable to another and not capable of being taken away or denied. To be inalienable is to be sovereign: to exercise supreme authority over one’s personal sphere. Administrative identifiers — what others choose to call us — are alienable. Relationships are alienable. Many attributes are alienable. Who we are, and our right to choose how we present ourselves to the world, is not alienable. The distinction between the inalienable and the alienable, the self-sovereign and the administrative, is essential. Without this distinction, we are constantly at the mercy of the various administrative regimes we interact with.

An SSI wallet and agent can provide a foundation for a self-sovereign digital existence by allowing us to frame ourselves. As I wrote last week, this, combined with self-certifying protocols is the basis for a Web3 that embodies people so they can act as full-fledged participants in the digital realm.


10 Lessons Learned after $5B of M&A by @ttunguz

Over the last few years, I’ve been lucky to work with founders and management teams to sell about $5b of startups. During that time, I’ve observed a few things about M&A. Here are 10 of my learnings: Most acquirers have built a relationship with the acquisition target. Suitors introduced during a sale process face wrestle with doubts of understanding what they don’t know about the space, the team, and the business.


Startup of the Week

What BlockFi’s $100M settlement with the SEC means for future of DeFi lending — TechCrunch

Crypto lending platform BlockFi will pay the U.S. Securities and Exchange Commission (SEC) $100 million in a settlement over claims that the company violated securities law through its interest account offering, the regulator announced today. The settlement represents the largest recorded penalty i…

…. As part of the settlement, BlockFi agreed to cease sales of its unregistered lending product. It also announced today its intent to register a new, compliant lending product, called BlockFi Yield, which it says would be the first SEC-registered crypto interest-bearing security.

The news comes as a huge blow to the emerging crypto lending ecosystem, digital asset attorney Max Dilendorf told TechCrunch, saying the SEC has essentially “wiped out” the crypto lending business model with its action against BlockFi.


Tweet of the Week

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