By Keith Teare • Issue #311 • View online
Another week and another glut of writing seeking to understand what has changed in the economy, the public markets, and the startup and venture capital world. As the old world dies the only important question is, what is being born?
In the last four weeks, the top 100 venture investors scored by SignalRank’s GPRank algorithm, invested in 181 funding rounds at the Pre-Seed, Seed, and Series A stages.
Here is the query from the excellent Crunchbase:
Why point this out? As you can see from the articles curated in this week’s newsletter, there is a strong sense of loss, readjustment and fear that is dominating thinking and decision making. There is some very excellent writing embracing what has changed and how fundamental that change is likely to be. Andreessen Horowitz, Sequoia, the always excellent Pete Flint from NFX, and my wife Gené from Crunchbase News are all linked below.
But what is more compelling is to examine what is being born as the past disappears in the rearview mirror. What is likely to shape the near future?
GPRank measures which investors in early startups consistently perform the best. The top 100 ranked investors have participated in over 900 funding rounds in unicorns. These rounds are in 487 unique companies. The average 5-year value growth for the top 10% of the companies these funds invest in is 30x. The investments made by these managers represent to emerging future.
2022 numbers for early-stage investments do show a trend.
SignalRank Research — Early Stage Rounds 2022
Free to View, derived from Crunchbase Pro queries.
The number of early-stage venture rounds involving the top 100 GPRank investors has shown a slow decline. From 313 in February to 181 in May. The amount raised across those rounds has also slowed, from $3.53 billion in February to $1.65 billion in May. The median investment per round has remained pretty steady at $6 million.
This is as it should be. Although the key drivers of future value are the same today as they were six months ago, the quality required to qualify for investment has risen.
Later stage capital will be required by these companies in 2023–2024. By then the series B rounds will reflect the new realities at that time. From the point of view of capital allocation, this is a great time to buy strong future growth, but not at a price far below the past two years. Prices so far are holding in the Series A and prior stages. I will keep monitoring whether that remains the case as the year evolves.
So, when the world around you seems to be imploding, what do you do? In the case of GPRanked early-stage venture capital, you focus on what you are good at and do it better. The outcome, as was seen in the cohort of companies formed in 2008–9, at least for the top-ranked investors, will be better than ever.
More in this week’s video.
The Birth of the New
Which Startup Investors Pulled Back The Most So Far In 2022?
Investors are sounding the alarm that the funding environment for startups has changed dramatically compared to last year.
Y Combinator last week warned its portfolio companies to “plan for the worst.”
Pete Flint at NFX recently listed 39 strategies for startups to deal with the downturn. “Only this downturn is different,” he wrote. “It’s bigger. And it’s likely to last much longer.”
Sequoia Capital gathered its founders on Zoom to address this “crucible moment.” In its presentation, the firm said “the cost of capital has fundamentally increased.” It also noted that crossover funds active in funding private companies are significantly impacted and “are tending to wounds in their public portfolios, which have been hit hard.”
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Venture investing fell in the first quarter of this year for the first time in two years, per Crunchbase data. We expect that downward trajectory to continue for the foreseeable future.
In 2021, by contrast, funding doubled year over year as growth equity investors increased their commitments significantly to invest in private companies, and venture funds raised larger amounts of capital.
Is the pullback here?
In light of these trends, have the most active investors actually pulled back their spending this year?
To get a sense of that, we analyzed the spending patterns of the most active investors — based on their investment pace between Jan. 1 and May 24, 2021 — to see how it compares with the same time periods in 2020 and 2022.
In this list are a mix of well-funded venture firms, alongside growth equity investors who piled into private company investing as technology stocks boomed after the initial pullback in the first quarter of 2020.
39 Moves to Survive (& Thrive) in a Downturn: 2022 Edition
Seemingly overnight, everything changed. It was 2008 and I was running Trulia. We not only faced a recession but a catastrophic meltdown in our core market.
It wasn’t my first crisis. I’d been in the eye of the storm once before when lastminute.com, a European online travel site where I was one of the founding team, was massively impacted by the 9/11 crisis and 2001 recession.
So when the Covid-19 pandemic landed hard in March 2020, I decided to write about what I’d learned managing the previous crises. I listed out several tactical decisions we’d made at Trulia and lastminute.com that worked.
Decisions that not only gave us a fighting chance, but the chance to pull ahead of our competition. These learnings helped many of our NFX Guild companies gain ground, at speed, while others stalled out during the pandemic.
Today, it seems we’re on the cusp of another economic downturn. Only this downturn is different. It’s bigger. And it’s likely to last much longer.
We’re facing a confluent swirl of the following: inflation rates hitting a near 40-year high; rising interest rates, oil and gas prices skyrocketing; a pullback in public equities and the crypto markets; a snapback of tech growth as the pandemic recedes; increasing layoffs; and socioeconomic and political turmoil due to the current war in Ukraine. It’s not pretty out there.
Your journey in this new bear market is only now getting started.Startup CEOs, Founders and teams: if you’re working at a startup today, this will likely be among the most challenging climates you’ll face.
That’s why I want to take an updated look now at what lies ahead for startups, and share an actionable list for how to find the opportunity in the storm. I’ve built this list pulling from my experience both as a former Founder and now as a VC.
The bull market is over… What are the implications for venture capital?
TLDR: Venture managers are changing their behavior with respect to new deal pacing and valuations. Although pacing has slowed, the market has not fully adjusted to the new market as investors and entrepreneurs are still evaluating how to participate in this new market economy.
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Sequoia Warns Founders of ‘Crucible Moment,’ Advises How to ‘Avoid the Death Spiral’
Its latest warning to its portfolio companies takes the form of a 52-slide presentation, a copy of which was viewed by The Information. Over the years, Sequoia, the venture firm behind Google, Apple and Airbnb, has developed a reputation as the tech industry’s Cassandra, through memos and presentations that it shared with the leaders of its portfolio companies during past macroeconomic crises.
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Sequoia Capital plays Nostradamus (again)
Sequoia Capital, the storied, 50-year-old venture firm, has become known over the years for using sweeping memos to warn the founders in its portfolio about market shifts after the shift has become somewhat obvious.
Still, while it’s tempting to poke fun at these missives — its “R.I.P Good Times” in 2008 and its “Black Swan” memo in March of 2020 have become legendary — many teams are wondering right now how long the current downturn could last, so it’s not surprising that the outfit has put together a new and very thorough presentation, telling the many founders with ties to the firm not to expect a quick bounce back.
Indeed, a 52-slide presentation first published by The Information makes clear the firm does not believe that — as during the outset of the pandemic, when markets froze, then quickly warmed — the abrupt shift the startup world is currently experiencing will be followed by an “equally swift V-shaped recovery.”
Andreessen Horowitz closes new $4.5B crypto fund as Sequoia warns founders and other firms pull back
As crypto markets crash and other funds make plans to hold off, Andreeessen Horowitz is leaning into Web3 with billions in new cash for its crypto investments.
This morning, Andreessen Horowitz (or a16z), said it had closed its anticipated $4.5 billion fund — now the largest traditional VC fund focused entirely on crypto in the market. Andreessen Horowitz started fundraising for the fund earlier this year, according to general partner Arianna Simpson. She declined to specify when it had officially closed.
Andreessen Horowitz raises $4.5 billion for record-breaking crypto fund — Axios
Andreessen Horowitz on Wednesday regained its crypto crown, raising the largest-ever venture capital fund dedicated to web3 startups and projects.
The big picture: It’s always sunny in the metaverse.
Backstory: A16z was one of venture’s earliest and most aggressive movers into crypto, raising $350 million for its first fund in 2018. Its third fund nabbed $2.2 billion last year, but was surpassed by a $2.5 billion first-time fund from Paradigm (led by Coinbase co-founder Fred Ehrsam and ex-Sequoia Capital partner Matt Huang). It also saw partner Katie Haun leave to raise $1.5 billion for her own eponymous firm.
- The new a16z fund totals $4.5 billion, split between two “sleeves”: $1.5 billion for seed-stage opportunities and $3 billion for more mature efforts.
The big question is if a16z is raising record sums at the wrong time, based on what the firm itself wrote in its recent “State of Crypto” report:
“Whereas prices are often a lagging indicator of performance in some industries, in crypto they are a leading indicator. Prices are a hook. The numbers drive interest, which drives ideas and activity, which in turn drives innovation.”
Prices, of course, are down. Both Bitcoin and Ethereum are down around 50% over the past six months, while Coinbase shares are off nearly 80% over that same time period.
What they’re saying: Arianna Simpson, a general partner with a16z Crypto, talked past that discrepancy during a conversation with me about the new fund, emphasizing long-term opportunity over short-term price fluctuations
“Many of the best companies are really built in quieter markets, and many of the best builders are today are drawn to web3” she said. “The same way that the Internet now powers all sorts of businesses that aren’t viewed as tech businesses, crypto components are being embedded into games and online communities and other things that aren’t traditionally crypto.”
- She also addressed the skepticism of many Web 2.0 titans toward web3, which wasn’t exhibited a decade ago by Web 1.0 entrepreneurs.
“The critical difference is that Web 1.0 was about open platforms and foundational protocols, with a really strong open-source ethos,” she argues. “That went away and was replaced by walled gardens in Web 2.0. So it makes sense that the pillars of Web 2.0 aren’t in favor of these new models, taking away power — and eventually money — from them … Platforms like Twitter and Facebook have been extractive, taking without giving back to users. Web3 can incentivize participation by giving both some ownership and financial upside.”
The bottom line: There are some signs of a crypto VC slowdown, but the market’s biggest player is still sprinting forward.Axios
The Metrics to Raise a Series B (Downturn Edition)
Given current market conditions, the baseline metrics required to raise a Series B have shifted. Here’s our advice to founders on how to navigate a downturn.
“The sky is falling!”
“Raise more capital at once!”
“RIP Good Times!”
In recent weeks, there has been a lot of chatter about how to prepare startup founders for this market correction. That conversation reached a fever pitch last week as public markets took a sharp turn for the worse, and, by and large, stayed there. Then, several prominent groups in the venture capital community published their own doomsday warnings to add fuel to the fire.
But why do public markets even matter in the venture business? Several reasons:
- Limited Partners. VCs don’t have money to invest unless LPs give it to them. LPs generally hold public securities as part of a diversified, multi-asset strategy. Due to this ‘denominator’ problem, it’s hard to make new investments when the overall asset base gets smaller for them.
- Comps. VCs all have underwriting criteria for which deals they invest in, whether it is a cash-on-cash multiple they are trying to hit, an IRR they are targeting, or if they, like Initialized, are trying to make investments that have the potential to return their entire fund at exit. No matter the exact underwriting criteria, it is necessary to consider, at least in part, multiples in the public markets for similar companies, and those are getting smaller and smaller.
This has been an especially brutal month to be an investor in any stage, public or private. While I appreciate all of the recent reports, opinions, and Tweet threads about surviving the next downturn, I have been encouraging portfolio companies not to panic. Instead, founders should think about creative ways to extend runway instead of rushing to raise capital.
Democratisation of private assets: Opportunities & outlooks
Private markets have long been a territory reserved only for large institutional investors and the super wealthy. Individuals have faced a labyrinth of barriers to entry, including operational, financial and regulatory challenges, as well as a lack of appropriate investment vehicles. While some of these persist, things are changing. With strong performance in recent years, continued inflows of capital and exciting, fast-growing firms choosing to stay private for longer (and going public at much higher valuations), the size and appeal of the private equity universe continues to grow. Its promise of resilience and returns amid volatile public markets have thrust the asset class into the limelight, and access is opening up to private investors — a largely untapped pool of capital.
In particular, demand from high- and ultra-high-net-worth investors is expected to drive the ‘democratisation’ of the asset class. A recent survey of wealth managers by the Investment Association and Goji Investments cited diversification (84%), performance (63%) and income/yield (58%) as the key drivers for investing in private assets on behalf of their clients.
By 2025, the global private equity market is set to more than double in size, with individual investors expected to increase their capital commitments to PE funds at a CAGR of 18.8% by 2025 to an absolute number of $1.2 trillion, significantly outpacing institutional growth, according to analysis by BCG. It’s a shift that will not only change how GPs operate, but also affect traditional Limited Partners with concerns voiced about investing alongside new investors that may be unfamiliar with the asset class — the fee structures, the liquidity profile and the capital calls — and who will likely have different investment goals.
Number of new venture capital firms drops by two thirds in 2021 — GrowthBusiness.co.uk
The number of new venture capital investors founded in the UK shrank by two thirds in 2021, reflecting a wider European slowdown.
Sixty-one new European VCs were founded last year — only half the number of new investors compared with 2020, according to research.
Ten of these new VCs were founded in the UK.
There were 817 venture capital investors across Europe as of end-2021.
Out of the 191 VC investors who have their headquarters in the UK, 67 per cent have an early-stage investment focus, at least among other stages.
This trend appears to be unbroken — nine out of the ten new investors founded in 2021 invest exclusively in early-stage startups.
“European scale-ups in later stages are largely dependent on money from the UK where by far most of the European growth capital is concentrated. However, the bigger the funding round, the more likely we see a US investor in the lead. There is definitely potential for more growth capital across Europe”, said Simona Huebl, CEO of report co-author i5growth.
And London remains Europe’s venture capital epicenter. The British capital alone counts 316 offices of investors from all over the world.GrowthBusiness.co.uk
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SoftBank Nominates Venture Capital Veteran Chao to Its Board — Bloomberg
SoftBank Group Corp. named venture capitalist David Chao to join its board as the Japanese tech investor tries to regain its footing from money-losing investments.
Chao is a co-founder and general partner at DCM, a venture capitalfirm with over $4 billion under management. The firm has invested in more than 400 tech companies in the U.S. and Asia since 1996, according to its website. Chao will replace Lip-Bu Tan whose term will end in June as an outside director, SoftBank said in a filing.
FinTech Clear Street Closes $165 Million Series B Funding Round to Improve Access to Capital Markets — Yahoo Finance
Cloud-native platform processing more than $3 billion in daily trading volume, plans to expand offering
NEW YORK, NY / ACCESSWIRE / May 24, 2022 / Clear Street, a fintech building better access to capital markets, announced today the completion of a $165 million Series B round to accelerate launching its platform. The round was led by Prysm Capital, LLC, a growth equity firm that partners with disruptive, category-leading companies in the technology, consumer, and healthcare sector. Additional investors included NextGen Venture Partners, Walleye Capital, Belvedere, NEAR Foundation, McLaren Strategic Ventures, and Validus Growth Investors, as well as angel investors, Illia Polosukhin (founder of NEAR), Moses Lo (founder of Xendit), and Alastair Trueger (Event Horizon Ventures).
Launched in 2018, Clear Street’s mission is to build better infrastructure to improve market access for all participants. The firm started with a prime brokerage platform for institutional investors. With this additional capital, Clear Street will be able to expand its capabilities to serve fintechs, market makers, and professional traders.
“We founded Clear Street to replace the outdated tech infrastructure being used across capital markets,” said Chris Pento, Co-Founder and Chief Executive Officer at Clear Street. “It shouldn’t take six months to open an account or a year to begin trading a new asset class. Clients are demanding better technology and better service. Clear Street is stepping up to address this issue head-on. Our cloud-native platform provides the services and data that investors need to compete in today’s markets.”
UK surges ahead of Europe to retain crown as venture capital ‘epicentre’ — City A.M.
The UK has retained its crown as Europe’s venture capital epicentre with 351 local investors now actively pumping cash into the country’s startups, new data has revealed
Britain welcomed ten new investors to the market last year as it surged ahead of Germany in second place with 199 and France in third with 128, according to data from the Entrepreneurship Centre of the Vienna University of Economics and Business and investment firm i5.
Venture investors based in the UK are also leading the pack in the success of their portfolios, revealed the new report released today.
“The portfolios of British investors are the most successful out of any in a European comparison,” Vienna University researchers said.
“Of a total of 130 European startups valued at $1bn, the so-called unicorns, 68 per cent have at least one British venture capitalist on board.”
For companies that investors believe have the potential to reach a $1bn valuation threshold in the next 24 months, the so-called ‘soonicorns’, this figure is as high as 60 per cent, the researchers added.
It comes as new research showed that London’s venture capital investors have been tempting staff away from traditional finance to keep up with a boom in investment in the past year, which saw $25.5bn pumped into the capital’s tech firms.
Essays of the Week
Web3 Was Supposed to Save the Internet. It Has a Long Way to Go. | Barron’s
Billions of dollars have flowed into a new version of the internet that promises to be democratic and decentralized. There’s a long way to go.
Early this year when anything still seemed possible for technology companies, futurists and venture capitalists were enthralled with the idea of building a new internet. Web3, as it became known, was poised to recapture the 1990s promise of a decentralized internet, free from gatekeepers and trillion-dollar platforms.
Cryptocurrencies had the starring role in the Web3 dream. Crypto, in theory, could wrest control from giants like Meta Platforms FB +4.81% (ticker: FB), Alphabet GOOGL +2.47% (GOOGL), Amazon.com AMZN +5.08% (AMZN), and Apple AAPL +2.42% (AAPL). It would shift our online activities to blockchains — handling everything from payments and trading to videogaming, social media, even real estate. It could also shift the economics to users, giving them financial incentives to govern and secure the networks.
A record $25 billion was plowed into crypto start-ups last year, with another $30 billion on track for this year, according to Bank of America. Even the recent downturn in crypto doesn’t seem to have chilled new investment. This past week, venture-capital firm a16z announced a new crypto fund totaling $4.5 billion.
“We think we are now entering the golden era of web3,” a16z partner Chris Dixon wrote in announcing the investment.
America’s billionaire class is funding anti-democratic forces | Robert Reich
Billionaire donors are pushing an unsettling agenda for America — backing Trump’s lie that the 2020 election was stolen, calling for restrictions on voting and even questioning the value of democracy itself
Decades ago, America’s monied interests bankrolled a Republican establishment that believed in fiscal conservatism, anti-communism and constitutional democracy.
Today’s billionaire class is pushing a radically anti-democratic agenda for America — backing Trump’s lie that the 2020 election was stolen, calling for restrictions on voting and even questioning the value of democracy.
The 1920s were the last decade in American history during which one could be genuinely optimistic about politics. Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women — two constituencies that are notoriously tough for libertarians — have rendered the notion of “capitalist democracy” into an oxymoron.
Robert Reich, a former US secretary of labor, is professor of public policy at the University of California at Berkeley and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. His new book, The System: Who Rigged It, How We Fix It, is out now. He is a Guardian US columnist. His newsletter is at robertreich.substack.com
How To Make VC More Accessible And Equitable
There’s no doubt that venture capital has earned a reputation as being inaccessible to many underrepresented groups, but thankfully that is changing. This battleship won’t turn overnight, but there are some emerging trends accelerating both the accessibility and equitability of VC.
The traditional stereotype of checks being written by old, white men is being heavily disrupted by new structures like, rolling funds, SPVs and even DAOs. VCs are actively competing on how to bring more diverse founders and fund managers into the space as quickly as possible.
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These onramps don’t create an immediate shift, but they lay the foundations for the next generation of venture capitalists to look, act and feel much differently than their predecessors.
The most common place VCs are currently competing on this front involves educational programs that advance everything from teaching young, diverse people about startups and venture capital to accelerating the knowledge curve for the next generation of emerging fund managers.
These programs are great and I’ve seen some extremely positive results from Ripple‘s fellowship program, Ripple X, where we actively engage with college students in order to provide them with a path to startups and venture capital.
There’s no doubt that the next generation of college graduates will be the most diverse bunch to date. Finding ways for these young entrepreneurs to receive the education, mentorship and coaching required to onboard them into the space is going to create a long-term, fundamental shift in making the world of startups and venture capital accessible to groups of people that previous generations left behind.
Startup of the Week
Sequoia Leads $37 Million Series B Funding Round In Singapore Metaverse Startup
Singapore-based metaverse startup BUD announced on Monday that it is planning to launch NFTs after raising $36.8 million in a new round of funding, just months after completing its Series A round in February.
The Series B round was led by Sequoia Capital India. According to tech publication TechCrunch, other investors include Chinese billionaire William Lei Ding’sonline and mobile games company NetEase NTES +4.5%, as well as Chinese VC firms ClearVue Partners and Northern Light Venture Capital. Existing investors GGV Capital, Qiming Venture Partners and Source Code Capital also participated in the round.