
E5: Mark Suster and Samir Kaji on the 2024 Venture Market, IPOS, and Secondaries
LiquidityFri Feb 16 2024
IVP's 18th Fundraising and Market Confidence:
- IVP, a prominent venture capital fund with 43 years of history, is currently in the process of raising their 18th fund, targeting an amount between $1.3 billion and $1.5 billion.
- The Series B and C rounds have seen decreased valuations by 21% and 37%, respectively, compared to Q1 2021, presenting favorable conditions for investors like IVP.
- Companies seeking funding at Series B stages and beyond are showcasing improved financial discipline due to reduced valuations in recent years.
- LP contributions to VCs have notably decreased by a significant 60%, leading top funds to secure substantial portions of all LP dollars.
Strategies for Managing DPI (Distributions per Paid-in Capital):
- DPI represents cash distributions in venture capital investments, playing a crucial role in evaluating returns over time.
- Upfront Ventures distributed $1.2 billion worth of positions from 2019 to 2022, focusing on liquidity management strategies within their investment portfolio.
- Selling partial stakes in high-performing companies has become a common strategy to balance short-term gains with long-term return potential.
- Various strategies like continuation funds, strip sales, and secondary vehicles offer options for managing liquidity while considering the objectives of the fund.
Shift Towards Private Equity Exits in Venture Funding:
- Private equity exits are increasingly favored as viable routes for venture-backed businesses facing challenges with IPOs or trade sales.
- Buyers prioritize EBITDA multiples when acquiring companies from venture capitalists within private equity transactions, emphasizing sound financial investments over speculative valuations.
- The trend towards private equity exits reflects extended stays in private markets due to prolonged company growth periods before potential public offerings.
Challenges Associated with Early Exit Decisions:
- Some VC funds may face pressure to sell positions quickly to demonstrate strong DPI performance for fundraising purposes rather than maximizing long-term returns effectively.
- Balancing short-term liquidity needs with long-term investment goals is essential for maintaining alignment with LP expectations while striving for optimal fund performance.
Impact of Right-Sizing Fund Strategies:
- Maintaining appropriate fund sizes below specific thresholds like $300 million allows for strategic flexibility during investments and exits without overwhelming deployment strategies.
- Larger fund sizes above $2 billion require sophisticated deployment approaches while navigating high valuation expectations at exit points successfully.
- Ensuring that investment decisions align with achievable exit scenarios contributes to sustainable fund performance and consistent returns across diverse company growth trajectories.
Venture Capital Investment Strategies:
- The scarcity of publicly traded tech companies valued at $5 billion or more is evident, with an estimated 300 to 343 such entities existing.
- An influx of unicorn startups was observed between 2015 and 2022, with a staggering 723 net new unicorns identified in just 2021. However, it is predicted that a substantial portion of these companies may never exceed a valuation of one billion dollars.
- Venture capitalists face the challenge of maintaining consistent success over multiple funds, as the top decile track record for VCs stands at approximately 3.06X returns over 25 years.
- Various venture capital investment strategies are employed, ranging from spray-and-pray tactics involving numerous investments to concentrated approaches focusing on fewer high-potential opportunities.
Financial Technology (FinTech) Market Analysis:
- FinTech has encountered issues related to overfunding and potential overvaluation, particularly in sectors like neo-banking, leading to uncertainties around valuations when these firms go public.
- Public market fintech multiples experienced a significant decline post their peak in 2021, posing challenges for fintech companies aiming to enter public markets due to valuation concerns.
- AI-driven finance solutions are viewed as promising innovations within the financial industry, especially in areas like wealth management and accounting software.
- The apprenticeship model plays a crucial role in VC firms' operations beyond investing by necessitating learning pattern recognition skills and effectively assessing probabilities.
Succession Planning and Firm Rebooting in Venture Capital:
- Kleiner Perkins underwent successful revitalization through new leadership figures like Mamoon Hamid and Ilya Fushman, reestablishing its prominence in the venture capital landscape.
- Succession planning within VC firms involves gradually mentoring future leaders to ensure smooth transitions and sustained success within the organization.
- Sustaining enduring success within venture capital entails leveraging both seasoned investors' experience and fresh perspectives from younger team members connected to emerging trends.
LP Interaction Strategies for GPs:
- Mistakes made by general partners when engaging with limited partners include treating all LPs uniformly without considering their distinct preferences or strategies.
- Building robust relationships with LPs requires understanding diverse needs and decision-making processes specific to different types of investors such as family offices versus sovereign wealth funds.
Venture Capital Fundraising Strategies:
- Venture capitalists emphasize the importance of building strong relationships with Limited Partners (LPs) and treating LP discussions as enterprise sales, focusing on understanding individuals before pitching.
- Successful fundraisers for fund one or fund two typically take about 17.7 months from start to finish, highlighting the substantial time commitment in fundraising efforts.
- Establishing genuine connections with LPs is crucial; following Zig Ziglar's quote "People don't care how much you know until they know how much you care," underscores the significance of trust-building and rapport establishment.
- Personal stories like Jamie Sparans' early belief in Mark leading to significant returns demonstrate the lasting nature of LP relationships and the value of personal connections within venture capital.
Recent Investments by GPs:
- Mark Suster has recently invested in Plan.ai, a platform enabling AI VoiceBots for developers, and Kubera Health, specializing in healthcare billing management between payers and providers.
- Suster also highlights a strategic shift towards investments in defense technologies such as satellites, automation in shipbuilding processes, and cybersecurity solutions aimed at addressing national security concerns.
- Jason Calacanis discusses investments in marketplaces including Stone Algo (a diamond search platform), Gigster (a service for booking event locations), and an undisclosed cat-sitting marketplace, showcasing his investment focus on diverse marketplace opportunities.
Efficiency in Company Operations:
- Industry leaders like Elon Musk have highlighted inefficiencies within bloated companies, stressing the tangible cost impact of stock-based compensation that can lead to considerable dilution for shareholders.
- The move towards prioritizing growth alongside a rigorous focus on costs has led to more efficient companies within capitalism compared to command-and-control markets like China or Russia.
- This drive towards efficiency has been reinforced by prominent figures such as Mark Zuckerberg and Mark Benioff advocating for growth complemented by a strict emphasis on cost control within business operations.