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E3: Venture Fund Size Growth, the Rise of Unicorns, and more with Elizabeth Yin and Zach Coelius

Liquidity

Fri Feb 09 2024



Venture Fund Size Trends:

  • Median venture fund size increased from $26 million in 2022 to $37.4 million in 2023, reaching the highest point in a decade.
  • Total amount raised by venture funds decreased by 62% to $66.9 billion year over year, with only 474 funds closed last year.
  • Larger funds are facing challenges in fundraising due to market conditions and concerns about high valuations and performance metrics.
  • Smaller funds historically outperform larger ones, with small venture funds showing a 20% IRR compared to 7.2% for funds sized between $400 million to $1 billion.

Factors Influencing Fundraising Challenges:

  • The competitive landscape has shifted, making it harder for new or smaller funds to secure investments.
  • Limited partners (LPs) are more cautious due to past inflated valuations and are focusing on established managers rather than newer entrants.
  • LPs are restructuring portfolios due to high exposure to venture capital, affecting their ability to invest further.

Investment Evaluation Process:

  • Automated rejections filter out around 50% of applicants initially based on set criteria.
  • Differentiation is crucial; crowded markets lead to higher customer acquisition costs and funding challenges.
  • Qualitative factors such as founder insight and industry knowledge play key roles in investment decisions.

The Significance of San Francisco's Tech Ecosystem:

  • San Francisco remains a hub for tech startups despite ongoing challenges.
  • Face-to-face interactions with investors significantly impact funding success rates.
  • Returning to in-person meetings signals increased investor interest and confidence in the Bay Area ecosystem's revival.

Transitioning Back to In-Person Interactions:

  • Investors emphasize the importance of personal meetings after initial virtual discussions for effective relationship-building and decision-making processes.

Venture Fund Size and Investment Trends:

  • Venture funds are indeed growing in size despite the slow market, with a comparison between smaller and larger funds.
  • Hustle Fund employs a quantitative approach to assess startups, showcasing a strategic investment strategy.
  • The Bay Area is highlighted as an entrepreneurial hub for rapidly scaling companies due to its unique ecosystem.

Unicorn Companies and Liquidity Challenges:

  • The number of unicorn companies has surged from 39 to 532 over ten years, but liquidity remains low, with only 7% having returned capital to investors.
  • Discussions revolved around potential solutions like secondaries to address the challenge of returning capital to LPs amid the lack of liquidity.

Impact of Large VC Funds on Capital Efficiency:

  • Over-influx of capital into late-stage pre-IPO companies by large venture funds has led to inflated valuations based on minimal revenue.
  • Competition among Me Too VC funds has escalated costs for businesses, affecting returns negatively across various segments and necessitating more efficient customer acquisition strategies.

Efficiency in Startups Amid Market Changes:

  • Many startups experienced growth stagnation around summer 2022 before reigniting post-restructuring efforts by last summer.
  • A decline in average capital efficiency for consumer and enterprise companies reflects changing valuation dynamics tied to fundraising amounts.

Innovative Startup Investments:

  • Shovels.ai utilizes AI for parsing government data sets such as building permits, offering valuable insights at different price points for contractors and customers.
  • Anadro focuses on new-age energy solutions through solar paneling partnerships for landlords looking to sell electricity to tenants.
  • Zest gamifies cooking education similar to Duolingo-style learning, appealing to those seeking cost-saving measures or health improvements through home-cooked meals.

Founder Fridays Meetups:

  • Founder Fridays are exclusive meetups tailored for founders to engage in discussions surrounding company management.
  • The goal is to bring together 5 to 10, and possibly up to 15-20 founders per city, fostering intimate and beneficial dialogues on running businesses.
  • These meetups aim to provide valuable insights and networking opportunities for participating founders.

Don't Die Meetups Franchise:

  • Brian Johnson has initiated "Don't Die" meetups where participants join activities like runs with him, leading to the formation of a community.
  • The meetup concept has rapidly expanded across various cities, potentially evolving into a significant aspect of Johnson's business model.
  • Ranging from three attendees in some locations, these gatherings utilize software that assigns leaders to efficiently manage the events.

Investing in Community Building:

  • Emphasis is placed on investing in community-building initiatives within different companies without using them solely for sales purposes.
  • It is highlighted that investments should align with personal interests while exploring avenues for deeper engagement or financial support within diverse ventures.