“What’s one factor you stress to new VCs now that wasn’t as necessary, say, 10 years in the past?” That was the query put to me final week by a senior chief at a big college endowment throughout Screendoor’s yearly Convening [part annual meeting for our LPs, part community event, part strategy session]. My reply was one thing like,
“That realizing when, and the way, to promote out of an organization is no longer simply opportunistic, however a part of your job.”
It was once as a seed investor that you simply’d largely simply maintain on and wait till the corporate exited by way of acquisition or the general public markets. Whereas this would possibly nonetheless be the default posture for many of a portfolio, if its your solely mechanism for liquidity you’re not considering strategically. Right here’s why:
It was once that every one enterprise traders had largely the identical objectives and incentives, up till perhaps the expansion spherical pre-IPO. Now even the Sequence A investor is commonly taking part in a unique recreation than the seed VCs. Most seed retailers are smaller AUM companies, the place the companions personal/share the economics. They’re more likely to personal the a lot of the firm with their first test, and take substantial dilution pre-exit. Most multistage companies have a number of ranges of companions, with many needing to show themselves to get momentum inside a fund cycle. Whereas after all the outcomes finally will probably be closing phrase on their efficiency, 3, 5, 8 years of ‘scorching offers’ and buzz, is what makes many careers. Mix this with early and multistage companies who at the moment are routinely $1b+ in measurement, and also you’ve bought a recipe for *very* completely different incentives. We used to speak about outdoors led rounds as being ‘the market’ setting a good worth by independently minded companies. Now we have now increasingly more consensus auctions the place the worth is an end result of a VC’s ballooned enterprise mannequin and FOMO. These results in each increased valuations earlier -AND- completely different underwriting targets for the bigger fund (that’s, $1b AUM fund is attempting to get to 3x internet, $60m seed fund is attempting to get to 5x internet). So ‘taking part in the sport on the sphere’ means contemplating promoting parts of your stake to different traders sooner than ever with the intention to lock in some good points and recycle capital.
It was once that corporations would get acquired or go public in “7 to 10 years,” however now many are staying non-public longer. Both as a result of the founders don’t need to go public (or consider they should get additional earlier than doing so) or as a result of acquisitions have dried up as a mixture of valuation mismatches and regulatory strain, all the pieces is taking longer. Whether or not it’s the multibillion greenback AUM VCs having the ability to go deeper and later into their corporations, or new sources of capital (sovereign wealth, crossover funds, and many others), the financings or tender provides relieve the strain earlier startups confronted, and which the general public markets might uniquely resolve. (Extra corporations ought to go public earlier however that’s a unique put up). So seed of us, typically first in from a most popular share standpoint, are sitting there for an extended time frame, buried beneath a bigger choice stack, and taking extra dilution. Repeating from above, ‘taking part in the sport on the sphere’ means contemplating promoting parts of your stake.
It was once tougher to search out secondary consumers. Now there are numerous extra of us on startup cap tables with entry to incremental capital to buy slugs of inventory, plus many fund LPs are in search of direct funding entry. There are additionally a rise in market makers/secondary retailers, though it’s nonetheless very a lot YMMV – there are of us we’ve labored with on either side of transactions who we belief, and there are different tales we’ve heard that didn’t go as effectively.
In addition to these three components you have got different extra particular conditions, such because the liquidity of tokens/crypto currencies, that may impression particular seed VCs. On the finish of the day, in the event you’ve backed nice corporations, ‘maintain and wait’ is definitely an inexpensive technique however it’s not clear it’s nonetheless the optimum one.
