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I work at a brand name venture capital firm which is actively investing. In this market, where 'flat is the new up', I'd regard having founders cash out at ear

I work at a brand name venture capital firm which is actively investing. In this market, where 'flat is the new up', I'd regard having founders cash out at early institutional rounds as unusual. There is comparatively little money being invested at the moment, and its a "buyers' market" which is to say that entrepeneurs have less negotiating power at present than they did when things were frothy.

swombat 18y ago
Are you seeing any trend of investments getting smaller? E.g. would your firm invest $200k into a promising company, or is that still out of the question even in these "tough times"?
- vc_investor 18y ago
  My firm would do and always has done pre-Series A stage, with a view to building a relationship and following-on in due course. However that is and has always been a less common strategy: most 'bulge bracket' firms (active fund of $300-600m) don't invest such small amounts. More generally, no, I do not see any trend in rounds getting significantly smaller. I do see a trend in pre-money valuations coming down, of course, but that's entirely different. The economics of bulge-bracket VC work when you invest say ~5% of your fund in each portfolio company, in the hope that 1/10 or 1/20 of your companies will hit it out of the park. Total fund size equilibriates when drivers for scale (partners' remuneration, principally, less relatively invariable overheads) balances with diseconomies from political inference effects which kick in when too many partners try to reach consensus and cut the cake. That's why top tier firms with a 'plain vanilla' strategy have roughly comparable fund sizes. FUD aside, nothing I'm seeing at the moment that gives me any reason to believe that underlying model is 'broken' or failing (though of course '07 and '08 vintages will be shot). Almost all successful start-ups need a lot of money to scale beyond a certain point. Free software doesn't really change the cost of airtime, or a VP bus dev. I'm writing anonymously so I have no real axe to grind in saying that. What is certainly happening in the industry is a shake-out. Good firms with strong reputations are raising quickly and comfortably (if quietly because it's not a time to be above the parapet), and will continue to invest without interruption. That is because there are well-priced deals to do in this environment, and innovation doesn't stop in a recession. A number of 2nd tier firms, on the other hand, are finding fundraising very difficult. Many will not survive. Firms that are thriving seem to be investing more slowly just at the moment. This is because there is a lot of noise in the market, and visibility is currently low. Analogy: when it's foggy you drive slower. (Economically: transaction costs rise as expectations less aligned, so liquidity declines.) What is tough is the squeeze at the bottom end for start-ups. I get the impression (though have less direct evidence of this) that there is a bit less easy money on offer from HNWs sub $500k as many are licking wounds, etc.
  - allenbrunson 18y ago
    This is very valuable information for us entrepreneurs to have. I see you created your account just today, I hope you'll stick around!
  - jonmc12 18y ago
    At some point, isn't it in the best interest of the VC firms to pioneer innovative methods for screening, analyzing and funding large amounts of quality smaller deals? 1) In addition to building relationships, funding a significant portion of smaller businesses would increase the number of available quality deals at later stages. 2) Lowering the transaction cost of attracting, analyzing and screening deals to the point where smaller deals could be profitably funded, would likely have efficiency impacts throughout the funding process of any VC firm. In fact, you could make the argument that if a VC firm really masters this process, it could obsolete the need for the 'bulge bracket' model entirely. YC did something innovative - they figured out how to invest <$20k in early stage companies in order to help those companies get to the level where they can bring a product to market. If the VC community really brought their perspective and resources to targeting this opportunity, it seems they would only stand to benefit in the long-term.
    - netcan 18y ago
      I know virtually nothing about YC so it seems off for me to be jumping in on this. But is YC really pioneering methods of investing. Aren't the other components: motivation, introductions, community, promotion, etc. more substantial the the "investment" element. I guess you could call those things investment too, but not capital investment. Basically, is YC in the same industry as VCs at all?
  - netcan 18y ago
    Thanks for that. I'm sure there has been a discussion of this article before. But I get the feeling that you disagree with it's predictions. I'm interested to know which points you think are off & why. The conclusion was that VCs are in a worse position. Investment needs to get smaller & to maintain their investment sizes VCs will need to buy shares from founders. 1 - Software Startups need/want less capital because of (a) lower technology costs (b) lower promotional costs (c) smaller teams. 2 - IPOs are less likely. This results in (a)the lower risk/reward goal of acquisition being set as a target. (b) less capital needed for the IPO process. I've added in point b 3 - Sellers' Market. (a)VCs' structure dictates investment size & fund size (as mentioned above) creating a surplus. (b)VCs are competing with acquirors offering a lower risk option. I imagine the current climate dampens these I suppose the last point is most debatable. It may be temporary. The VC industry may contract or move away from Software. But if 1 & 2 are correct, this should result in smaller investments, founders cashing out or some combination of these. Do you see these points as being incorrect? Am I missing something else?

swombat 18y ago

Are you seeing any trend of investments getting smaller? E.g. would your firm invest $200k into a promising company, or is that still out of the question even in these "tough times"?

vc_investor 18y ago
My firm would do and always has done pre-Series A stage, with a view to building a relationship and following-on in due course. However that is and has always been a less common strategy: most 'bulge bracket' firms (active fund of $300-600m) don't invest such small amounts. More generally, no, I do not see any trend in rounds getting significantly smaller. I do see a trend in pre-money valuations coming down, of course, but that's entirely different. The economics of bulge-bracket VC work when you invest say ~5% of your fund in each portfolio company, in the hope that 1/10 or 1/20 of your companies will hit it out of the park. Total fund size equilibriates when drivers for scale (partners' remuneration, principally, less relatively invariable overheads) balances with diseconomies from political inference effects which kick in when too many partners try to reach consensus and cut the cake. That's why top tier firms with a 'plain vanilla' strategy have roughly comparable fund sizes. FUD aside, nothing I'm seeing at the moment that gives me any reason to believe that underlying model is 'broken' or failing (though of course '07 and '08 vintages will be shot). Almost all successful start-ups need a lot of money to scale beyond a certain point. Free software doesn't really change the cost of airtime, or a VP bus dev. I'm writing anonymously so I have no real axe to grind in saying that. What is certainly happening in the industry is a shake-out. Good firms with strong reputations are raising quickly and comfortably (if quietly because it's not a time to be above the parapet), and will continue to invest without interruption. That is because there are well-priced deals to do in this environment, and innovation doesn't stop in a recession. A number of 2nd tier firms, on the other hand, are finding fundraising very difficult. Many will not survive. Firms that are thriving seem to be investing more slowly just at the moment. This is because there is a lot of noise in the market, and visibility is currently low. Analogy: when it's foggy you drive slower. (Economically: transaction costs rise as expectations less aligned, so liquidity declines.) What is tough is the squeeze at the bottom end for start-ups. I get the impression (though have less direct evidence of this) that there is a bit less easy money on offer from HNWs sub $500k as many are licking wounds, etc.
- allenbrunson 18y ago
  This is very valuable information for us entrepreneurs to have. I see you created your account just today, I hope you'll stick around!
- jonmc12 18y ago
  At some point, isn't it in the best interest of the VC firms to pioneer innovative methods for screening, analyzing and funding large amounts of quality smaller deals? 1) In addition to building relationships, funding a significant portion of smaller businesses would increase the number of available quality deals at later stages. 2) Lowering the transaction cost of attracting, analyzing and screening deals to the point where smaller deals could be profitably funded, would likely have efficiency impacts throughout the funding process of any VC firm. In fact, you could make the argument that if a VC firm really masters this process, it could obsolete the need for the 'bulge bracket' model entirely. YC did something innovative - they figured out how to invest <$20k in early stage companies in order to help those companies get to the level where they can bring a product to market. If the VC community really brought their perspective and resources to targeting this opportunity, it seems they would only stand to benefit in the long-term.
  - netcan 18y ago
    I know virtually nothing about YC so it seems off for me to be jumping in on this. But is YC really pioneering methods of investing. Aren't the other components: motivation, introductions, community, promotion, etc. more substantial the the "investment" element. I guess you could call those things investment too, but not capital investment. Basically, is YC in the same industry as VCs at all?
- netcan 18y ago
  Thanks for that. I'm sure there has been a discussion of this article before. But I get the feeling that you disagree with it's predictions. I'm interested to know which points you think are off & why. The conclusion was that VCs are in a worse position. Investment needs to get smaller & to maintain their investment sizes VCs will need to buy shares from founders. 1 - Software Startups need/want less capital because of (a) lower technology costs (b) lower promotional costs (c) smaller teams. 2 - IPOs are less likely. This results in (a)the lower risk/reward goal of acquisition being set as a target. (b) less capital needed for the IPO process. I've added in point b 3 - Sellers' Market. (a)VCs' structure dictates investment size & fund size (as mentioned above) creating a surplus. (b)VCs are competing with acquirors offering a lower risk option. I imagine the current climate dampens these I suppose the last point is most debatable. It may be temporary. The VC industry may contract or move away from Software. But if 1 & 2 are correct, this should result in smaller investments, founders cashing out or some combination of these. Do you see these points as being incorrect? Am I missing something else?