The Up Round #2

The Memo

Welcome to the second edition of The Up Round. As a reminder, this is a "round-up" of relevant news and resources for fund managers building a best-in-class firm. Expect us to land in your inbox every other weekend.

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Moving on, Santosh had the benefit of meeting a prominent, LP investor this week who shared his story from the dotcom days to the present. He has invested in >200 venture funds over that 20-year period with a particular focus on sub-$50M pre-seed and seed funds on their first or second vintages. His investments include some of the OG seed managers that are now considered to be founders of the movement and the best in the game. A few interesting data points from this individual's portfolio:

1. Only 10 of the 200 funds over 10 years old have returned any capital
2. 9 of those 10 funds that he would deem "successful" are the first vintage
3. He is selling a basket of his LP investments in prominent franchises at a 40% discount to NAV (the buyer is a prominent secondary LP investor). Note that discounts tend to be in the 20-30% range in "good times"

This illustrates the reality of VC and how challenging an asset class it is through cycles. What's interesting is that it requires a level of patience that runs counter to the impatience found in the most successful founding teams.

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Sequoia announced that it will separate into three individual businesses: Sequoia Capital in the US and Europe, HongShan in China, and Peak XV Partners in India and Southeast Asia. It's worth noting that the three firms always had meaningful independence from the start with investment decisions handled separately by the three offices. They did share back office functions at the onset to bring leverage for the overall firm. Over time, Sequoia India and China have built up their own back office to address the localized needs of IR. (link)

Other Reads, Listens, Watches

Filings Reveal PE and VC Returns Amid Escalating Write-Downs. Portfolio performance from large public pensions and endowments is reflecting the changing tide across private markets. Looking at 2022 figures, nearly all venture funds are reporting a decrease in value and there is certainly a case to be made that some growth-stage holdings might be worth even less as 2023 continues to play out. There are a few funds that have sustained outperformance such as Union Square Ventures.

SuperReturn Recap: European Emerging Manager Fundraising to Be Squeezed and European IPO Backlog Building. European VC fundraising is expected to remain slow in 2023, mirroring the environment in 2022. That said, funds of funds remain open for business... after all, they're paid to deploy through cycles! Meanwhile, the region's family offices - which are large and longstanding- are seeking specialized strategies over a generalized approach. On the flip side, there's an increasing backlog of quality companies that are waiting to go public and the proceeds of which could accelerate LP cash deployment into venture funds. It's interesting to note that those companies who've filed an S1 to date are doing some with "hundreds of millions in revenue and 50-100% growth rates".

🎧 Brad Gerstner On Building Firm Culture. A few interesting comments that can be taken universally regardless of stage/strategy: 1) most VCs do too much; 2) understand the information (and therefore the underwriting) differences at each stage; 3) "If a founder relies on us to succeed, we've chosen the wrong founder".

Hunter Walk on Why Seed VCs Should Care More About Ownership Than Valuation. "We set a ‘max check size’ for our initial investments which was meant to get us, on average, 10-15% ownership and if held to, would overall guide us to an investment period that provided both time and company diversification for the fund. It also drove our reserves strategy. So in any negotiation, whether we wrote our ‘max check’ to get the target ownership was a factor of round size, company stage, and so forth. But we would rarely walk away from an opportunity based on valuation if it fits within that target ownership and check-size box."

Tweet of the Week

Great insight from Sam Zell (RIP)

“Life (and business) is all about long term relationships” pic.twitter.com/nl7o4NPVKN

— David Senra (@FoundersPodcast) May 21, 2023

As VCs, we can learn from one another but also from investors and fund managers in other asset classes. Zell's point on the importance of long-term relationships is worth heeding in all aspects of VC - working with founders (especially through downturns), LP relations, and collaborating with co-investors.