The Up Round #6

The Memo

Welcome to the sixth issue 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.

The consistent theme of the last couple weeks has been around the growing need for liquidity among venture funds - especially those looking to raise a new vintage. One of the LPs in our network is a prolific LP in sub $100M funds via his family office. He mentioned a couple weeks ago that the current fundraising market was the worst he's seen in nearly 40 years of being in the game. He noted it was all driven by liquidity, NOT denominator or asset allocation problems.

To align with this need, there is an increased supply of secondary capital looking to provide existing LPs cash. But in many a case, the cost of liquidity at 30-60% discounts to NAV is hard for investors to stomach and ultimately transact around. We have heard of some investors and GPs exploring strip sales - where they offload some of their winners - to bridge the liquidity gap. For those who are cross-asset class curious, Warren Buffett has made some of his best returns providing liquidity in otherwise liquidity-constrained environments. Let's see, it might be that the biggest winners of the COVID-era, ZIRP venture binge are players with secondary strategies.

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The current fundraising environment is proving to be challenging and pushing GPs leading firms with a poor or no track record to reconsider their future. Mergers amongst venture firms are rare and rarely if ever does it make sense for a strong firm to merge or purchase an underperforming one. If anything, the quality GPs will get hired away from such situations. For most funds, the best option might be to go into “zombie” mode where they collect fees and wait for the portfolio to be "run-off" over the remainder of their fund life. (link)

Other Reads, Listens, Watches

Pinegrove Capital Launches with Brookfield & Sequoia Heritage's Backing (link). Brookfield and Sequoia Heritage, Sequoia’s $16B “multi family office” will create an investment vehicle to capitalize on plunging valuations of VC-backed companies by buying secondary interests. The two firms are planning to split a 50/50 stake in a new company Pinegrove Capital Partners led by Brian Laibow, previously co-head of North American at Oaktree Capital Management. The firm hopes to raise more than $2B for its first fund, lining up behind others who also see the opportunity to bridge the liquidity gap for existing LPs and fund managers.

Why the Party’s Over for Chinese VCs in Silicon Valley (link). “The US government is deeply suspicious of any technology linked to China, tightening its controls and threatening to ban companies from its market, making American companies nervous about taking Chinese investment. China, too, is throttling the flow of money and talent to the US. Chinese venture capitalists still want to put their money to work in America, they say. But the good times are well and truly over.”

VC Is Still Not Normal (link). Correlation Ventures’ data set continues to support that venture as a whole remains a strategy dictated by the power law. Whilst the details of the underlying data is unclear, it is interesting to consider that <4% of dollars invested in venture-back companies exiting over the last decade generated 10x or greater return whilst over a third lost money. Given this dynamic, it’s hard to ignore the value of disciplined seed stage strategies that are best positioned to maximize return on a cash-on-cash basis.

Andy McLoughlin of Uncork Capital Firm Succession and 2024 for Startups (link). Andy of the state of venture funds- “I think a lot of the smaller seed funds that blossomed in the last five or six years are going to find that after having blown through capital on a one-year or 18-month cycle a few times, their LPs are kind of tapped out. Many high net worth, individual LPs are just going to say, ‘Look, you can’t keep coming back to the well. We need to see [distribution to paid-in capital] before we can recommit.’ A lot of operator VCs are probably going to get pressure from their companies and their board members to be focused on their [own] businesses. I think Series A firms will continue to move down. Every Series A fund now has a seed program. But for us, that’s where the opportunities lie because we know we can beat them when we move quickly. The big funds need time, even if it’s a $2 million check. Smart entrepreneurs still realize, too, that there is still some signal risk in bringing in a top-tier firm that ultimately doesn’t lead their Series A. And I think we’re going to see kind of a bloodbath in 2024 because so many startups at all stages have really kind of dug in and are making their cash last as long as possible. Companies that probably should have been fundraising this year are going to try to go out in 2024 or 2025 [to avoid a down round], but there’s going to be more businesses raising than there is cash to go around.”

Fund Debuts, Talent & More

Valhalla Ventures Launches $66M Deeptech and Gaming Fund (link). Valhalla Ventures has already invested in 15 startups since early 2022 with the aim to find entrepreneurs who challenge the status quo and break the boundaries of science and engineering. The debut fund will focus on seed-stage companies in deeptech such as materials science, biology, energy generation/storage, and space technology.

Reed Jobs Raising Debut Fund, Focused on Cancer Treatments (link). Steve Jobs’ son, Reed Jobs is starting an investment firm that focuses on new cancer treatments, following a topic close to home as his father died from complications of pancreatic cancer. Reed Jobs started focusing on oncology when he was 15 with an internship at Stanford. He then went on to create Yosemite, a VC firm that has raised $200M for new cancer treatments, which is a spin-off of Emerson Collective founded by his mother and where Reed served as MD for health-related investments.

Ocean 14 Capital Revises Target of New Fund Up to €200M (link). Ocean 14 Capital is focused on growth stage investments in the blue economy or in other words, businesses related to the ocean. It passed its €150M funding target due to a €30M investment from Convex Group and others. According to co-founder Gorell Barnes, the fund is on track to meet its goal of growing its portfolio of companies to between 20 and 25 businesses.

Victor Lazarte is Benchmark’s Newest Partner (link). Lazarte was previously CEO of the Brazilian gaming startup, Wildlife Studios. Lazarte will focus on investing in consumer and fintech companies and is committed to investing in Latin America due to his strong Latin American background.

Arash Ferdowsi Joins Pear as Visiting Partner (link). Ferdowsi cofounded the Dropbox alongside Drew Houston. The story comes full circle as Pear co-founder Pejman Nozad wrote an angel investment into the company after YC.

Felicis Ventures Announces Several Promotions (link). Felicis announced the promotions of Teresa Chan, Dasha Maggio, and Katie Riester. Teresa Chan was promoted to co-Chief Operating Officer which she will add to her existing title of CFO. Dasha Maggio was promoted to co-Chief Operating Officer and has helped establish some key pillars at the company including the 1% Founder Development Pledge. Katie Riester was promoted to MD/GP of Funds of Funds after being an early LP in Felicis’ fund, she has helped grow their AUM by 400%.

Sequoia Continues to Skinny Down the Team (link). Sequoia laid off seven employees affecting one-third of the firm’s talent staff which helps with recruiting functions for startups in portfolios. Sequoia is not the only firm to start this process as the VC industry is facing a downturn. The firm’s COO, Sumaiya Balbale said the layoffs were part of a broader restructuring at the firm as they move away from a one-on-one approach to providing support to founders.

Tuesday Capital Closes $31M Fund (link). Tuesday Capital relocated to Austin, TX during the pandemic after a long history in the Valley. Originally co-founded by Patrick Gallagher and Michael Arrington, TechCrunch founder, the fund capitalized on the pandemic to lean into the shift in meeting founders online. The new approach allows the fund to invest outside of the Bay Area as it now can easily meet founders, coast-to-coast.

Prime Movers Lab Announces $245M Early State Fund (link). Prime Movers Lab is focused on investments in breakthrough scientific startups and now has a total AUM >$1.2B. The early-stage fund will invest in companies facing the world’s biggest problems across energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture sectors.

A/O Announces First Close of Second €250M Fund (link). A/O announced the first €100M close of its second fund. The new fund will invest in technologies that reduce emissions and help digitize the built world with a focus spanning from design to construction, building operations, and also decommissioning. The firm aims to invest 60% of its money into European based companies with the other 40% being invested into North American based companies.

Goodwater Bags $1B Across Two New Funds (link). Goodwater, one of the few firms to focus exclusively on consumer tech investments, just closed on $1B in capital commitments across its fifth early-stage fund and its third opportunity-style fund. The California firm now has over $3.3B in AUM with investments and has seen many exits in apps like Musical.ly which sold for over $1B and Photomath which Google acquired for an undisclosed amount. Founded by veteran VCs Chi-Hua Chien from Kleiner Perkins and Eric Kim from Maverick Capital, Goodwater has now backed 79 early and growth-stage startups.

Molten Launches New Irish Fund (link). Backed by investments from the Ireland Strategic Investment Fund, Molten will use the €50M fund to invest in high-growth tech companies based in Ireland. Previously known as Draper Esprit, Molten Ventures is one of the most active and well-known VC firms in the Irish market having funded companies such as Manna Drone Delivery, Sweeper, &Open and Valutree.

Thought of the Week

I used to think early stage VC is a "coverage game." The longer I'm in it, the less I think this is true.

— Micah Rosenbloom (@micahjay1) July 30, 2023

It appears that as seed investing in particular has matured, there's increasing value placed on focus and specialization which we'd suggest is the "anti-coverage game." This certainly helps to reduce the "size of the field" but also lean into expertise and skills around selection and stewardship/support. Food for thought for the next generation of seed managers.