EU Fund Debuts Galore, Liquidity, Coatue EMW Conference
👋🏽 Welcome to issue #27 of The Up Round- published July 21, 2024. As a reminder, this is a summary of relevant news and firm-building resources for VCs. Expect us to land in your inbox every other weekend.
The Memo
I got up this morning reflecting on what’s top of mind the last couple weeks when I think about the realm of VC (and no, I’m not discussing politics). I got to the topic of liquidity.
In the last two weeks, liquidity seems to be top of mind for GPs sitting on vintages that are over seven years old. Sequoia’s announcement earlier in the week related to Stripe reinforces the thinking. At Dynamo, we’ve had a framework around liquidity probably earlier than most would expect when consider ourselves still in the “emerging manager” bucket.
Simplistically, we look for secondary when a company approaches or becomes a “fund-returner” where we shave 20-30% of our holding so we 1) de-risk the position itself and 2) start generating early liquidity and DPI. This also has knock-on effects for fund IRR given the timing of cashflows. We hold-on to the balance of our shares till the ultimate exit knowing there’s upside on the table. We are open and transparent about this with our portfolio and in the current environment experiencing founders voice their support and understanding. Apart from a primary round where we sell secondary to incoming investors, we’re also building out a network of secondary funds that we could call on as such opportunities arise. Our fund structure prevents one fund from buying shares from another (like Sequoia is doing, see below for more) and we’re still far-enough away from our 12 year period that we haven’t explored a strip sale or portfolio secondary.
Sticking to secondary sales, we’ve found amongst growth companies that early investors can help facilitate an employee tender by increasing the available supply of “sellers” can get funds to the table that have minimum check sizes in their own right- but employees always eat first. We’ve also seen this as a tool to lower the blended entry valuation amongst companies wanting to raise a bit more capital ahead of profitability or an exit event (for M&A, for example). Above all we remind ourselves, “we won’t sell great companies at shitty prices” as we do believe valuation matters- both at entry and exit. One thing we’d note is that we’re seeing secondary discounts compress (as suggested below) but discounts for strong companies (good growth, plan to achieve profitability) be significantly below the conventional 20-30%.
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What I’m Reading
Coatue 2024 EMW Conference Presentation (link). I got clued into this on one of the more recent episodes of the BG2 Podcast (big fan). Some of the macro data from the Coatue portfolio is sobering and serves as a reminder for VCs that business model durability and pragmatic capital allocation helps us endure through cycles. We could still very well be feeling this hangover into 2025.
THE Primer on AI and the Path to AGI (link) via Earnest at Swimming with Allocators. If you have mandatory reading on AI, this is it. Earnest’s nudge made me prioritize it. It is dense but throw it on your iPad or Kindle to highlight and take notes.
How VCs Become Assholes (link) via Michael at Cendana. This is a reminder for all VCs to prioritize EQ in the face of challenges.
Industry Ventures: 50% of Unicorns Shouldn’t Be Unicorns (link). Talk about a mic drop title. Given Industry Ventures’ vast portfolio that’s 700+ funds big and 400+ on the direct side, they have built proprietary data on 391 unicorns. It appears that thus far in the cycle, 25% of unicorns have lost their status due to FMV measurements or secondary sales. What’s curious is that SaaS still accounts for the lionshare of unicorns despite the correction in valuations - fintech is holding strong too. Lastly, Industry is astute to point out that several unicorns are now great PE targets… liquidity anybody?
Avenir Growth on SaaS (link). A no BS, data-rich commentary on where we’ve come in the world of SaaS, where we are, and some optimism around where we could go. I’d point you to a few slides I found interesting (and also shuddered remembering my days as a banking analyst): slide 9 around negative real returns from SaaS; slide 13-14 on current SaaS multiples vis a vis growth and margin; slide 15-16 on the IPO and M&A market.
Fund Debuts
ZAKA Closes €15M Debut Fund (link). A spin-out from a family office, ZAKA focuses on CEE founders with the ambition to scale to the US. The family office has invested in €11M in >55 startups, worldwide.
BOOOM Debuts €17M Pre-seed/Seed Fund (link). The fund was founded by Felix Plapperer along with the founders of sennder (proud investor!), David Nothacker, Julius Köhler and Nicolaus Schefenacker. The fund will invest €100-400K in 30 B2B SaaS startups at the pre-seed stage.
Blake Robbins Launches Hidden Capital with $60M (link). Blake originally broke into VC as part of the Ludlow Ventures team and over the last two years was a Principal at Benchmark. At Hidden, he will focused on making “high conviction seed investments.”
Alpine Space Ventures Launches with €170M Fund (link). As the name suggests, the fund will focus on space-related startups in both Europe and the US. It will invest up to €5M per company across 10-15 startups (five completed so far) with 70% of capital earmarked for European investments. It took roughly two years to raise from LPs including EIF and the NATO Innovation Fund.
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Other Fun(d) Stuff
Kearny Jackson Closes $65M Fund III (link). This fund is roughly 4x larger than the Fund II raised last year. LPs include Marc Andreessen, Sequoia, Bain Capital Ventures, Menlo, StepStone, as well as several family offices, endowments, and pensions. The fund will remain bi-coastal with a focus on SaaS, infrastructure, and fintech infrastructure, investing $1.5M at the pre-seed or seed stage for 6-10% ownership. This fund will deploy over the next three-to-four years in 30-35 startups.
Iceland-based Frumtak Ventures Closes €80M Fund IV in Less Than Six Months (link). The fund will invest €1-3M across 10-15 investments at seed or Series A with a focus on on software, AI and deeptech in areas such as ocean tech and logistics, healthcare, travel, energy, climate and gender equality. The female-led fund continues Iceland’s success in being one of the world’s most gender-equal countries.
13Books Capital Closes £121M Fintech Fund (link). This fund extends 13Books’ track record in fintech after investing in names like nCino, Coincover, and Runa, amongst others. This fund will invest in Seed and Series A startups with £1-7M tickets; five of which have already been closed. LPs include British Patient Capital, KfW, Isomer, and IPGL.
Sequoia’s Approach to Secondaries and Liquidity (link). Liquidity is the name of the game and Sequoia’s offering a secondary purchase of Stripe stock for LPs in it’s older-dated funds. A few things to note: 1) this is availed because of the 2021 restructuring where newer funds are buying stakes in older funds; 2) the letter outlines how well aligned the firm is with this- partners will not be able to profit unless they opt to sell secondary nor will the firm take carry on the sale; 3) rather than bicker over valuation or discount, it’s done at the latest 409A. Powerful validation for Stripe at a $50B valuation. BTW, from PitchBook on secondary discounts, “The median startup valuation discount to the previous round stood at 46% in December 2023. By June, that had dropped to a 31% discount.”
Seae Ventures Acquires Unseen Capital (link). After the death of Unseen founder, Kayode Owens in 2021, Seae is acquiring Unseen to continue investing in healthcare for minority and underrepresented populations. Unseen had raised $30M prior to Owen’s passing whilst Seae has raised $107M (>$200M post-acquisition) with a $150M second fund in-flight.
Talent Tracker
Milo Werner Joins DCVC As a General Partner (link). Milo was previously as The Engine and will focus on investing and supporting deeptech startups focused on addressing climate solutions.
Kahini Shah Promoted to Partner at Obvious Ventures (link). Kahini has been with Obvious since 2022 and focuses on AI investments in healthcare, governance/ethics, and robotics. She was previously at Gradient Ventures.
Hari Arul Rejoins Khosla Ventures as Venture Partner (link). Hari rejoins the firm after founding Bold, a healthtech startup. He will focus on AI, cyber infrastructure, and health investments.
Index Ventures Closes $2.5B in Fresh Funds Amid a Changing of the Guard (link). The new funds are a coup during one of the hardest fundraising environments on record. Alongside, the firm parted ways with four mid-level investors and one senior investor. It’s worth noting that Mike Volpi that established the firm’s presence in SF also stepped back as part of this fund.
Pelion Venture Partners Promotes Tyler Hogge to Partner (link). Tyler originally joined in January 2023 as Venture Partner, prior to which he was SVP Product at Divvy (via the acquisition of Bill.com) and has been an active angel investor.
JD Vance Joins Trump Ticket as Vice President (link). I’d be remiss NOT including this, am I right? Politics aside, I’ve known JD for several years, originally when he just joined the Rise of the Rest Fund and more recently when he setup Narya Capital. He was always respectful, thoughtful, and articulate.
LP Radar
📹 Superclusters: Ian Park of Primer Sazze on How Sovereign Wealth Funds Work (link). I’d guide you to parts of the conversation focused on incentives within large funds; the importance of LPs having independent conviction when doing co-invest; underwriting Fund II and Fund IIIs.
The Family Office Boom is Proving Positive for Alternatives (link). “The average family-office portfolio allocation to alternative assets at a not-insignificant 45 percent” validate that this cohort of LPs are an importnt stakehodler for VCs. This will persistgiven that “70 percent of family offices expect to see their AUMs rise in 2024, while 79 percent expect their families’ total wealth to increase.” That said, not all asset classes are made equal with groups curbing their appetite for illiquid assets due to allocation limits and instead focusing on income generation and near-term liquidity plays via private debt and private-equity secondaries.
Family Offices Are Going to Save VC (link) by Trace Cohen. An interesting, data-driven perspective on family offices filling gaps in the VC LP environment. Perhaps running counter to the above, this suggests VCs are continuing their investment activity from the last five years in the asset class, especially amongst emerging managers.
NewView Targeting $700M for Venture Secondaries (link). Spun out from NEA in 2018, NewView is raising two funds focused on secondaries. NewView prides itself in bringing a “growth equity mindset” to the secondary market. The $700M will be across two funds that work in tandem but it’s unclear how they differ in their approach.
