The Big Book of Venture Capital

2023 will be etched in the memories of everyone.

A decade down the line, there will be investors who will boost their credibility of having lived through 2023. It’s that significant! Like in equities, we reminisce over the Great Financial Crisis (GFC) and divide the investors between those who survived the 2008-09 period and those who have only seen the boom phase.?

Nevertheless, 2023 can be summarised in three words - Low, Limited, Lopsided ('LLL' environment)

• Low: Valuations of startups in most stages went through their lowest levels.?
• Limited: Capital availability and deployment became limited to only the best opportunities.
• Lopsided: The power remained in the investor’s corner in 2023. It was lopsided towards the capital providers.?

Another reason that makes 2023 unforgettable is that we saw it all - the advent of AI in almost everything, fundraising pain for founders, the failures of SVB and Signature Banks, SEC regulations changes, AI-regulation discussion uptick, failure of FTX, startup closures, the Twitter takeover saga, growth of hard-tech, calls for more diversity, the Fearless Fund lawsuit, VC fund pauses/closures, and much more.?

What else can you ask for from such a transformational period?

An LLL environment begets a downward push on returns. Public markets were flat (except top tech stocks) for most of 2023, and interest rates were running high, creating a competitive environment for VC investments. Slowdowns in public markets pushed down the valuations of startups. Consequently, VCs started seeking lower price points for entry into startups.?

Nevertheless, the startup environment wasn’t the only one to suffer in 2023. Plus, we shouldn’t look at 2023 as one year but rather as a phase in a long-drawn change spanning multiple years. For some of those changes, 2023 represented a culmination (like COVID-19); for others, it’s just a start (like AI-boom), and yet, for others, it’s in the middle of a prolonged change (like geopolitics-based restructuring).

Investors typically pause when the external market environment is incomprehensible. VCs were no different in 2023, and there were many reasons for them to pause or to slow down. Despite the pause, the pace of global transformation, fueled by tech progress in both the ‘atoms’ and ‘bits’ sectors, is still strong.

This LLL environment, in the end, is likely to benefit the larger ecosystem. The argument lies in the theory of ‘booms and busts.’ Without going into the nuances, the ecosystem needed a reset, and 2023 provided just the same. Moving into 2024, I’m sure we have adapted to the realities and will scale up energetically in a newer set of circumstances.

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Startup valuations and performance

Summary - Valuation data

2023 was a year of humbleness

• The deflation of the VC bubble was bound to happen following the period of plentiful market liquidity during the ultra-low interest rate phase after the Great Financial Crisis.?
• With increasing interest rates and a more challenging IPO market, startup valuations have been impacted substantially.

Early stage has been more robust in 2023

• At Seed stage, valuations have either been stable or have trended upwards (depending on geography, and other variables)?
• This early-stage valuation surprise is driven in part by (a) Principal Power: participation of large (multistage) investors fishing for future unicorn startups upstream and inflating valuations in a bidding war, and (b) Supply: formation of more early stage VC funds
• Nevertheless, early stage deal counts have also fallen significantly, in unison with late stage.?

Late-stage valuations were most impacted

• Late stage saw the biggest valuation downfall in early 2023. The deal count also declined drastically.
• The sharper decline in the late stage can be attributed to - the weak IPO market, weak equity markets leading to less buying power, extended duration of VC investments (making them more vulnerable to interest rate fluctuations), and ZIRP aftermath (easy capital availability pushing startups into the late stage, without translating into correct fundamentals).?
• After seeing their lowest levels, late stage valuations might finally be showing signs of recovery in Q4.

Uptick in the market activity

• Investors are re-entering the market due to the lower cost of investment (lower valuations and more VC buying power).?
• Many investors believe the bottom is behind them, and the likely scenario ahead is a road to recovery in deal-making.
• Signs of this change can be seen in the valuation data, which has trended higher on a QoQ basis.
• Private markets are generally a lagged mirror image of public markets. Hence, it is likely that the public market rebound might be reflected in the startup sector in mid-2024.
• In the U.S., elections will also dictate the flow of confidence.

Summary - Unicorns

Unicorn formation impacted

• 2023, a challenging year, massively pushed down the unicorn creation rate.

Big valuation changes aren’t reflected yet

• Upon analyzing and applying public market metrics to private market unicorns, a valuation gap appears.?
• Private valuations, being more subjective in nature, have yet to reflect the complete macro + public markets impact on the startup ecosystem.

Private unicorn to public IPO journey

• A significant gap has developed between the number of unicorns (with a valuation between USD 1-3 billion) in private and public markets.
• All the private market unicorns won't be able to IPO in 2024, and M&A isn't going to be an option for many of them - suggesting a tough time in 2024 if nothing substantial changes in the macro environment.

Summary - Early stage strength

Early stage growth in the last years is undeniable

• Seed-stage VC funding has grown dramatically over the past decade.?
• Several factors have led to this scenario - ease of building a startup, tech talent moving out of established startups to start their own company, growing presence of accelerators/incubators, the advent of crowdfunding, the rise of Seed stage VC funds, multi-stage VC funds moving in early stages, direct investing from Family Offices, Super Angels, CVC participation, and more.

There is a caveat to early-stage growth

• Large/multi-stage investors have increasingly embraced early-stage investments.?
• From 2010 to 2022, the number of large investors participating in the Seed stage more than doubled.
• Large/multi-stage investor’s participation has impacted the deal metrics.
• Despite the slowing participation of large/multi-stage investors in Seed in 2023, Seed deal metrics (like valuation) have remained high due to the growing Pre-seed market, the plethora of smaller VC funds closed in recent years, higher competition, and more. ?
• This leaves the early-stage deal market at unsustainable?levels.

Startup Fundraising

Section - Data

Startup fundraising saw a dramatic slowdown in 2023

• Breakneck pace of fundraising observed in 2021 turned upside-down in 2023.?
• Many investors voiced concerns that funding levels in 2021 weren't healthy for the industry.?
• First half of 2023 turned out to be one of the slowest periods for early-stage investment activity in a decade.
• GPs have adjusted their deployment pace to align with historical norms and macro conditions.?
• U.S. investor's participation in global startup fundraising showed a significant fall in 2023.

Fundraising shouldn’t be put in one bucket

• While both supply and demand of capital have increased, demand has increased significantly relative to the supply of capital - especially in the late stage.
• Fundraising also varies based on the startup’s sector. Example: capital-intensive BioTech startups raised at relatively valuation caps - but only a few of them got funded.
• W.r.t round sizes, late stage saw the maximum negative impact. Meanwhile, for Seed, it increased slightly. Mega rounds almost disappeared, except when it was about specific sectors like AI.
• W.r.t geographies, the European share of global startup fundraising has risen consistently in the last decade.
• European fundraising round sizes have been tracking and catching the U.S.

New VC investments take a hit

• Insider rounds became so common in 2023 that follow-on funding and bridge rounds dominated dealmaking.?
• VCs are channeling investments into their current portfolio’s best-performing startups through extensions, bridges, or insider-priced funding rounds. Hence, ‘new’ investments from VCs have taken a hit.

Alternative fundraising metrics were also abysmal

• In 2023, mega-rounds were also low compared with 2021 and 2022.
• Time gap: Median years since last funding has edged higher across stages.
• Lower investment cadence: Average fund velocity?declined from 3-4 deals to under two deals per quarter in H1 2023.

Summary - Deal dynamics

Age of investor friendliness

• The long-term decrease in investor friendliness took a U-turn in Q1. Markets were ruled by investors.
• As the year is coming to an end, the decrease in predatory deals is visible.
• Investors are still demanding more startup equity at growth stages than before.

Deal Specifics?

• Startups were having more difficulty getting priced rounds done. Hence, the use of SAFEs edged higher.
• On the one hand, SAFEs could bridge the funding gaps, but on the other hand, they have essentially become less founder-friendly.?
• Pro-rata’s became increasingly non-negotiable amid?a more investor-friendly environment.
• Demand for liquidation preferences is making dealmaking a more complicated topic in 2023.?
• Governance will become a key topic in 2024, given the negative startup cases this year (like OpenAI).

Definition of what it takes to do successful fundraising has changed?

• Due to the dwindling runway, a substantial number of startups will have to raise in 2024, creating a make-or-break scenario.
• Investors will concentrate on significant milestones/KPIs accomplished. Definitions of those KPIs have also changed.
• The focus has shifted to back quality founders. It’s not just about team setup, pedigree, or traction; but it’s also about being a founder who can turn capital into demonstrable progress.
• Startups that are barely hanging on will find fewer suitors. Raising less and building more could easily become a mantra.

Is VC capital the best fit for a startup?

• Traditional venture capital cycles might not be the best fit for certain categories of startups. A newer approach to fundraising is required - either via. niche funds or new structures of funding.?
• It isn’t an easy thought, but founders must consider whether their fundraising strategy and business outcomes align well with the VC strategy of power law and delivering >10X outcomes.

Startup exits

Summary

VC exits have slowed down dramatically

• After an exceptional exit environment in 2021, startup exits have slowed down dramatically.?
• This has dampened the startup ecosystem mood and actual returns to VC firms and LPs.?
• Without a healthy exit environment, it is unlikely that the whole ecosystem can fully recover.

Market environment isn’t supportive of exits

• Declining economic conditions have continued to challenge the late stage venture market.?
• High-interest rate, geo-political tensions, and subdued public markets (beyond top stocks) - has impacted the mood.
• Valuation step-ups of companies being acquired or going public have fallen to or near a 10-year low.?

IPOs have dried up

• Although startup exits also happen via M&As and Buyouts, the most substantive form of liquidity comes from IPOs.?
• KPIs required for an IPO have changed, and investors are now focused on profitability and efficiency.
• Pressure continues to build in the venture’s late stage, with the IPO window shuttered.?

Recent IPOs were a mixed bag

• Three IPOs in September 2023?(Instacart, Arm, and Klaviyo)?have reignited optimism, and investors have started deciphering market trends and signals.
• While these much-anticipated three IPOs boosted exit values, they had a lukewarm reception afterward.

2024 - the year of opening up?

• An IPO stack is building up for the companies with the potential to go public in 2024. However, some investors might be advised to hold off until there is more stability in interest rates.
• Startups considering an IPO might delay their market debut until tech-growth stocks receive more favorable valuations in public markets.?

M&A markets

• M&A and Buyouts have also been subdued this year. A drop in the share price of public tech firms and higher interest rates led to less appetite for strategic acquisitions.
• Acquisitions are skewing smaller, as smaller deals tend to occur during periods of uncertainty. The total value of acquisitions of VC-backed companies is on track to reach the lowest annual level in a decade.
• Big tech acquisitions are declining as regulatory pressure increases.?
• Bigger companies acquiring smaller startups was?by far?the most active category in 2023.

Buyouts, distressed sales, and divestitures

• Small tech buyouts are a growing niche, and VC firms are exploring buyouts as a strategy. Buyout strategy is inherently opportunistic, and taking advantage of current headwinds makes sense.?
• 2023 saw a string of divestitures or distressed sales. Startups unable to raise in 2024, could face a similar sad ending.?

Secondary markets were abuzz?

• Buyers were primarily purchasing top pre-IPO names. Many were adding to stakes in companies they already own.
• Median discount of +50% compared to valuations at their latest funding rounds, making it one of the hottest opportunities in the secondary markets since the 2008 financial crisis.?
• Some prominent money managers were willing to buy stakes piecemeal.
• Sellers: Pool of sellers was the widest and included top VC funds, Hedge Funds, and institutional investors willing to think about selling.?
• The number of actual deals done this year is still fairly low relative to the opportunity due to the divergence between the expectations of buyers and sellers on price.
• Secondary investors disappeared because of OpenAI's recent news - a testament to the fragility of the market.

Talent

Summary

Global tech talent impacted massively in 2023

• Layoffs were very high in 2023, with even big tech impacted. There were multiple reasons for tech layoffs - startups running out of cash, startup closures, higher cash burn, startups wanting to extend runways, and more.
• A tough environment forced founding teams to split up.

Slower hiring

• Tech industry's recovery has been sluggish due to shift in focus from expansion to efficiency.?
• Founders are now focused on product + sales and doing more with less, which impacted startup hiring numbers.
• In Europe, slower hiring was combined with higher talent attrition in the market.

Compensation impacted

• In Europe, pay increases were down by 50% compared to 2022.
• Salaries for employees have stayed flat in 2023 (in certain geo’s).
• Bootstrapped founders are paying themselves lower than VC-backed founders, constraining their situation.

Startup equity grants were down

• Average equity for new hires was down 25%+ in some cases.
• Current market is increasingly less talent-driven. Startups are not motivated to provide equity to new employees.

Founders shouldn’t just set aside 20% for employees

• Option pool allocations have stretched out over longer periods of time. Option allocation utilization was also all over the place.?
• Certain sectors reserved more than others for option allocation.?

Where do unicorn founders come from?

• Multiple studies were done on the topic.
• One from Endeavour caught everyone’s eye. A few highlights: Unicorn founders are global citizens, most top unicorn founders did not study or work at an elite institution, and most top unicorn founders have previous entrepreneurial experience.?

High startup formation

• Layoffs are leading to a massive wave of startup formation.
• Engineering folks and managers - are heading back to the drawing boards and building new startups.?
• In some places, the startup formation metrics are crossing the highest points.

Venture capital talent

• Tough environment is impacting the career growth of VC partners.
• Toxic working environment + unhealthy cultures led to burnout.
• Younger VC investors are contemplating startup operator roles.

Limited partners

Summary - Corporate Venture Capital (CVCs)

More than just returns

• Unlike traditional VCs, CVCs seek more than just financial returns on their investments.?
• For a startup, fitting in their strategic vision, CVCs can provide a long-term strategy and fitting partnership.

Scooping the gaps

• CVCs in 2023 decreased their deal sizes. This is due to the valuation inflation in the last couple of years, in which CVCs were very active. As they retrench from late to moving early, deal size will decrease. In addition, there is much more interest in investing in emerging VC funds (more exposure + learning).
• However, they still are taking a more prominent role as other investors pull back.
• There is a regional difference in the activity of the CVCs. In Europe, CVCs are leaving their mark.

High and dry

• Some CVCs invested millions into late-stage startups at higher/peak valuations during the last decade. They are now cutting internal valuations or trying to sell their stakes in secondary markets.
• CVCs are also becoming increasingly selective, raising their bar for new investments.

More CVCs and increasing firepower?

• More CVCs are being built. Ones that are already active are increasing their funding firepower.
• The focus of many such newer CVCs is undoubtedly AI.

Running CVCs isn’t easy, either ?

• A large percentage of CVCs got disbanded or stopped being active. Caution, though, as some have spun out or become independent entities to allow for better economics and the ability to add third-party capital/LPs.
• VC talent working at CVC units are much more likely to change jobs than those working at institutional VC firms.?
• Kick-off delay as some corporates planning to start CVCs have halted their efforts. Now, their bigger emphasis is on data and software for managing VC programs.

Summary - Family Offices (FOs)?

Increasing role of FOs in the VC sector

• FOs-backed deals have been increasing in the last 10 years.
• FOs investment style is shifting from an early stage to becoming more relevant at a late stage.
• VC asset class still occupies less than 10% of most FOs capital allocations.

FOs investing in VC managers

• FOs typically have a hybrid investing structure, with the majority of FOs investing in startups via VCs rather than directly.?
• In Europe, the biggest backers of VC Funds are FOs and HNWIs.
• In making direct investments, FOs are most concerned about operational risk and deal flow quality.
• FOs in 2023 weren’t keen to deploy into a venture without liquidity events - either from funds or directs.
• FOs who supported EMs were now more risk averse - higher threshold for capital raised before considering investment

FO’s don’t invest alone

• FOs don’t invest alone. FOs prefer to invest in a syndicate with other families.
• 9 in every 10 family office-backed investments in startups have been via. “club deals.”

New age FOs

• Unicorn founders are building their own FOs and using their industry network to get access to startup deals.
• Caution: Be aware that dedicated staff with experience is needed, and a one-size-fits-all CIO doesn't work in VC.

Growing importance and nuances

• Caution may be warranted in taking capital directly from FOs. Some FOs may desire more personal involvement, which may not align with the startup’s goals and objectives.
• There are more than 10K FOs globally, and their presence is likely to grow in 5-10 years.
• FOs can sometimes look complex due to their multi-stakeholder structure with varying incentives.

Summary - Fund-of-Funds (FoFs)?

FoF represents diversification with an element of an additional layer of fees

• FoFs offer an option for investors aiming to mitigate risk, as they inherently diversify investments across various underlying funds. These underlying funds can span different sectors, stages, and geographies.
• LPs need to be convinced of the two layers of fees.

Changing FoF dynamics?

• Historically, FoF was an "access" vehicle to brand-name VCs. With "access" less of an issue and brand-name VCs increasingly being market "beta," the focus of the FoF model is now on emerging managers, where selection is important for driving alpha. This is one of the most important shifts in the last five years.?
• FoFs are also an option for less sophisticated or less experienced LPs within the venture asset class.?
• Last few years were GP-favourable, but this dynamic has shifted in 2023 towards LPs.?

FoFs as a means to access early stage deals

• Many established VCs focusing on late stage have begun investing directly in emerging VC managers. This way, VC LPs gain insights into GP’s portfolio, and this information asymmetry is leveraged to make investments better.?

FoFs powering emerging managers (EMs)

• FoFs can become a vehicle of choice to invest in EMs.
• Majority of FoFs (in one survey) are invested in EMs, with?44% of FoFs acting as?cornerstone?investors.

Institutional investors moving into FoF business

• A growing number of institutional investors are moving into the FoF business to gain access to the VC asset class or to fund certain topics (ClimateTech, critical technologies, emerging managers, etc.)
• This is a welcome change, though it remains to be seen which segment of the VC funds gets maximum benefit.?

Summary - GP-LP Dynamics?

Staying in the game

• LPs should take the cue from public markets where there is a considerable performance difference between the scenario of ‘remaining fully invested’ vs. ‘missing 10 best days’.?
• Although many LPs aren't in the market right now, but those who are can reap the rewards.

GP evaluation

• There are multiple mythologies, models, or structures for LPs to analyze and evaluate GPs.?
• Such frameworks go beyond the typical ‘Skin-in-the-game’ adage and use parameters like People, Processes, and more.?
• While there is no one single truth to evaluating VC GPs, care must be taken to evaluate not just past performance (in which many emerging managers can fall through) but also potential for the future.

Tacking bad LP behavior

LP world isn’t all nice, after all. There were instances of LPs ghosting GPs, not wiring capital, or pushing for certain outcomes in GP’s portfolio. GPs can still use a few tactics to anticipate and tackle bad behavior:

• Knowing LPs better by doing LP due diligence and sharing experience with the broader GP community.
• Delving into the process: Understanding where GPs are in the LP process and who decision-makers are.

GP-LP alignment

• ‘Skin-in-the-game’ is the most widely referred mechanism for GP-LP alignment, but it doesn’t guarantee alignment.?
• LPs should look beyond and inspect topics like reputational alignment and investment processes.

Venture capital fundraising

Summary

Record amounts of venture capital dry powder?

• At the beginning of 2023, the industry had record sums of dry powder. But neither VCs nor their LPs were in any rush to deploy.?
• Some VCs slowed their deployment due to a cautious approach, while some LPs were liquidity-constrained to support the capital calls.?
• The net result is that dry powder either remained with the VCs (to be allocated over extended periods in the upcoming wave of startups) or got deployed to portfolio companies that were top performers (as bridge rounds or down rounds). Some portion of dry powder also went to new investments.?
• Certain areas still received new commitments from LPs, increasing VC's capacity to deploy - think ClimateTech and AI.?
• Europe, on the other hand, remained constrained on the dry powder KPI.

Venture capital fundraising took a nosedive in 2023

• In the U.S., the venture fundraising environment has been one of the worst in the first nine months of 2023 compared to the past decade. However, compared with the U.S., the venture fundraising drop in Europe doesn’t look that alarming.
• LPs in 2023 were much more likely to back new vehicles of VCs that have strong historic performance.?
• LPs also seemed to have favored bigger VC funds (in the context of solo or 1st time-smaller EM funds).
• LPs were increasingly pushing managers to show actual cash returns (DPIs). Many younger firms might be unable to showcase such a performance.
• Fund size and stage became part of VC’s fundraising strategy. Pre-seed and Seed funds are more achievable as they don’t require large capital to raise, and low valuations became a better narrative for fundraising.
• The challenging environment forced not only smaller funds to decrease their targets but also impacted mega VC funds. Also, some VC firms will simply not raise funds as frequently as they previously intended.?
• H2 2023 has shown signs of recovery for fund managers. However, enough doubts remain for 2024.
• While raising a fund is paramount for GPs, they should also be aware of LP quality - as it is a long-term relationship.

Venture Business

Summary - Venture fund management

Liquidity management

• Liquidity management should be a priority topic for LPs - especially FOs and other institutional investors.?
• It takes time for a single VC fund to provide liquidity (typically 5+ years). It’s even more exacerbated when LPs start the allocation process on a per-year basis.
• Pressure to send money to LPs drives some VCs to sell portfolio company stakes on the secondary markets. But buyers are interested only in the best assets. Less attractive startups are not generating demand, even at big discounts.

Portfolio size?

• Portfolio performance is controlled by multiple variables. Out of these variables, portfolio size is one critical part.?
• GPs must design their strategy well before going to LPs for capital.?
• Large portfolio size decreases the probability of less than 1X return but also limits potential return as big wins are diluted.
• Some LPs think of portfolio size in the context of achieving at least one unicorn in a random portfolio of startups.?
• LPs who are allocating to both FoFs and direct startup investments need to handle portfolio topics separately for both buckets.?

Selling portfolio startups

• Buying decisions are almost always driven by analysis, making them more rational decisions. Selling, on the other hand, tends to be emotional.
• There is no single correct approach for VC managers to decide when to sell. Important is that there should be a process and a defined approach that is followed every time.

Summary - Venture performance

VC fund performance

• Negative valuations (net NAVs) have driven declining returns significantly over the last year. The distribution component of venture performance has lagged the median since 2022 beginning.
• VC fund performance trends across sizes and regions have broadly moved in tandem.
• VC returns are more dispersed than other asset classes. Even within VC managers, different sub-categories can lead to performance differentiation.
• Much like in public markets, LPs should avoid being overly reliant on past performance when selecting managers and instead focus on their assessment of the broader investment thesis and whether the manager has the right processes and personnel to execute that thesis.

Case of DPI

• A greater share of VC investments have yet to be monetized. Not all TVPI will become DPI.?
• Due to their limited operational history, DPI is the elephant in the room for emerging VCs.?
• Is VC fund performance highly repeatable? According to one data provider, 12.5% of firms returned at least one 3x fund, and only 2.5% returned at least two 3x funds.

VC benchmarks may be overrated

• Although useful for comparison, Benchmarks are frequently overemphasized in manager selection and tend to ignore the flaws in this asset class category.
• VC benchmarking is a data issue, not a lack of demand for having better benchmarks. Benchmarks are definitely not all created equal.

Will 2023 turn out to be a good venture year?

• According to a report - VC exhibited superior returns in the vintages emerging from recession across nearly all major performance metrics.
• According to another research - venture golden periods tend to occur three to four years after a yield curve inversion or near inversion.

VC investing has different styles

• Many LPs treat VC as a single asset class. However, under the hood, things are more complex. Not only can we divide VC asset class geographically, but we can also divide them based on (a) Fundraising stage (example - Early stage), (b) Size (example - below USD 150million AUM, etc.), and (c) Terminology (example - Emerging vs. Established managers).?
• Diversification vs concentration in venture investing: Both approaches arrive at similar expected returns, but the paths are very different.?
• Smaller vs. Bigger funds: Fund TVPI performance is stronger in smaller funds.?
• Generalists vs. Specialists: Specialist funds are the clear winners for vehicles under $250 million in IRR and TVPI. According to another dataset, GP, who is a domain expert, was the biggest source of differentiation among VC managers.

Summary - Venture as an asset class

Are VCs investing in the right areas?

• An unending discussion - ‘Should VCs fund another 5-min delivery app, or are our planet’s needs more important?.’?
• While established VC sectors like SaaS or Enterprise (now even AI) receive unending love (i.e. VC capital) every year, other areas (like CleanTech) critical for humanity may be left behind.
• Some DeepTech startups developing novel new technologies with lengthened commercialization timelines might not fit in every VC’s fund. Hence, something needs to change - either more VCs launching specialized funds to back niche areas or robust alternative funding options for startups.

PE vs. VC

• Compared to the PE market, the VC business is still small and nascent from many structural perspectives.?
• This will change in the future as the industry develops and institutionalizes much more.?

Benchmarks in the context of VC asset class may be overrated

• Benchmarks are sort of a necessity in the investing world. But in the world of VC, benchmarks might not hold much weight considering the inherent flaws like skew for manager selection, self-reporting, survivorship bias, and more.
• And if we look under the hood, the methodology of valuing portfolio companies like Last Round Price (LRP) is clean but maybe not robust.

VC fund performance persistence?

• Like public markets, LPs should not depend heavily on historical performance when choosing managers.?
• Instead, they should also evaluate the investment thesis and determine if the VC manager possesses the appropriate strategies + a team to implement that thesis effectively.

Venture asset class isn’t a monolith

• A lot of LPs treat VC as a single asset class. However, under the hood, things are more complex.?
• Not only can we divide VC asset class geographically (example, U.S. vs European VC fund), we can also divide them based on (a) Fundraising stage (Early stage, Multi-stage, Late-stage fund, etc.), (b) Size (funds till USD 150million AUM, etc.), and (c) Terminology (example - Emerging vs. Established managers).?
• For a better investment, LPs need to understand the mechanics of each segment separately.

Indexing venture asset class isn’t easy. Why?

• Venture is driven by power law, which applies to both managers and their portfolios. Trying to index a power law without access to, or knowledge of, the top 1% will leave LPs with mediocre returns.
• Most attempts at indexing are done with what?has?worked in mind. But what has worked isn’t usually what?will?work. The market is too efficient and funds swell too quickly. New LPs won’t have the same asymmetry the old ones did.

Venture is a game of outliers

• Investing in VC funds seems easy, but it isn’t. Because top funds may not want to take new LP money, as they raise from existing LPs and/or invest more of their own money.?
• Not all top quartile funds remain top quartile.

Summary - Future of venture capital

AI upending the VC world

AI has gathered VC capital, and the VC industry itself may be on the brink of change because of AI. How??

• Scenario 1: Startup world change: AI productivity gains lead to tens or hundreds of millions of startups made up of only one or two people. Startup financial engineering vanishes. The role of VC changes profoundly or doesn’t even exist.
• Scenario 2: VCs start using generative and predictive AI in their investing decisions. They will evaluate startups using the latest AI tools. VC work diminishes.

Growth of more VC hubs

• Ultimately, as the VC asset class becomes more mature, the prominence of other geographies will gather momentum.?
• Many VCs were traveling to Japan and the Middle East for fundraising, given that their home LPs became more restricted.?

Venture as a tool for geo-advantage

• Venture capital drives economic growth and employment via startups.?
• Countries are utilizing startups to impact geopolitics outcomes indirectly - especially true for critical sectors like chips, AI, manufacturing, defence, etc.

VCs landscape redefined

• Given industry pressure - VC M&A’s are happening, and funds are getting closed - in short, shakeup is happening.
• As VCs continue to financialize themselves, they must redefine what it takes to win in the new era. Bigger question - Is there room for anybody in between small emerging managers and large multistage ecosystems?
• An increase in GP stakes sales in VC funds is quite probable. We could also see more VCs contemplating going public.?