October Rundown

'All Things VC’ newsletter focuses on topics relevant to Founders, GPs, and LPs on a strategic level (i.e., valuations, market dynamics, fundraising, D&I, portfolio construction, etc.). Individual investment areas (ClimateTech, SaaS, HealthTech, etc.) and their dynamics are not covered. For extended versions or previous posts of this newsletter, check Coda Link.

This one is a long read for a long weekend (at least for some of us).

October had too much to give in terms of reports and knowledge nuggets. We have already entered the last leg of startup fundraising for 2023. Likely, the top ones stuck in the VC pipeline for the last few months will get cleared (i.e., get funded) first, while for the new ones, the grind could get more challenging in the run-up to the year-end.

Valuations & Performance

CB Insights published State of Venture Q3’23 Report

Link to report. Few highlights w.r.t valuations:

• Unicorn births (private companies reaching $1B+ valuations) fell 40% QoQ to just 12 in Q3’23 — the lowest level in over 6 years
• Most major regions saw quarterly drops in the number of new unicorns in Q3, though the US continued to lead unicorn births with 5 total. This was followed by Asia with 4 new unicorns and Europe with 2.

PitchBook on decreasing IRRs for VC funds

Link for the post. "After about half a decade of registering double-digit percentage returns in nearly every quarter, venture capital's performance has reversed dramatically. US-based venture capital funds' IRR fell to -16.8% in Q4 2022"

Though IRR as a metric has its limitations - we all know it! As also Marc Penkala points out in his post. PitchBook also had a paragraph worth noting.

• While IRR is an indication of a fund's performance, limited partners have been paying more attention to another measure during the downturn: distributions to paid-in (DPI) capital, which shows how much cash was returned relative to what was invested. Cash returns have been particularly important for LPs during the downturn because they need that capital to reinvest in the asset class.

Peter Walker 's post on "Why are seed stage valuations immune to decline?"

Link to the post based on Carta data. Few highlights.

• Seed valuations peaked in Q2 2022 at 81% above Q1 2020 levels. Today, they are all the way down to...74% higher than Q1 2020. Basically as pricey as they've ever been!
• The number of companies getting these robust valuations at seed-stage has come down a lot.
• More cash raised for seed-stage funds in recent years means the most competitive deals have a lot of suitors.

Fundraising, M&A & Exits

CB Insights published 'State of Venture Q3’23' report.

Link for the report. Few highlights w.r.t fundraising and exits:

• "Global venture funding shows signs of life — rebounding 11% quarter-over-quarter — while depressed deal volume and a dearth of new unicorns paint a more sober picture."
• Global venture funding increases 11% QoQ to $64.6B
• The global IPO market continues to rebound, with IPOs up 24% QoQ.
• Europe leads global exit share at 38%, with the US close behind at 35%.

Loom was acquired by Atlassian

This is the kind of happy story startup and VC people are looking for, right now.

• A post from co-founder Vinay Hiremath details the specifics (Link).
• A line from Vinay's post caught my eye - "To put the longevity and growth of the relationship into perspective, Atlassian was all-in on Loom when we were doing just under 1m looms per month in 2019."
• M&As and exits take time and relationship building!
• Was it truly a good exit? Phil Haslett 's post (Link) and Alexander V. 's post (Link) provide enough details about the deal by breaking down the captable. Summary - "Great returns for almost all their investors."

Dropbox DocSend published - "The pre-seed round in 2022-23"

Link for the report. Few highlights:

• Shift from growth to profitablity to minimize risk
• Roadmap your product's path to long term success
• Show how your traction and monetization plans are integrated
• Avoid elaborate pre-seed competiton sections
• Investors decreased their engagement with pitch decks by 11.5%
• Founders sent out 16% more pitch decks
• Overall time VC spent in reviewing decks is down another 19%

Dave McClure & David Zhou published "How VCs should think about selling mature VC portfolio assets, also trade-offs in realizing DPI vs TVPI"

Link to post, which is worth your time to read thoroughly. Few highlights:

• Generally speaking, don’t sell your fast growing winners early.
• Except when…
• Selling on your way up may not be a crazy idea.

VC as a sector

PitchBook report on global VC ecosystem rankings

Link for the report. Some industry folks cautioned on rankings and to take them with a 'grain of salt.' On the other hand, their methodology seems robust. Few highlights:

1. San Francisco is the most developed VC ecosystem in the world by a considerable amount.
2. VC ecosystems in the US and Asia account for 85% of the 20 most developed VC ecosystems.
3. London is the only European city among the top 10 most developed VC ecosystems globally. Though 65% of the hubs with the highest growth rates are in Europe

Silicon Valley Bank produced its CVC report

Link for the report. Few highlights:

• CVCs are taking their foot off the gas - with most respondents reporting a slower investment pace in 2023.
• CVCs jump on the latest tech - like AI and ClimateTech
• Managing the corporate parent - highest increases in time spent managing their corporate parent, pulling their focus away from investing and adding strategic value.
• CVC Bellwhether Index is a must read!

Ilya Strebulaev wrote a post about "What should the composition of corporate venture capital (CVC) teams be?"

Link for the post. Few highlights from the post.

• Most CVCs are small, lean organizations, with between three and nine investment professionals (fewer in the U.S., larger outside the U.S.)
• Four of every ten CVCs have a business development team, which is in charge of connecting portfolio companies with the parent.
• CVCs with only insiders have more trouble seeing the light of day when they build their deal flow or seek syndication with other investors.

Sam Lessin on "The state of VC in 2023"

Link for the post. Lessin did an incredible job putting together different thoughts in a deck. Such compilation of ideas often takes time and requires an intricate, high-level understanding of the ecosystem. Few highlights:

• The shutdown of VC factory line and death of 'factory famed' unicorn narrative
• The awkward crowd into seed investing by multi-stage firms
• The post-pandemic fundamental cultural change impacting startups

Research from Paul X McCarthy, Xian (Elaine) Gong, Fabian Braesemann, Fabian Stephany, Marian-Andrei Rizoiu, Peggy Kern on "The impact of founder personalities on startup success"

Link for the report. Few highlights:

• We show that founder personality traits are a significant feature of a firm’s ultimate success.
• We find that the Big Five personality traits of startup founders across 30 dimensions significantly differ from that of the population at large.
• Key personality facets that distinguish successful entrepreneurs include a preference for variety, novelty and starting new things (openness to adventure), like being the centre of attention (lower levels of modesty) and being exuberant (higher activity levels).
• We do not find one ’Founder-type’ personality; instead, six different personality types appear.

Peter Walker on soft launching new program: Friends @ Carta

Link of the post. Startup job seekers can email Carta and receive accurate salary and equity ranges you can take into your compensation negotiation. Awesome! Plus, it indirectly helps in solving compensation discrimination based on diversity.

"The advantage in our data is this is generated from the company HRIS systems instead of self-reported surveys."

All about Europe

European Investment Fund (EIF) did a Venture Capital Survey 2023 : Market sentiment, scale-up financing and human capital

Link for the report. They surveyed almost 500 VCs to get their views on the state of the market. Few highlights:

• 70% of VCs say the fundraising environment is bad or very bad — and almost two-thirds think it will get worse or remain the same in the next 12 months.
• 28% of VCs say their investment activity has decreased
• Nearly half of VCs say competition for deals has decreased
• Two-thirds of VCs say portfolio company valuations have fallen
• More portfolio companies underperformed expectations in 2023, with increased insolvency expectations and deteriorating access to external finance.
• 72% of VCs, the exit environment has significantly deteriorated in 2023 — although half think it’ll get better next year.

PitchBook published its Q3 European Venture report

Link for the report. It was filled with insights. Few highlights:

• Deal value within VC markets is set to end 2023 well below 2022, but signs of recovery could be evident.
• Late stages continue to show greater declines versus early stages.
• The top 10 deals in Q3 2023 were skewed towards cleantech investments.
• Nontraditional investor participation declines in line with total market.
• Corporates continue to use venture markets to tap the latest technologies.
• Exit activity remains weak, with limited recovery this year. By exit type, public listing value remains the most depressed this year, with buyouts showing the most resilience.
• Through Q3 2023, VC fundraising sat at half the level of 2022.

General Catalyst joins forces with a European VC La Famiglia

Link for the post. Could more such partnerships or M&A between VC firms be imminent, given the harsh fundraising environment and U.S. VC's ambitions to expand geographically!?

Bigger pool for Europe!? Horizon Europe's successor requires €200 billion to meet future challenges.

Link for the post from Maria Da Gra?a Carvalho

"The European Union’s next seven-year science funding programme has to have a budget of €200 billion to ensure that future challenges can be met"

German LP @ launches €200m ‘emerging managers facility’ to boost diversity in VC.

Link for the news post.

"The EMF is a component of the federal government’s €10bn Future Fund — which was launched in December 2020 to help plug the late-stage funding gap in Germany. The Future Fund will invest €200m in the EMF by 2030."

European founders are backtracking on employee equity

Link for the news post from Sifted . Few highlights:

• As the fundraising environment cools down, European startups are becoming less generous with employee equity — and it’s likely to cost them the best talent.
• In the UK, new equity grants were down by over 40% compared to September 2022
• Europe has historically lagged behind when it comes to employee ownership, with the typical share of equity given to workers stagnating around 10% of stock options — half as much as in the US.

Must listen podcasts from October

1. Jamie Rhode, CFA on "Why 95% of LPs Can Only Achieve a 10% IRR" - Link
2. Joe Schorge ( Isomer Capital ) on "Why now is Europe's time" - Link
3. Samir Kaji 's special LP roundtable podcast (Link) on "What are LPs thinking about in Venture" with Chris Douvos of Ahoy Capital, Beezer Clarkson of Sapphire Partners, and Guy Perelmuter of GRIDS Capital
4. Sapphire Partners’ Elizabeth "Beezer" Clarkson, shares her insights on the current LP landscape (Link)
5. Ho Nam of Altos Ventures on "Lessons in Venturing Differently" - (Link)
6. VC/LP Pitch Session (Link) between Marc Penkala of Altitude & Michael Sidgmore of Broadhaven Capital Partners on the EUVC podcast
7. Philipp von dem Knesebeck of Blue Future Partners on EUVC podcast (Link) talks about - Fund of Fund strategies, investing in emerging managers, solo GPs, portfolio construction, and Europe vs US.
8. Kauffman Fellows podcast (Link) featuring Mike Maples, Jrof Floodgate Fund in talks with Code Cubitt of Mistral Ventures on how he launched and built Floodgate Fund

Our fun side - top memes & puns ????

Dirk Sahlmer (Link) - How investors review pitch decks. If you ever wondered why the average time spent on DocSend is 00:04.

eric dolan (Link) - I was at Starbucks, and this VC in line asked me what I did.

Michael Jackson (Link) - on venture cycles, the ups and downs

Michael Jackson (Link) - on VCs on their way to the latest AI conference in France.

The END.