A Data driven thread on the state of VC today, which we characterize as a "Tale of Two Cities"

So much data seemingly conflicts of whether things are "back" or whether things are dire (Hint: It's both, but with qualifiers).

It's a long thread, but packed with data

🧵 1/ Let's first look what we saw during the high times of 2011-2021 with funds/companies.

SaaS Multiples go to 4x the 20 year average!

With insitutional LPs pulling back, global family offices have been a focus for fund managers raising capital.

There are few things to keep in mind with these groups (from my experience working with 250+ families): A short🧵 1) First, there are clear reasons why FOs have been a target. According to Goldman, 55% of FOs invest in venture funds & 85% do some time of venture investing
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On down rounds or valuation cuts:

1/Common perception of down rounds and valuations being cut is a negative signal for the company and that sets it on an irrecoverable path toward being a large, durable company.

It's not. 2/ Unfortunately over the years, down roads and valuation cuts have been stigmatized to the point they are avoided at all costs due to the view they signal some failure. Destigmatizing this is healthy.

A lot of LPs ask me if there is a certain model of VC that I think is best (i.e. small, big, high reserves/low reserves, sectors).

There isn't a one size fits all, and there are many ways to do well.

Instead, here are the 6 attributes I care about when assessing a manager🧵 1/ Self-Awareness

Managers should know exactly where they truly have some type of true advantage and lean into it.

Asymmetric success comes from simplifying the zone of genius and attacking relentless there vs. trying to shore up "weaknesses".

1/Now that the SVB auction is live, know that we believe them to be a very attractive purchase given relationships and core business.

I expect that both banks and private capital will bid and there will be a lot of bids 2/ To make it work (as it will be at a discount), their will have to be some assistance to cover the asset/liability mismatch when the purchase price discount is accounted for

1/This will be a very critical day for the banking industry. Yellen was quoted on making sure depositors are taken care of. There are several options. Some general thoughts before I have to go offline for most of today 2/ First, the assets SVB has (Loans and security) pen out to nearly a full recovery of funds if liquidated. As mentioned prior, it's a time issue that is most concerning. Because of this, the deposits will be an interesting liability to buy for private capital (hedge or other)

The latest on what I'm seeing / hearing this afternoon on the banking contagion, and what people are doing (and what I've mentioned to folks)

Sorry for the all the threads, but so much to discuss!

🧵 1) The regional banks that have the highest risk of contagion (those that are in PE/VC/tech) are actually fine. Ratios are strong, no issues in meeting obligations in normal course of business. The SVB BS concern was understandable, but overblown and didn't justify a bank run.

I'm now seeing emails from various firms imploring their companies to move all cash to a top 4 bank (including from FRB, Signature, etc). This type of panic will break the system, is frankly, very dangerous.

However, a few things to think about: 🧵 1) To put a bow on the SVB situation, I keep hearing that SVB was a sinking ship because of HTM assets being impaired on a mark-to-market basis. No, the HTM issue was mainly a NII/NIM issue, & normal deposit outflow could have been covered by borrowing, CF from ops/HTM, cash/AFS.

Crazy day. After 22 years between SVB and FRB, I'm still at shock. My wife also works at SVB right now.

The news today was huge, and here is what I've pieced together across 100's of conversations yesterday/today.

🧵 1/ So, this AM California state regulators put the bank in receivership under FDIC control. This has created a spiral in the banking industry overall, although it is clear to many of us the issues at Silvergate & SVB are very idiosyncratic.

A lot of panic re: SVB (you should see my phone/emails!). A bank run driven by panic is the real risk here, not the action of selling LT securities at loss

I have no inside information as I left SVB in 2012, but know enough about banking to piece together.

Quick 🧵 1) First, one of the core KPI's of a bank is Net Interest Margin (NIM); basically the delta between what it earns on assets (loans and securities held) vs. cost of funds.

Most banks try and get in the 3% range

Going back to 2009, I've met and worked with 1,500 emerging managers.

Characteristics I've seen of the most successful emerging EM's

Friday🧵 Grit and hustle

The best EM's I've seen respond to founder texts/emails within a hour.

The founder journey is tough, and we appreciate ppl that respond quickly.

LPs are moving to risk-off in VC, meaning passing emerging managers in favor of established. Data showed this in 22'.

For Emerging Managers, there are ways to be more successful in raising, which requires being able to answer the "why"

Short🧵 1/ "Why" are you doing this?

What is your personal mission behind this?
What inspired you starting a firm?
Why do this vs. something else?
Why can you not, not do this?

Most managers have high opportunity costs, so you should be able to offer a compelling, and clear answer.

Glad the @theallinpod & @DavidSacks covered venture debt in the last ep. It definitely is something founders get wrong too often. I was a venture debt lender in 99/00.

For founders, here is a quick primer: Venture Debt is often confused, but within lender community, it typically refers to Series A/B debt that augments an equity round. I.e. You raise $10MM in an A, a bank or fund provides you $2MM-$4MM in debt.

@Lady10x shared this on LI recently outlining fund performance wrt different size funds (Using Burgiss data).

I have a few thoughts, and it explains LP behavior in general.
🧵 1/The common view is that small funds perform better than large funds.

And that is directionally very correct, but the two things that GPs should also factor/understand when marketing to LPs 1) return Dispersion and 2) Risk

2023 will be a very difficult year to raise a venture fund as an Emerging Manager.

That part is obvious unless the condition of investor sentiment suddenly changes.

As a EM however, it's important at least be aware of some of the issues HNW LPs are thinking through.
🧵 1/We will focus on non-inst LPs as EMs often rely on non-institutional capital; we found that >60% of capital in Fund 1/2's came from Family offices and High Net Worth individuals.

With this group, there are a few common objections/issues that will come up.

In difficult markets, there is a flight to quality with LP capital.

True Emerging Managers will feel the brunt of the downturn.

If you are a first time fund manager, aggressive fund sizing isn't the way to go. 🧵 Raise the smallest fund that is minimally viable for you to run a strategy.

I still see managers set target 2-3x of what is reasonably likely in the mkt.

Starting small has plenty of benefits (check out the first fund sizes of @haystackvc @Lux_Capital @Initialized @eniac)

The last 10 years have spoiled a lot of investors and skewed venture expectations. I've had both GPs and LPs this week casually say that 5x net is a reasonable benchmark for seed stage firms.

Why is this unreasonable? Let's look at the math. 🧵 A $100MM seed fund with a 2/20 structure needs to have $600MM in total capital proceeds to return a 5x ($500MM profit, $100MM to GPs, $400MM to LPs).

And keep in mind many firms have done higher carry based on hurdles with full catch up.

Common themes of successful VCs I've observed from meeting with 1000+ VC's

1/Playing the "game" they can win, and not getting moved into a game that plays into someone else's strengths
2/ Ok with being on an island (non-consensus) and being wrong

cont/ 3/ Realizing they are going to be wrong more than right, and that is ok. Anti-portfolio market cap is usually > portfolio cap even for best firms
4/ Are conviction based, but not stubborn and willing to be swayed
5/ Constantly re-inventing themselves

Track record (and how they benchmark) is what LPs rely on more than anything when evaluating fund managers. But track record often represents nothing more than a semi-useful metric.

Why? Track records are similar to headlines. They give you a brief TLDR, but rarely tell the whole story.

What you really want to get to is the probability of how repeatable outlier outcome may be moving forward.

Fundraising as a fund manager is tough for 90% of firms of the market. As I've mentioned, we are extremely likely to move into the hardest fundraising cycle I've seen since 2008.

So, what to do in these markets to understand/adapt? 🧵 The reversal in stock markets has created issues:

Inst. investors are being confronted with the denominator effect (size of total asset base has dropped due to public stocks, and VC is now overweight)

HNW/FO are re-assessing portfolios, and feel appreciably poorer/unsettled

For VC’s looking to raise from institutional LPs such as endowments, the next 12-18 months, it is almost certain that we will see the dreaded “denominator effect” come into play.

So….What exactly is the denominator effect?

A quick 🧵 When institutional investors allocate capital, they have committees that decide on allocation buckets – i.e. 40% pubic equities, 20% private equity, 10% real assets, etc.

While there is some flexibility, too high/low on one asset category requires rebalancing