The changing landscape of adventure. The world around us is disrupted… | by Mark Suster | September 2021 – News Couple
ENTREPRENEUR

The changing landscape of adventure. The world around us is disrupted… | by Mark Suster | September 2021


The world around us is being disrupted by the acceleration of technology in more industries and more consumer applications. Society is redirecting it toward a new post-pandemic norm – even before the pandemic itself has been fully tamed. The loosening of federal monetary policies, especially in the United States, has pushed more dollars into project ecosystems at every stage of funding.

We have global opportunities from these trends but of course also significant challenges. Technological solutions are now used by autocrats to monitor and control populations, to thwart the economic prospects of an individual company or to wreak havoc through demagoguery. We also have a world, as Thomas Friedman very elegantly put it – “hot, flat and crowded.”

With the massive changes in our economies and financial markets – how can the venture capital market remain? Of course we can’t. The landscape is literally and figuratively changing under our feet.

I often answer the same way…

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“First off, yes, almost every corner of our market is valued. By definition – I overpay for every check I write in the VC ecosystem and valuations are raised to ridiculous levels and many of these valuations and companies will not be held for the long term.

However, to be a great vertical boss, you have to have two opposing ideas in your head at the same time. On the one hand, you are paying too much for each investment, and the ratings don’t make sense. On the other hand, the biggest winners will be much greater than the prices people have paid for them and this will happen faster than at any time in human history.

So we just need to look at the massive expansion of companies like Discord, Stripe, Slack, Airbnb, GOAT, DoorDash, Zoom, SnowFlake, CoinBase, Databriks, and many others to understand this phenomenon. We are operating at a scale and speed unprecedented in human history.”

*******

I first wrote about the changes to the venture capital ecosystem 10 years ago and this still serves as a good introduction to how we got into 2011, after a decade of booming web 1.0 dot com.

Part one and part two:

Briefly, in 2011, I wrote that cloud computing, initiated notably by Amazon Web Services (AWS)

  • micro-VC . movement was born
  • It allowed a massive increase in the number of companies to be created with less dollars
  • Creation of a new breed of LPs focused on very early stage capital (Cendana, Industry Ventures)
  • Reducing startup average life and making it more technical

So the main differences in venture capital between 2001 and 2011 (see chart above) were that in previous entrepreneurs they pretty much had to boot themselves (except for the biggest foam in the dot-com bubble) and by 2011 a micro-capital market emerged Salim. In 2001, the companies’ IPOs were too fast if they were running, and by 2011 the IPOs had slowed to the point that Eileen Lee of Cowboy Ventures cleverly called the multibillion-dollar results a “unicorn” in 2013. How little did we all know to How ridiculous this term would become but nonetheless held up.

Ten years on a lot has changed.

A time traveler can barely recognize today’s market from 2011. For starters, a16z was only two years old at the time (as was bitcoin). Today you have funders that focus exclusively on “day 0” startups or companies that haven’t yet been created. It could be ideas you hatch internally (via a foundry) or a founder who just left SpaceX and raised money to research an idea. Silicon Valley legends are dead – two founders in a garage – (HP Style). The founders who are more connected and better able to invest start with large amounts of cash. And they need it because nobody big on Stripe, Discord, Coinbase, or for that matter Facebook, Google, or Snap is leaving without much incentive to do so.

What was once a round A in 2011 is now routinely called a seed round, and this has been so ingrained that founders would rather take less money than put the words “round” into their legal documents. You have seed rounds but you now have ‘introductory rounds’. Pre-incorporation is just a narrower part as you can raise $1–3 million on a SAFE note and not be given any board seats.

The founding round these days is 3-5 million dollars or more! And there is so much money being put to so many entrepreneurs that many companies don’t even care about board seats or governance rights or forbid Heaven to work with the company because that would just take the time to chase 5 more deals. The seed plant has become an option for many. In fact, many entrepreneurs prefer it this way.

There are of course many Seed venture capitalists who take seats on the board of directors, don’t overcommit to many deals and try to help with “company building” activities to help the weak foundations of the company. So in a way it is self-selection.

A-Rounds were valued between $3 and $7 million with the best companies able to skip that smaller amount and raise $10 million on a $40 million pre-cash valuation (20% dilution). These days, $10 million is odd for top A-Rounds, and many are raising $20 million at $60-80 million pre-money valuations (or more).

Many of the best exits are now routinely 12 to 14 years old from the start because there is a lot of private market capital available at very attractive rates and without scrutiny by the public market. As a result, there are now very strong secondary markets where founders and foundation funds alike sell their ownership long before the final exit.

Our fund (Upfront Ventures) recently returned over 1x a full $200 million fund selling only a small mine in secondary sales while still holding the majority of our shares for final exits in the general market. If we were to sell more than 2x the fund easily in the secondary markets while still staying big. This would not have happened 10 years ago.

The biggest change for us in the early investing stage is that we now need to commit in advance. We can’t wait for customers to use the product for 12-18 months and interview customers or look at purchasing groups. We must have a strong conviction of team quality, opportunity and commitment more quickly. So in the early stages we have about 70% seeds and 30% pre-seeds.

It is highly unlikely that we would do what people now call a “tour”. why? Because investing at $60-80 million before the cash (or even $40-50 million) before there is sufficient evidence of success requires a larger fund. If you’re going to play in the major leagues, you need to write checks from the $700 million – $1 billion fund, so the $20 million is still only 2-2.5% of the fund.

We’re trying to cap our A funds around $300 million, so we maintain the discipline of early and small investment while building our growth platform separately to do late stage deals (we now have >$300 million in AUM assets for growth).

What we promise the entrepreneurs is that if we go in for $3-4 million and all goes well but you just need more time to prove your business – at this scale it’s easier for us to help fund the initial extension. These extensions are less likely to be at the next level. Capital is less impatient on a large scale.

What we do and think is unique to some seed companies is that we like to think of ourselves as “core investors/investors” meaning that if we write $3.5 million in a seed round, we are more likely to write $4 million in a round when you have solid progress.

Otherwise, we have adopted the “Iron Strategy” where we may choose to avoid the expensive and less stable A&B rounds but have collected 3 growth funds which you can lean on when there is more quantitative evidence of growth and market leadership and we can guarantee a round of 10-20 million dollars from a separate vehicle.

In fact, we just announced that we’ve hired a new head for our growth platform, (follow him on Twitter here → Sixum Suryapa – He promised me to give away knowing Corp Dev), which will be based alongside Aditi Maliwal (who runs the FinTech practice) in San Francisco.

While the skills of a Seed Round Investor are closely aligned with building an organization, helping define strategy, increase company awareness, assist with business development, discuss product, and ultimately help with downstream financing, Growth Investing is very different and closely related to performance metrics and appraisals. Exit. The timing horizon is much shorter, and the prices one pays are much higher, so you can’t be right about the company, but you have to be right about the valuation and the exit price.

Seksom recently managed corporate development and strategy for Twitter, so he knows a thing or two about getting out of companies and whether or not he’s funding a startup I think many will get value from building a relationship with him for his expertise. Prior to Twitter, he held similar roles at SuccessFactors (SaaS), Akamai (Communications Infrastructure) and McAfee (Security Software) and was an investment banker. So it covers a large area of ​​industry knowledge and M&A slicing.

If you want to know more about Seksom, you can read our TechCrunch interview here.

By 2018, I felt he was right and we started focusing more on our approach to ironing.

We believe that to generate significant returns, you must have an edge, and to develop an advantage, you need to spend your time building relationships and knowledge in an area where you have media advantages.

At Upfront, we’ve always made 40% of our investment in Greater Los Angeles, and that’s exactly why. We’re not going to win every great deal in Los Angeles – there are many other great companies here. But we are certainly focused in a massive market that is relatively less competitive than the Bay Area and produces big winners including Snap, Tinder, Riot Games, SpaceX, GoodRx, Ring, GOAT, Apeel Sciences (Santa Barbara), Scopely, ZipRecruiter, Parachute Home, Service Titan – For example but not limited to!

But we also organize ourselves around practice areas and have done over the past seven years, and these include: SaaS, cybersecurity, FinTech, computer vision, sustainability, healthcare, marketplace companies, video games – each with partners as a leader.

  • Sustainability Growth and Climate Investment
  • Investments in “Web 3.0” that broadly cover decentralized applications and possibly even decentralized independent organizations (which may mean that in the future venture capital should be more focused on token value and monetization than stock ownership models – we’ll see!)
  • Investments at the intersection of data, technology and biology. One only needs to look at the rapid response mRNA technologies by Moderna and Pfizer to understand the potential of this market segment
  • Investments in defense technologies including cybersecurity, drones, surveillance, counter-surveillance, and the like. We live in a hostile world and it is now a hostile world backed by technology. It is hard to imagine that this does not drive a lot of innovation and investment
  • Continued reinvention of the global financial services industries through technology-enabled disruptions that eliminate bloating, idleness, and high margins.

As the tentacles of technology become more widespread in industry as well as in government, it will only accelerate the number of dollars flowing into the ecosystem and thus fuel innovation and value creation.





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