What is a way to determine the behaviour of investors, both public and private equities?
The interest rate environment
How does private market reaction compare to public market?
The private market is delayed compared to the public and it impacts later stage private companies more given they are closer to exit and may have to face public markets sooner
How does changes in capital markets impact founders?
Impacts how founders operate thier businesses and how employees get compensated causes further ripple effects across the economy
Do later-stage companies follow the power rule?
Later stage companies have less risk and therefore don’t follow the traditional power rule
What type of companies makes the power law work?
high profile and high risk
What can be said about 2021 deal environment?
2021 had more deals than the 4 prior years
- low interest environment (almost at zero) which resulted in a flow of capital
- adds capital to the market from parties that would otherwise not be in venture (corporate funds, wealth managers, commercial banks)
- Floods the market with capital and completely changes the funding dynamics for all
What does a low-interest rate environment mean for investors?
They search for yield and profit
What is dry powder?
Money a venture fund has that is not invested
Whast is the result of high dry powder?
- Pressure to deploy from LPs and desire to look for ways to do so
- potentially result in overpaying for assets and lead to overvalued assets across the market
- Overpaying leads to poor ROI
What are the types of investors disrupting the venture capital space?
- Solo Capitalists
- Corporate Venture Capitalists (CVC)
- Wealth Managers
What are solo-capitalists?
- Go in and invest money by themselves
- Win deal through empathy, speed and expertise
- Not raising from random parties – big banks giving the power to solo-investors
- Many manage more $$$ than traditional VCs
One happened in 2022 in relation to the market and dry powder?
In 2022 everyone stopped investing, and the pace slowed down and the VC’s are sitting on mountains of dry power that they can invest
What is a Corporate Venture Capital?
- Slower moving
- Late to market (once they get there its too late)
- Any big corporation you can think of has created this in the last 5 years
- Walmart started a venture fund
- Completed by: creating a new arm instead of paying off the balance sheet which would give entrepreneurs more security
- The partner might not get carry depending on deal structure
- often looking for strategic investment thesis in addition to financial returns
What is a wealth manager?
provide holistic financial advice to help their clients grow and protect their wealth. This advice goes beyond just providing advice on a client’s investments or designing a financial plan for them. Wealth managers generally work with clients with a higher net worth
- going into the venture capital space to diversify portfolio and pump lots of capital into companies
What are the problem with these new types of investors entering the venture capital space?
Wealth managers, solo investors, and corporate venture capital cause the following:
- inflate the market
- venture capital is not their main focus
- drive up overall risk in the market
- pretend and create the facade that they are experts
- they probably won’t last the full-time horizon of 10 years –> won’t be there when shit hits the fan
- huge risk to the founder (the value add low, and they might be out of the market as quickly as they came in)
Describe the deal dynamics from 2009 to 2021
Founders are in control
(more capital than good companies to invest in)
Fundraising was easy
- term sheets out in a week or less
No due diligence
- the breakdown in governance
- no board seats
- If I take time to do the due diligence, I might lose the deal
virtual meetings
- no founder/investor relationship
Secondary transactions everywhere
- founders taking money off the table at all rounds (even seed!)
- VCs would do anything to win the deal
What is the impact across the venture ecosystem of upwards pressure on valuations? First and second order?
First Order:
- overvalued companies
- overvalued VC books showing higher value to LP
- employees having highly valued shares
- multiple explosions (companies trading at 100x revenue)
Second Order:
- venture funds raising follow on funds based on book returns
- employees using high share prices to take on debt/leverage
- founders getting rich
Their books look fantastic and so everyone thinks they are rich but its all book return and they haven’t seen return yet
Explain how founder culture has evolved in the last few years.
Founders became celebrities and superstars with a magnetic pulsed
What was the result of founder-centricity and competitive deal dynamics?
Lack of due diligence
Lack of governance
Funds that only think power law without reflecting on downside protection
Founders had no social contracts or employees and it was 100% driven towards their own empire creation
How would venture capitalists justify investments in deploying capital into random businesses?
They would say anything was ‘technology’
- can’t find enough ways to get rid of capitals
- started investing in non-tech things just so they could keep deploying cash (lots of dry powder)
- the more you deploy the more AUM you can manage and the more management fees you can make
E.g., Casper: Mattress online (technology company?)
Describe the 2009-2021 public markets environment
Daily Trading Volumes: Sky high in post-covid 2020 and high market volatility
Covid Effect
- market uncertainty
- stock market initial crash
- governments infused $$$ into the market
- people not working
- interest rates were low
- equities took off
Rise of Trading Platforms
- No-fee, easy-to-use trading platforms (e.g., Robbinhood)
When reflecting on competitive deal
dynamics in the venture markets coupled
with strong public equity performance
what might this incentivize private
companies to do?
- IPO due to the influx of cash
- 2021 IPOs in the public market popped off
The definition of ‘big outcome’ changed.
- The VC may not have invested prior but due to the rise in public sentiment in public markets may be seen as successful (even at seed stage)
What is a SPAC?
a Special Purpose Acquisition Company
Raise a pool of capital
○ Create a holding company with a ‘mandate’
○ The holding company goes public with simply a balance sheet
○ It seeks an acquisition target to acquire, thereby bringing that company
public
What are the PROS and CONS of going public through a SPAC?
PROS:
- Faster execution than an IPO
- Upfront price discovery rather than depending on market conditions
- the possibility of raising additional capital (debt or PIPE)
- No road show needed (save marketing costs)
- Companies might have negative cash flows and be valued on future growth, IPO is valued on current growth
- With negative cash flows the company wouldn’tt have passed the test that qualified to for IPO
CONS:
- potential for capital short fall
- compressed timeline (burden on company to have financials and SEC filings)
- Light diligence requirements (incorrect valuations and other financial metrics, lawsuits)
