Slowing Down To Speed Up
I saw this chart in Recode’s piece on Benchmark:
It’s an interesting chart because it breaks out new investments and follow-on investments, both of which have been falling at Benchmark for going on five years now.
The Recode article, written by Teddy Schliefer, also states that Benchmark has not raised a new core fund in over four years.
Our numbers at USV are not as stark, we never took up our investing pace that much. We have always done around 6-10 new deals a year and while there is a fair bit of variability in that number year to year, over time it has stayed pretty constant.
But we last raised a new core fund in early 2016 and we are maybe 2/3 of the way through investing that so it should take us at least three years to put that fund to work. That is down from the two year period where we went from the 2012 fund to the 2014 fund to the 2016 fund.
So Benchmark is not the only leading VC firm that has slowed things down over the last three to four years.
Teddy makes an interesting point in his piece:
That long a dry spell between funds — at a time when rival firms are competing with one another to raise bigger and bigger war chests at a faster and faster clip, led by SoftBank’s $100 billion Vision Fund — is decidedly unusual.
Longtime readers know that I have a huge amount of respect for Benchmark. I think they are a firm that beats to its own drum and does what it thinks is right and doesn’t worry too much about what others think. That approach leads to better returns over the long run in my view.
But if there are diverging perspectives among the top-tier VC firms right now, who is right? Or maybe both are right. Slow down the pace of early-stage investing and step on the gas in later-stage/growth?
And then, of course, there is crypto, where a lot of the smart people and smart money is going. Chris Dixon at Andreessen is raising a dedicated crypto fund. Matt Huang leaves Sequoia to do a crypto fund with Fred Ehrsam. And those are just two high profile examples, but there is most definitely a discernable pattern of smart money and smart people moving to the crytpo sector over the last few years.
So times they are a changing in VC land right now. Which mirrors the broader tech sector which is maturing and consolidating while a next wave starts brewing. How to play this whole thing is challenging. The future of the VC business and its top firms are in flux and those who play it right stand to gain a lot and those who don’t stand to lose a lot. It is most definitely not a time for the status quo.
Does the divergence in views correlate to returns?To wit: If a firm is generating good real returns (cash on cash) then such a firm feels little pressure to raise new funds as soon as possible.For one thing, their returns should provide them access to LP investment whenever they decide to raise. Also, good returns mean the GPs are making a lot of money themselves, and don’t need to chase management fees by raising as many new funds a s possible. Rather, they are focused on investing and opportunity trends and technology developments and being smart about what to invest in and when, not fundraising.Conversely, firms that know that, given enough time, their returns will be mediocre or worse, will be in a rush to raise new funds, and as often as possible. I’ve seen “powerhouse” firms built this way — the firms raise funds as soon as and whenever possible, taking advantage of the almost inevitable mark up in portfolio valuations that occurs in A and B rounds (but not necessarily indicative of the ultimate cash on cash results of the funds over their lifetimes.) Such firms then market themselves as big and successful — look at how much we have under management! look how many other LPs gave us money! — and the self-perpetuating cycle goes on…USV and Benchmark strike me as much more the former, almost the definition of the former.
“Top line is vanity; bottom line is sanity.”+100 on this comment. VC is cyclical, generational some sort of ‘al’.What is the huge trend pushing a massive advancement right now?Crypto is it.Everything else – hard / materials science, bio science, clean tech, energy innovation…..nothing seems to have an underlying trend.You can’t pull unicorns out of a pen with no horseflesh in it.
getting older, getting younger seems to be the germane theme of the article.perhaps Teddy is actually trying to subtly condition the Recode old guard to think more about their ‘golden years’ as part of his cunning career development strategy.
Yes. Some need the management fee. But seriously, when you have technological innovation and huge disruption, a lot of the industry gets cleared out but the ones that add real value hang around and do better.
“technological innovation and huge disruption, a lot of the industry gets cleared out but the ones that add real value hang around and do better”You could be talking about newspapers.Disruption…Adapt…survival of the fittest
or trading. or a lot of things. we are in the midst of one of the greatest technological renaissances in human history. it will cause a lot of disruption and fear. But, our lives will be better for it and a massive amount of jobs will be created on the other side. But, we don’t know what they will look like or skills they will need and the natural human psychological fear of the unknown shapes the debate today
“…we don’t know what they will look like…” Or do we?https://magazine.seats2meet…
“…on the other side” ??
History might be a good guide. The printing press was highly disruptive. It put some people out of work, but created new jobs. Technology invading the trading marketplace was the same.
…..and, the faint of heart.
As much as there are any professional services careers where judgement, networks, relationships, and access still matter. Extend that to 40 years out and it’s questionable – the rise of AI – if it happens, might be able to replace the judgement part. Networks and relationships will either get more or less important as the Millennial generation and those that follow take a more active role in the economy. Will they continue the traditional makeup or disrupt it? Will they seek out more human contact and relationships to counter the increasing dependence on AI and computer generated judgement? Good question and much too early to tell.
I like your first sentence. Dead on. And in 40 years, I’ll be dead. Seriously though, I think it is REALLY hard to predict things more than 5 years out. It’s hard for one year. For 5 all of your errors compound, maybe you get lucky and your errors net out.But I look at this chart with human not AI knowledge and I think…..In 2008 others were not investing. It was target rich for new investments, people would accept valuations. That tailed off in 5 years. But the follow on for those investments increased. Now they look at it and think, I am going to keep my powder dry for another 2008. And that is about right. I have been in this for three decades and seen three cycles. Old hands know this.I’ll say it again. Entrepreneurs remember that money is not in your wallet. It is in your company. And if things don’t work out you won’t own “your” company. (It’s not yours because you took money) and that money you wasted in your company, not your pocket will get written down……out of your hide.
Some things are driven by human nature. Human nature is eternal.See other comments.
or 5. why wait?
No question, Yes!. VCs bring the cash but all the experience and moves when things go wrong.
The vc industry needs to evolve. When 75% of capital flows to 3 communities, that is not an efficient market.A new model will be introduced soon that deploys public market disciplines, portfolio-level risk management, tax optimization, and ETF-like traits. When 85% of venture funds underperform a public market index equivalent, maybe ‘stock picking’ doesn’t work in this asset class as well.The portfolio construction method is labeled the S.I.F.T. method:* SMART Transparency expectation – leveraging the research that shows a link between transparency & operational effectiveness* Index-like portfolio construction – applying the research that reflects a properly diversified Seed fund needs 100 companies equal weighted to optimize for Alpha and avoid adverse signals of over-weighting or under-weighting individual holdings* Filtering (vs. stock picking) selections based on multi-factor (Smart Beta) techniques, to avoid anchored biases (read pattern fit or ‘everybody’s doing it’) in security selection* Tax Optimization – deploying the overlooked QSBS tax laws that lower the after-tax risks and raise the after-tax returns.
This is the type of statement that is made when there is nothing going on in tech.For all their faults, Baby Boomer Dorks were amazingly productive, as the rode the massive wave of automation.The next frontier isn’t AI. It isn’t crypto, those are derivative.The next frontier needs a broad scientific convergence before anything meaningful surfaces.
https://avc.com/2018/06/slo…”And then, of course, there is crypto, where a lot of the smart people and smart money is going.” Ummm. Hmmm. Well, that assertion directly contradicts many assertions made by Warren Buffett and Charlie Munger. But hey. What would they know about finance and investing? Seriously Fred, are you trying to drive LPs away with your absurd pontificating? When the crypto bubble bursts—and it will burst—you might not come out looking like a financial maven.”The future of the VC business and its top firms are in flux and those who play it right stand to gain a lot and those who don’t stand to lose alot. It is most definitely not a time for the status quo.” Let me spell it out for you Fred: C-O-N-S-O-L-I-D-A-T-I-O-N.You either close up shop and become a rainmaker for a larger VC, or ride off into the sunset on your trusty horse. Then later you can express your heartfelt shock and remorse when the crypto bubble you shilled for and therfore helped to inflate bursts much like the Florida land bubble in 1925. The frontier is closing rapidly. Farmers are fencing in the wide open praire.VCs are desperately trying to figure out how to stay in business so they are clinging to the fantasy that crypto is something more than a wildly popular collectible that within a decade, probably even five years, will join the ranks of past fads like Pet Rocks and Beanie Babies.
let’s see where we come out on this question in five years. the good news is this comment thread will be online and visible to all. as will this blog post and all of my blog posts. the ones i wrote five, ten, fifteen years ago are still online. you can go back and test everything i’ve written against what happened. i have been wrong. i have been right.
You had a good point about poker and investing. People think Buffet is a genius. When you have the big stack it’s a bit easier, but those that pick and choose their moments…..I know you don’t care about anonymity. And I respect that, but not agree with that.
In another post you said (I thought) that 25% of new investments are in crypto that you made in the last year (or something like that). Seat of pants that feels like a great deal over allocated the way I see it on that sector. But it’s not my thing so …Anyway assuming 25% of the new money is in crypto  what I will say that it seems or appears that more than 25% of your attention is in crypto. So if it works out that is great. However if it doesn’t there is more than a loss of money. There is also the opportunity cost of not focusing on something else with your time and your attention (meetings, what you read, attention and so on). Plus the fact that potential investments could see USV as less desirable because of that focus. And you are the marketing guy so if you are appearing to be all focused on crypto then how does that play out? You think of the big box store for what they market as their focus, right?Will bring it back to dating which I often do. If one of your kids dates the wrong person they have lost time toward a goal after all they get tied up for X years. During those X years someone else, more ideally suited for them, could end up being taken by another person.My last point is going to be the fact that even if everyone thinks you are crazy and was wrong in the past (and you were right) doesn’t mean that you will be right in the future because that is what they said before.Look I hope it works out since I have made a great deal of money off the fact that there is crypto and what is happening. And I mean a great deal. But I am realistic as well. I realize I have to keep many different irons in the fire including irons that really aren’t worth the time I am spending on them relative to what I have made in and around what is going on with crypto. Just in case. That is the way I look at it. It’s your decision and there are things that I don’t know about why you do what you do obviously.
Shill is a term you should use in person. When your physical safety can be brought into question. Its not a keyboard term.Just an FYI.And, by the by, I think crypto is Y2K like. Impact is 1/1000 of hype. But its real.More substantively, for you, is that you seem ignorant of the fact that anyone worth their marketing spit knows that all mature markets diverge, which is not the same as consolidate.Its never a good plan to type words in some Drop the Mic / A$$hat way…..but its pretty catastrophic to do so and then not know your P’s from your Q’s.It is an absolute truth that divergent, mature markets have large players at the top. These players have – indeed – consolidated the supply chain via M&A or just by squeezing the margins.But, in VC, clients are not exclusive, meaning that Consolidation Oriented Large Ambitious Suppliers cannot squeeze fellow suppliers from the client side.And, of course, VC is a people business, which means COLAS are limited in their ability to completely choke off competitors from the supply side.And, of course, COLAS cannot consolidate financially independent competitors who have access to supply and clients and no desire to be involved in the lovely day to day infighting and jackal like cannibalism that engulfs almost all COLAS.And, of course, the reason smaller players can maintain supply, demand and their quality of returns is that they focus on the quality of their relationships – something you could work on, FYI.Like, say….- without any inside knowledge here, just a fun hypothetical -…. when a VC who has the strongest track record of any investment management firm that a Massive University Endowment Fund Manager Client uses tells that client that he’s not in a hurry to raise a fund because the underlying fundamental dynamics are not there and the mid to short term opportunity pipeline seems lean and maybe you, Mrs. Massive University Endowment Fund Manager Client, should deploy that capital outside of VC.But you would have to deal in cowboy realities to know that, jackass.
i tried to answer that question near the end of the interview i posted on saturday
it is not a ridiculous question
You just commented to yourself, LOL
tweetstorming teaches you to do that
I think it is.There is no way your customer base does not want to have a 3P handle funds to make sure they are exposed to a segment of the market that genereates both cache and returns.No way they want to:a) DIYb) not do it
Hard question to answer. Harder so for you
Five years ago on PandoDaily Sarah Lacy asked you what “contrarian truth ” you held. You answered that there ultimately wouldn’t be a need for VCs to ever have funds in 30 years—a potential unbundling of advice, control, and money. Regardless, times are changing in the VC landscape now, and I think change itself (Benchmark/Softbank otherwise) is exciting.
Fred’s terrible at that type of stuff.
? I don’t understand. @fredwilson:disqus was making a contrarian prediction that seems to be shaping out correctly.
He’s better at broad intuition & seeing large trends way in advance. Specific ideas less so.Contrarian means you are right and herd is wrong.My VC contrarian prediction would be 4 global VC firms, 400 4 person firms
Good Lord, USV will be there for Fred’s kids if they want to pick up the mantle.Remember when Free Agents & Direct Online Ad Buying were going to revolutionize Big Business Marketing? Sayonara Y&R et al.VC is in the same, servicing giant customer spot.How else will massive fund managers diversify their portfolios while maximizing their CYA requirements?