Major VCs have expanded to broader asset managers; is the model sustainable? • TechCrunch
Last week at TechCrunch’s annual Disrupt event, this publisher sat down with VCs from two companies that have looked alike for the past five years or so. One of those VCs was Niko Bonatsos, managing partner of General Catalyst (GC), a 22-year-old company that started as a Boston startup and now manages tens of billions of dollars as a registered company. investment advisor. Bonatsos was joined on stage by Coatue partner Caryn Marooney, which started life as a hedge fund in 1999 and now also invests in growth and early-stage startups. (Coatue still manages more billions than General Catalyst — more than $90 billion, according to one report.)
Because of this blurring of what it means to be a venture capital firm, much of the discussion has focused on the outcome of this development. The overarching question was: does it make sense that companies like Coatue and GC (and Insight Partners and Andreessen Horowitz and Sequoia Capital) are now tackling nearly every stage of tech investing, or would their own investors be better off? lotis if they had remained more specialized? ?
While Bonatsos referred to its company and its rivals as “products of the times”, it’s easy to wonder if their products will remain just as attractive for years to come. The most problematic at the moment: the exit market is practically frozen. With a global recession looming, it is will also be particularly difficult to offering outsized returns after increasing the amounts paid out to venture capital firms in recent years. General Catalyst, for example, closed at $4.6 billion in February. Coatue meanwhile closed on $6.6 billion for its fifth growth investment strategy in April, and it is currently believed to be in the market for a $500 million seed fund. That’s a lot of money to double or triple, not to mention increase tenfold. (Traditionally, venture capitalists aimed to multiply investors’ dollars by 10.)
I was thinking today about last week’s conversation and I have some additional thoughts in italics about what we discussed on stage. The following are excerpts from the interview, edited for length. To catch the whole conversation, you can watch it around 1:13 minutes in the video below.
TC: For years we have seen what a “risky” business really means. What is the result when everyone does everything?
NB: Not everyone has earned the right to do everything. We’re talking about 10 to maybe 12 companies that [are now] able to do anything. In our case, we started from a start-up company; the early stage continues to be our core. And we’ve learned from serving our clients – the founders – that they want to build sustainable businesses and they want to stay private longer. And therefore, we felt that growth fundraising was something that could meet their demands and we did. And over time, we decided to become a Registered Investment Advisor as well, because it made sense. [as portfolio companies] became public and [would] grow very well in the public market and we could continue to be with them [on their] traveling longer instead of leaving early like we used to.
CM: I feel like we’re in this pretty interesting place of change now. . .We all travel to meet the needs of founders and SPLs who entrust us with their money [and for whom] we need to be more creative. We all go where the needs are and where the environment is. I think the thing that has stayed the same may have been the VC vest. The Patagonia vest has been pretty standard but everything else is changing.
Maroney was of course joking. Also note that the Patagonia vest has gone out of fashion, replaced by an even more expensive vest! But she and Bonatsos were right to meet the demands of their investors. To a large extent, their companies simply said yes to the money given to them to invest. Stanford Management Company CEO Robert Wallace told The Information last week that if it could, the university would funnel even more capital into select venture capital vaults as it pursues our top returns. Stanford has its own scaling problem, Wallace explained: “As our endowment grows, the amount of capacity we get from these very carefully controlled, highly disciplined seed funds does not increase proportionately. . .We can get more than 15 or 20 years ago, but it’s not enough.
TC: LPs had record-breaking returns last year. But this year their returns are abysmal and I wonder if part of that is due to overlapping stakes in the same companies because you’re all converging on the same [founding teams]. Should LPs be concerned that you are now operating in each other’s lanes?
NB: Personally, I don’t see how it’s different from what it was before. If you’re an LP in a top endowment today, you want to have a portion of the top 20 tech companies starting every year that could become the next big thing. [The difference is that] now, the results of the past few years have been far greater than ever before. . . . What LPs need to do, as has been the case for the past decade, is invest in different pools of capital to which venture capitalists give them an allocation. Historically, it was in start-up funds; you now have the opportunity to invest in many different vehicles.
In real time, I moved on to the next question, asking if we would see “right sizing” of the industry as yields dwindle and exit routes cool. Bonatsos responded that VC remains a “very dynamic ecosystem” which, “like other species, will have to go through the cycle of natural selection. It will be survival of the fittest. But it probably made sense to dwell more on the question of overlapping investments because I’m not sure I agree that the industry works the same way. It is true that exits are larger, but there is no doubt that many private companies have raised too much money at valuations that the public market was never going to support because so many companies with far too much money pursued them.
TC: In the startup world, power flows from founders to VCs and back, but until very recently it had become surprisingly founder-friendly. I’m thinking of Hopin, a virtual event company that was founded in 2019. According to the Financial Times, the founder was able to cash in nearly $200 million in stock and still owns 40% of the company, which makes me disturb- blowing. What happened?
NB. Well, we were one of Hopin’s investors.
TC: Your two companies were.
NB: For a while it was the fastest growing company ever. It is a very profitable business. Also, COVID happened and they had the perfect product at the perfect time for the whole world. At the time, Zoom was doing really, really well as a business. And that was the start of the crazy VC funding ramp-up kicking off in the second half of 2020. So many of us were intrigued because the product looked perfect. The market opportunity seemed quite large and the company was not consuming money. And when you have a very competitive market situation where you have a founder who gets about 10 different offers, some offers have to sweeten the deal a bit to make it more compelling.
TC: Nothing against the founders, but people who have since been fired from Hopin must have boiled, read [these details]. Were any lessons learned or will the same thing happen again because that’s how things work?
CM: I think people who are starting businesses now are no longer under that genre. [misperception that] everything goes right. I think the generation of people starting now on both sides is going to be a lot more clear-headed. I also think there was this feeling like, “Oh, I just want the money with no strings attached.” . . . And that has changed drastically [to]”Have you ever seen this before, because I could use your help.”
Note: Absolutely. Market conditions have changed. If you start a growth cycle today and you’re not one of them [type of company] or significantly exceed your plan, it’s probably more difficult because a lot of cross-funds or late-stage investors open their Charles Schwab brokerage account and they can see what the conditions are there and they’re better off. And they can buy today; they can sell next week. With a private company, you can’t do that. At the very beginning it depends a bit on how many funds are keen on writing checks and how much capital they have raised, so at the start-up stage we haven’t seen much difference yet, especially for the first checks . If you’re a seed company that raised last year or the year before and haven’t made enough progress to earn the right to raise a Series A, it’s a bit more difficult. . To the best of my knowledge, I haven’t seen companies decide to raise a Series A with really nasty terms. But of course, we have seen this process take longer than before; we have seen some companies decide to build a bridge around [in the hopes of getting to that A round eventually].
For what it’s worth, I suspect early founder liquidity is a much bigger and trickier issue than VCs want to imply. In fact, I later spoke to Disrupt with an investor who said he’s seen a number of founders in social settings whose businesses floundered but because they were able to walk away with millions of dollars upfront , they are further removed from what is happening than would otherwise be the case.
TC: The exit market is cooked at the moment. SPACs are out of fashion. Only 14 companies have chosen a direct listing since [Spotify used one] in 2018. What are we going to do with all these many, many, many companies that have nowhere to go right now?
NB: We are very lucky, especially in San Francisco, that there are so many technology companies that are doing really well. They have plenty of cash on their balance sheet and hopefully at some point, especially now that valuations seem to be more streamlined, they will have to innovate through mergers and acquisitions. In our industry, especially for big companies like ours, we want to see smaller releases, but these are the sustainable companies that can really go the distance and produce 100x returns and pay for the whole vintage or the entire portfolio. So it’s an interesting time, what’s happening in the release landscape right now. With the rationalization of terms, I guess we will see more mergers and acquisitions.
Naturally, there will never be enough acquisitions to save most of the companies that have received funding in recent years, but for Bonatsos, the VCs are betting that some of these exits will be big enough to keep institutional investors as keen on regard to the VC than them. I grew up. We will see over the next two years if this bet goes as planned.