YC S23 Batch / How's the weather out there?
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YC S23 Batch / How's the weather out there?
An opportunity to invest in the next YC batch, and a look at the fundraising conditions for emerging managers currently
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Good morning!
Today’s agenda:
Opportunity to invest (very selectively) in the Y Combinator Summer 2023 batch;
How’s the weather out there?
A mix of data and content on the markets and the fundraising environment for fund managers at the moment, which is just as tough (if not tougher) than the market for founders. Some thoughts on the mid-term outlook too;Best of the Internet
The usual miscellany and mischief.
Invest in the YC S23 batch
As we approach another highly-anticipated YC demo day (6th September), we are delighted to renew our partnership with solo GPs Juan Abundes and Warrick Shanly to offer the opportunity to join their syndicate and invest in this batch.
Via Koro Capital, people will have the opportunity to access 2-4 deals from YC’s summer 2023 cohort.
It will be a pledge structure - you will need to commit to invest in all the deals to gain access. The minimum ticket size (total) will be $15k USD. Hard commitments by the end of August.
A recurring talking point about this batch is the fact that valuations seem to be disconnected from the state of the market, with SAFE valuation caps pushing $40m in some instances
I think there is some truth in this, but I also agree with Garry Tan that YC’s numbers speak for themselves. Nobody has a higher hit rate, and the filter for quality is excellent.
I also thought Erik Bruckner’s analysis was interesting.
We have chatted with Juan and Warrick about their investment strategy for this batch. They said they will be more selective than usual, and will avoid hyped deals and silly valuations. Rather than ~10 investments, they will at most invest in 4 this time around.
Even if you decide to pass on this YC batch, I would add that Juan and Warrick’s track record speaks for itself. Staying close to their deal flow will present opportunities to back some exceptional startups in the future.
How’s the weather out there?
This summer has been pretty nice in the UK. Things have looked quite grim in venture though.
Sam Lessin has been predicting the end of seed as we know it:
“Really it was the Snap-Allbirds-Robinhood-Lyft-Box-Dropbox-Buzzfeed-Zoom-Oscar-BlueApron etc. etc. at deca-billion outcomes that made all the math work for seed...and it turns out that those companies just relatively aren't worth that much (some less than capital invested!)”
The public markets are certainly reflecting this sentiment.
I recently wrote about Bolt and Getir going up in flames.
WeWork has somewhat inevitably followed in their footsteps. After raising over $20B, they company has gone from a $47B private valuation to ‘substantial doubts’ about its future as a going concern. It’s currently trading at 13 cents a share, down >100x from its public markets high of ~$27B
Another victim: scooter company Bird.
After raising ~$1B over the last few years, Bird had just $6.8m in cash and cash equivalents at the end of Q2 2023. In Q2, Bird generated $48.3m in revenue, down 29% vs last year and posted a net loss of $9.3m
After going public in November 2021 via SPAC at a price of $210 per share, the share price now sits at $1.14. The Board has terminated the contract of Bird CEO, Shane Torchiana and has appointed Michael Washinushi as their interim CEO.
The reckoning is picking up pace in the private markets too
Ahhh, Hopin. The belle of the covid ball raised over a billion dollars in total, peaking at a $7.8B valuation in 2021. Everybody wanted a seat at the table - a16z, General Catalyst, Northzone, 20VC (Harry Stebbings), Temasek (Singapore’s sovereign wealth fund), Tiger Global, Slack, Salesforce and many more big names invested. Founder Johnny Boufharat cashed out over $120m in secondaries along the way (well played sir).
Their core assets and customers were recently sold off to RingCentral for a reported $15m, with the opportunity for a max payout of $50m depending on terms of the deal.
This is an especially disappointing outcome for early Hopin employees, who I imagine are walking away with nothing from their stock options after a rollercoaster of emotions and years of blood, sweat and tears.
New unicorns are also looking much more scarce at the moment.
Some VCs are beginning to “mark to market”, reflecting the decline in public markets valuations and the failure of big names like Hopin. Union Square Ventures, one of the world’s leading seed and series A investors, has marked down its portfolio by 26%.
More will follow. Established managers with strong track record can afford to do this and survive. If you raised your first fund in the last couple of years, it’ll likely be harder.
How is all of this affecting managers currently raising?
Capital raised by both emerging managers and fund of funds is tanking year over year
You could be forgiven for wondering if the venture boom of the last 20 years or so was actually just a low interest rate phenomenon that we won’t see again any time soon.
Maxwell Strachan (tech reporter at Vice) certainly thinks so.
VCs Face an Existential Threat: There Are Too Many of Them…
“In the 2010s, back when you could toss a dollar bill into the wind and earn a 20% return on it, it felt like anyone with a bit of money and a lot of confidence was suddenly working at a venture capital firm. As Jeff Clavier, a longtime venture capitalist, put it to me: “Everybody became a VC because it was fun, because it was up and to the right, because it seemed easy.”
There is, of course, truth to all of this. We are in a “new normal” of sorts, and it’s unlikely we will see the heady days of 2021 again soon.
But it is also prudent to remember three things:
1. We are at an inflection point in human history like no other.
AI has the potential to create masses of opportunity in the next 20 years or so.
I don’t think we are witnessing the “death throes” of the last boom cycle with the spike in AI investments. Yes, there is hype around LLMs, but there are also many, many practical applications of this technology already emerging. 70%+ of this YC batch are leveraging AI in some way (same as the W23 batch). This is the start of something new.
Nobody states the facts on this better than Tim Urban did back in 2015.
2. The bad times, like the good times, never last forever.
Tomasz Tunguz believes that we may be close to the bottom: the Fed is no longer predicting a US recession, and there is arguably a land grab opportunity for well capitalised startups. It may be that we will see a “mean reversion” in round frequency (and probably valuations too) towards the end of this year.
3. It pays to be greedy when others are fearful
People deploying currently are likely to get in on some great deals at excellent prices. It’s a bargain basement out there.
Brookfield Asset Management and Sequoia Heritage (a $16bn fund that manages the wealth of Silicon Valley) would probably agree. They are anchoring a new investment vehicle called Pinegrove Capital Partners with $500m of their own capital and aiming to raise a further $2 billion to capitalise on plunging valuations in venture land at later stages. Their timing is good, with late-stage capital demand far outstripping supply at the moment.
If you’re an emerging or more established manager struggling to raise a full fund at the moment, or looking to double down on your breakout companies, in my highly biased opinion it’s a great time to do some SPVs. You should talk to us.
This approach allows you to build trust with your prospective LPs, and ensure you don’t miss out on quality opportunities at excellent prices. Crashes do not come around often, and careers can be made in these situations.
User signups on our platform, deal volumes and conversations we are having with family offices all seem to indicate that investors in emerging managers are fans of the deal by deal approach:
Best of the Internet
Venture deals for value investors
On the subject of bargain basements, I really enjoyed this episode of Patrick O’Shaughnessy’s excellent “Invest Like the Best” podcast, with Jeremy Giffon.
Jeremy was on the founding team at Tiny Capital, which acquires and grows small software companies.
This conversation is absolutely packed full of fascinating insights on the micro private equity / special situations opportunities that exist in software.
I think it’s a very interesting time for this strategy. With so many VC funds at the end of their life cycles trying to divest their non-outlier assets in a tricky market, there is a big opportunity to come in and negotiate great deals.
I was surprised to learn that funds at the top of the preference stack (at least the better ones) will often be happy to get rid of a portfolio company for free or very little money if it means they can just get it off their books. As a result, you can end up buying a business turning over 10, 15 or 20m for pennies, strip out all the unnecessary fat the VCs put in to pump growth and turn it into an excellent, profitable small software company very quickly.
The challenge is handling the messy negotiations with everyone else on the cap table, and getting the right team in (perhaps even retaining the founders if you can get the incentives right). But if you’re willing to go through this pain, there does seem to be good money to be made. So many companies out there have great fundamental products and business models, but have been bent out of shape by too much VC funding.
Fishing in a smaller pond
In a similar vein, Sydney Thomas argues that there is opportunity for small fund managers (fund size <$30m) to invest at pre-seed / seed and very intentionally target exits more in the $50m - $250m range. This means focusing on capital efficient businesses that don’t require significant follow on funding.
I think this is smart. The fund economics really can work at this level, and there are so many overlooked opportunities that fit this description, because they don’t move the needle for the majority of established managers investing out of a $200m+ fund. They also get ignored by the people following these guys into whatever they think is hot.
Living forever
I’ve been enjoying Laura Deming’s excellent guide to the weird and wonderful world of Longevity. It’s beautifully written and easy to understand.
Energy math
Andrew posts some great stuff. I enjoy following him.
Priorities
That’s all for today!
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