If you’re feeling confused about the state of startup investing, join the club. Stocks of publicly traded companies have been hammered relentlessly in recent months amid mounting recession fears, yet startup funding seems as buoyant as ever, and what’s even more surprising to us, VCs are still routinely announcing huge amounts of new funding, as they have since do many years.
To better understand what’s going on, we spoke this week to Index Ventures co-founder Danny Rimer, who grew up in Geneva, where Index has an office, but now splits his time between London and San Francisco, where Index also has offices Has. (It just opened an office in New York, too.)
We accidentally caught Rimer – whose bets include Discord, 1stdibs, Glossier and Good Eggs – in California. Our conversation was slightly edited for length.
TC: This week, Lightspeed Venture Partners announced $7 billion across multiple funds. Battery Ventures said it closed for $3.8 billion. Oak HC/FT announced nearly $2 billion. Typically, when the public market is so down, institutional investors are less able to commit to new funds when the public market is down, so where is that money coming from?
DR: That’s a great question. I think we should remember that many of these institutions have made extraordinary gains over the last few years – let’s call it the last decade, actually. And their positions have really exploded in that time. So what you’re seeing is an allocation to funds that have most likely been around for a while. . . . and have actually achieved very good returns over the years. I think investors want to put their money in institutions that understand how to allocate this fresh new money in each market.
These funds are getting bigger and bigger. Are there new sources of funding? We’ve obviously seen sovereign wealth funds play a bigger role in venture funds in recent years. Is Index looking further afield than it used to be?
There was certainly this bifurcation in the market between funds that are probably more into the business of wealth aggregation and funds that are trying to continue the artisanal practice of ventures, and we play in the latter camp. So, relatively speaking, our fund sizes have not become very significant. They haven’t grown dramatically because we were very clear that we wanted to keep it small, keep our craft alive and continue down this path. First of all, this means that for our institutional investor base we have no family offices and do not take sovereign wealth funds. We’re really talking about endowments, pension funds, nonprofits, and funds of funds that make up our investor base. And we are fortunate that most of these people have been with us for almost 20 years now.
You have quite a lot of money under management, you announced $3 billion of new funds last year. This is no small thing.
No, it’s not tiny, but compared to the funds you’re alluding to — the funds that have grown a lot and made sector funds or crossover funds — when you look at how much Index has raised [since the outset] compared to most of our colleagues it is actually a completely different story.
How much Has Index raised about the company’s history?
We should check. I wish I could have the exact number on the tip of my tongue.
It’s kind of refreshing that you don’t know. Are you in the market now? It feels like it’s been a year later and a year later in terms of fundraising for most companies, and that doesn’t change.
We are not in the market to collect donations. we are obviously invest in the market.
We see many companies reassessing their valuations. Do you have discussions with your portfolio companies about doing the same?
We conduct all kinds of interviews with companies in our portfolio; nothing is off the table. We definitely don’t want to suspend disbelief when it comes to the realities of the situation. I wouldn’t say it’s a closed discussion that we have with all of our companies. But we consistently try to ensure that our companies understand the current climate and the conditions specific to them and are as realistic as possible about their future.
Depending on the company, valuations have sometimes outgrown themselves and we can’t count on the crossover funds coming back. . . They must defend their public positions. So some of these companies simply need to weather the storm and make sure they’re prepared for the tough times ahead. There really is an opportunity for other companies to step in and grab significant market share during this time.
Like many VCs, you say you would prefer a startup to do a “down round” rather than agreeing to onerous conditions to maintain a certain rating. Do you think founders got the memo that down rounds are acceptable in this climate?
It really depends. I think you probably have some new funds launched during this period — you have some new sector funds — that complicates it because [they’re] don’t invest in the best deal. [They’re] Investing in the best company or trying to fund the best company in this sector. So there’s probably some pressure on some of the VCs that some of the entrepreneurs are feeling.
I want to emphasize that not all companies need to take a cold shower when it comes to valuation. There are many companies that are doing very well even in this environment.
Fast, an online login and checkout company, quickly shut down earlier this year, and Index got a little wrecked online for quickly removing the company from its site. What happened there and what could Index have done in retrospect in this situation? I assume your team had an autopsy on this.
I wasn’t aware that we removed it from our website. I think it’s probably there, but probably harder to find is what I suspect. We promote the companies that are doing well.
You’re right, we digested it as a company and really tried to learn the lessons from it. There are a number of factors that we can’t yet digest or know about, but what’s probably been difficult during COVID was really gauging talent and understanding the people we’ve worked with. And I’m sure that my partners who were in charge of the company could devote more time and really understand the company’s entrepreneurial culture much better if we could spend more time with them personally.
(We’ll have more of this interview in podcast form next week; stay tuned.)
https://techcrunch.com/2022/07/15/making-sense-of-the-market-right-now-with-danny-rimer-of-index-ventures/ Making sense of the market right now with Danny Rimer of Index Ventures – TechCrunch