Last week at TechCrunch’s annual Disruption event, this editor sat down with VCs from two firms that have looked the same over the past five years. One of those VCs is Nico Bonatos, a managing partner at General Catalyst (GC), a 22-year-old company that started as an early-stage venture outfit in Boston and now manages tens of billions of dollars in revenue. Investment advisor. Bonatsos was joined on stage by Coatue partner Karin Maroni, who started life as a hedge fund in 1999 and now invests in growth and early-stage startups. (Coatue is managing billions more than General Catalyst — more than $90 billion, according to one report.)
Because of this blurring of what it means to be a venture firm, much of the discourse has focused on the outcome of this evolution. We wondered: Does it make perfect sense for firms like Coatue and GC (and Insight Partners and Andreessen Horowitz and Sequoia Capital) to initiate all technology investments now, or would their own investors be better off being more specialized?
Although Bonatos calls the company and its competitors “brands of the moment,” it’s easy to imagine that their products will remain very attractive in the coming years. Most problematic at the moment: the exit market is cold. But it’s also challenging. They offer exorbitant returns when they raise the sizes we’ve seen venture firms enter over the past few years. General Catalyst, for example, closed at $4.6 billion. As of April, the fund had closed on $6.6 billion for its fifth growth investment strategy, and is currently reportedly in the market for a $500 million seed fund. That’s a lot of money to double or triple, let alone grow tenfold. (Traditionally, venture firms aim to earn 10x investor dollars.)
That said, not a single company we know of has announced plans to return the large amount of capital they’ve raised to investors.
Today I was thinking about last week’s discussion and I have some additional thoughts about what we discussed on stage (in italics). The following are excerpts from the interview; You can watch the program below around the 1:13 minute mark to catch the entire conversation.
TC: Over the years we’ve seen a blurring of what a “venture” firm means. What is the result when everyone does everything?
Note: Not everyone has the right to do everything. We are talking about 10 to 12 companies. [are now] Able to do everything. In our case, we started from being an early-stage company; Primary remains our core. And we’ve learned from serving our clients—founders—that want to build sustainable companies and stay private for the long haul. And because of that, we felt that raising development funds was something that could meet their needs, and we did that. And eventually we decided to become a registered investment advisor, because it made sense [as portfolio companies] It came out officially and [would] We can grow well in the public market and continue to be with them [on their] Instead of leaving early like we did in the past, take a longer trip.
CM: I feel like we’re in this very interesting place of change right now. . .We are all driven to meet the needs of LPS, its founders and those who trust us with their money. [and for whom] We have to be more creative. We all go to needs and environments. I think the rest is probably a VC vest. Patagonia clothing is pretty standard, but everything is changing.
Marroni was joking, of course. It should be noted that the Patagonia shirt fell out of fashion, replaced by a more expensive shirt! But she and Bonatos were right about meeting their investors’ needs. By and large, their companies simply said yes to the money they were given to invest. Robert Wallace, CEO of Stanford Management Company, told The Information last week that if he could, the university would inject more capital into certain venture coffers because it wanted better returns. Stanford has its own scale problem, Wallace explains: “As our endowment grows, the capacity we get from these very carefully controlled, very disciplined primary funds does not increase proportionately.” . .We can get more than we got 15 or 20 years ago, but not enough.
TC: LPs had record returns last year. But this year, their returns have been terrific and I think it’s partly due to the overlapping stocks you hold in the same companies because you’re all coming together. [founding teams]. Do LPs have to worry about you working on each other’s lines now?
Note: I personally don’t see how this is different from the previous situation. If you’re an LP at a top endowment today, the top 20 tech companies starting each year could be the next big thing. [The difference is that] Now, in recent years the results are much bigger than ever before. . . . What LPs have to do, as they have done in decades past, is to invest in the various pools of capital that VC firms allocate to them. Historically, this was first-rate money; Now you have options to invest in different vehicles.
In real time, I moved on to the next question, asking whether we’ll see the industry’s “true size” as returns diminish and exits freeze. Bonatos responded that the VC remains a “very dynamic ecosystem,” adding, “Like other species, they have to go through a cycle of natural selection. It’s going to be survival of the fittest.” But maybe it makes sense. I’m not sure if it’s going to last long in the case of leveraged investments because I’m not sure if the industry is working the way it’s working. True, the exits are big, but there is no question that many privately held companies have raised so much money at valuations that the public market could never support them because so many companies with so much money were chasing them.
TC: In the world of startups, power flows from founders to VCs and back, but until recently, founder-friendliness has grown at an alarming rate. I’m thinking of Hopi. It is a virtual events company founded in 2019. According to the Financial Times, the founder was able to cash out nearly $200 million in stock and still owns 40% of the company, which to me is mind-blowing. what happened?
NB So we were one of the investors in Hoppin.
TC: Both were your organizations.
Note: It was the fastest growing company of any time for a while. It is a very profitable business. Also, covid happened and they had the perfect product at the perfect time for the whole world. By then Zoom was doing very well as a company. And it was the beginning of the crazy VC funding acceleration period that started in the second half of 2020. So many of us were excited because the product seemed perfect. The market opportunity seems huge, and the company isn’t taking any money. And when you have a very competitive market like when you have a founder receiving 10 different offers, some offers need to sweeten the deal a bit to make them more compelling.
TC: Nothing against the founders, but the folks who have been fired from Hoppin’ since then should be reading. [these details]. Did you learn something, or will the same thing happen again because that’s just the way things work?
CM: I think that people who start companies now are not under that kind of influence [misperception that] Everything goes right. I think the generation of people starting from both sides now will be more open-eyed. I think there’s a feeling like, “Oh, I just want money with no strings attached.” . . . And this has changed dramatically [to]“You’ve seen this before because I could use some help.
NB: Absolutely. Market conditions have changed. If you are raising a growth round today and you are not one [type of company] Or if you dramatically exceed your plan, it’s probably difficult because many cross funds or late-stage investors open their Charles Schwab brokerage accounts and see what the terms are and they’re better. And you can buy it today; You can sell it next week. You can’t do that with a private company. At a very early stage, it’s a little bit of a function of how many funds are willing to write checks and how much capital they’ve raised, so at the seed level, we don’t see much of a difference. Yet, especially for the first checks. If you’re a seed company that raised last year or the year before and didn’t grow enough to get a Series A raise, it’s a little harder. . As far as I know, I haven’t seen companies decide to take the Series A off with really ugly words. But of course we have seen that this process takes more time than before; We have seen some companies decide to build a bridge [in the hopes of getting to that A round eventually].
For what it’s worth, I suspect early founder liquidity is a bigger and thornier issue than VCs want to let on. In fact, I was talking to an investor later in a row, and I’ve seen a lot of founders in social media who were able to walk away with millions in the beginning, but not really. By destroying themselves in order to save those companies.
TC: The exit market is ripe now. SPACs are out. Since only 14 companies have chosen a direct list [Spotify used one] in 2018. What are we going to do with the many, many, many companies that now have nowhere to go?
Note: We’re very fortunate, especially in San Francisco, that there are a lot of tech companies that are doing really, really well. They have a lot of cash on their balance sheet and hopefully at some point, especially now that valuations seem more reasonable, they’ll have to come up with some M&A. In our industry, especially for large companies like ours, we’d like to see some small exits, but it’s about the sustainable companies that go the distance and produce 100x returns paying off the entire vintage or the entire portfolio. So it’s an interesting time, what’s happening in the climbing landscape right now. In rational terms, I suspect we will see more M&A.
Naturally, there won’t be enough acquisitions to save most of the companies that have received funding in recent years, but to Bonatos’ point, VCs are betting that some of these exits will be big enough to make institutional investors as enthusiastic as VCs. has grown. We’ll see over the next couple of years if this gamble plays out the way they expect.
