If you're trying to get a pulse on what's happening in the venture market right now, you could do worse than talk to Hans Swildens.
Industry Ventures has $5 billion in assets and raised $1 billion last year. The firm makes investments in both direct and venture funds. It participates in smaller tech buys. It is a limited partner in other funds. It knows when people are willing to sell stakes in companies, when they aren't, and where the market is pricing everything.
Swildens' firm has locations in London and Alexandria, Va., but he is based in San Francisco and spoke from his office near the Transamerica Pyramid. He talked about everything from VC distributions to the secondaries market and the reappearance of deal terms meant to protect investors as he answered our questions.
The highlights from that chat offer a useful snapshot of current conditions that other investors and founders might benefit from knowing. For readers who work outside of VC, we have put in some of our own notes in brackets to explain some of the terms he is using.
A lot of late-stage investors are interested in publicly traded shares whose prices have nose-dived. Are you seeing a decline in late-stage VC?
With late-stage, pre-IPO unicorn rounds, we are seeing them continue to get done but with structure.
Do you mean deal terms? What kind are you seeing?
Money back, plus participation, is like one-and-a-half times investors. VCs are now asking for preferred shares, where they get their money before anyone else gets paid.
Or senior 1.75x with an anti-dilution. Anti-dilution provisions allow investors to maintain their ownership percentages if new shares are issued.
Minimum compounded return hurdles are 20%. The hurdle rate is the minimum rate of return that will offset the investor's costs. The basic idea here is that investors need downside protection.
There is a lot happening at that stage of the market where the companies have $100 million in revenue but their last round was done at a $5 billion valuation. New financings are happening, but they are happening with structure so that they look like high-yield debt-equity instruments.
When did the provisions start showing up?
It began a month or two ago. Things were still operating as they have been in January. The two months of February and March were when people began to experience daily declines in their stock portfolios. A lot of the hedge funds and crossover funds changed their investment locations or the terms and conditions of their financings about a month ago. Private equity firms are mostly dropping in structure into the securities now.
Is the same terms being used in deals by VCs?
We haven't seen many traditional funds drop in structures as much. Now that CEOs are agreeing to it and everyone else in the market who is a venture investor is seeing it, you will probably start seeing the terms popping up, including from some of them. A lot of the venture firms and the growth firms that are more venture-y have gone down market into Series B and C deals.
We hear a lot about Tiger Global. How many players have entered the market from the hedge fund world in the last few years?
There are many hedge funds with side funds. There are 30 of them. There are 20 private equity funds that have growth teams. 50 to 75 people are dropping structure everywhere.
I don't think you need to raise financing if you have $100 million in revenue and you raised your round at a valuation of $10 billion. There is a 75% chance you will do structure if you need to raise financing.
Most of the up rounds that have happened were already done in Q4.
You are an investor in other venture funds. What are you seeing when you look at returns?
The decrease in venture fund stock distributions is due to the fact that all the stocks got hammered. The venture funds are trying to determine if they hold on or not because some of the shares are half of what they were in January. During the last three months, not many venture funds have done distributions. It has been a big drop. We used to get distributions every day. We used to get a check every day, but now I see like a third of the market as an LP. In this quarter, it is like one every two weeks, and it is an 80% to 90% drop from an exit distribution perspective.
In terms of distributions, last year was very high.
It was a big year last year. Something went public, something got bought out, or you got stock every day. This year has been a bad one for getting money back. Most of the stuff that was distributed this year was cut in half. Didi and Robinhood were the two largest stock distributions of the year, and Didi got unlocked and distributed for three to four bucks.
Are you wearing a fund manager hat, hanging onto your shares in hopes prices will rebound?
At the end of last year and in January, we didn't know if the market was going to bounce back or not, so we held two. We are in the same situation, where we have two things that we don't want to sell or distribute.
What happened in the first quarter may lead to more opportunities to buy discounted secondary shares of companies or even fund portfolios.
I'm waiting for the Q1 reports, which reflect performance through March 31, and I've got Q4 reports across everything.
If a fund held any of the public stocks during the first quarter, it will be a loss. It will not be reported into your capital account until a month or two from now. So we are waiting to see how that wipes out and the other fund managers want to see that as well.
If you own a house that was worth ten million dollars in December, and now is worth six million dollars, do you sell? You would be like, "What happened?" How can someone buy your neighbor's house for $5 million? It dropped. It was inflated.
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