If you’re unsure about how startup investing is, join the club. Public company stocks have been steadily depreciating in recent months amid rising recession fears, but startup funding seems to be as buoyant as ever and, even more surprising to us, VCs are still regularly announcing huge new funds like they have been doing this for years.
To better understand what’s going on, this week we spoke with Index Ventures co-founder Danny Rymer, who grew up in Geneva, where Index has an office, but now lives in London and San Francisco, where Index also has offices. (It’s simple opened an office New York too)
We happened to snag Rymer, whose bets include Discord, 1stdibs, Glossier, and Good Eggs, among others, in California. Our conversation has been slightly edited due to length.
TC: This week Lightspeed Venture Partners announced $7 billion across multiple funds. Battery Ventures announces closure $3.8 billion. Oak HC/FT announced almost $2 billion. Usually, when the public market drops this much, institutional investors are less able to invest new funds when the public market drops, so where does this money come from?
DR: That’s a great question. I think we should remember that over the past few years, many of these institutions have made extraordinary progress – let’s really call it the last decade. And their positions during this period really grew like mushrooms. So what you’re seeing is a distribution across funds that have most likely been around for a while. . . . and have actually provided very good returns over the years. I think investors want to invest their money in institutions that understand how to distribute this new money in any market.
These funds are getting bigger and bigger. Are there new funding sources? Obviously, in recent years, sovereign wealth funds have played a large role in venture capital funds. Is Index looking further than ever?
To be sure, there has been a fork in the market between funds that are probably more into asset aggregation and funds that are trying to continue the artisanal venture capital practice, and we are playing in the latter camp. So in relative terms, the size of our funds has not become very significant. They haven’t grown much because we’ve made it clear that we want to keep them small, keep our craft alive, and keep going down that path. This means that when it comes to our institutional investor base, first of all, we do not have family offices and we do not take money from public funds. We are really talking about endowments, pension funds, non-profit organizations and funds of funds that make up our investor base. And we are lucky that most of these people have been working with us for almost 20 years.
You have quite a lot of money under management, and you announced $3 billion in new funds last year. This is not a small amount.
No, it’s not tiny, but compared to the funds you’re talking about – funds that have grown a lot and made sector funds or crossover funds – if you look at how much the index has raised. [since the outset] compared to most of our peers, it’s actually a whole different story.
How It has Has the index risen in the history of the firm?
We must check. I wish I had the exact number on the tip of my tongue.
It’s kind of refreshing that you don’t know. Are you on the market now? In terms of fundraising, for most firms, it really does feel like one year has gone by and one year less, and that’s not changing.
We are not in the market to raise funds. We are obviously in the market to invest.
We are starting to see a lot of companies reset your grades. Are you negotiating with your portfolio companies to do the same?
We conduct all types of negotiations with companies from our portfolio; nothing is out of scope. We absolutely do not want to give up distrust when it comes to the realities of the situation. I would not say that this is a general discussion that we have with all our companies. But we are constantly trying to make sure that our companies understand the current situation, their specific conditions and make sure that they are as realistic as possible when it comes to their future.
Depending on the company, sometimes valuations are way ahead of themselves and we can’t count on cross-funding returns. . . they must defend their public positions. So some of these companies just need to ride out the storm and make sure they’re prepared for the tough times ahead. Other companies do have the opportunity to lean into this period and capture a significant market share.
How many venture capitalists, you’re saying you’d rather have a startup “round down” rather than agree to onerous terms to maintain a certain valuation. Do you think the founders realized that rounds down are acceptable in this climate?
It really depends. I think you probably have some new funds that came out during this period – you have funds for new sectors – that make it harder because [they’re] don’t invest in the best business. [They’re] invest in the best business or try to fund the best business in the sector. So probably some entrepreneurs feel some pressure on some venture capitalists.
I want to emphasize that not all companies need to take a cold shower in regards to valuation. There are many companies that succeed even in such conditions.
Fast, an online check-in and checkout company, quickly shut down earlier this year, and Index went bust online for quickly removing the company from its website. What happened there and, in retrospect, what else could Index have done in this situation? I’m assuming your team did an autopsy on this.
I didn’t know we removed it from our site. I’m guessing it’s probably there, but probably harder to find, that’s what I suspect. We promote companies that succeed.
You’re right, we digested it as a firm and really tried to learn from it. There are a number of factors that we’re still digesting or can’t be aware of, but probably what’s been difficult during COVID is really appreciating talent and understanding the people we’ve worked with. And I’m sure that my partners who were in charge of the company could spend more time and really understand the entrepreneurial culture of the company better if we could spend more time with them in person.
(We’ll have more of this interview in podcast form next week, stay tuned.)
Credit: techcrunch.com /