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Skip the J-Curve: An Intro to Venture Capital Secondary

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A brief overview of venture capital secondary, by Practical Venture Capital (Sept 2020, Dave McClure)

Publié dans : Économie & finance
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Skip the J-Curve: An Intro to Venture Capital Secondary

  1. “Skip the J-Curve” – An Intro to Venture Secondary
  2. Seed A B C LATER-STAGE IPOs / Big ExitsSTAGE TIME LIQUIDITY C A A A B B 3Y2Y1Y 4Y 5Y 6Y 9Y8Y7Y 10Y + beyond Buy fund secondary @ 25-50% discount D C B D “Buy Unicorns on Sale” Invest in VC funds that are already winning “Skip the J-Curve” Avoid the first 5 years of risky bets FUNDS COMPANIES VALUE RISK
  3. 3Y 4Y2Y1Y 5Y 6YTIME 7Y 8Y 11Y 12Y10Y9Y 13Y 14Y 15Y 7 year vehicle 1X Faster return of principal 10-15 year vehicle Better performance 0.5X 3-5X 1-2X VC Fund Secondary Typical VC Fund Benefits: Faster Growth, Faster Liquidity
  4. What’s the Difference between Fund Secondary and Company Secondary? DIVERSIFIED: less risk exposure LESS COMPETITIVE: less activity, fewer buyers BIGGER DISCOUNTS: 25 - 50% D B D C B C Company (Direct) SecondaryFund Secondary CONCENTRATED: more risk exposure MORE COMPETITIVE: more buyers and sellers SMALLER DISCOUNTS: 0 - 20% FUND COMPANIES SLICE of LP interests across PORTFOLIO Equity stake in a SINGLE COMPANY D C B PVC advantage
  5. Why are Discounts BIGGER for Fund Secondary than Company Secondary? D C B Fewer Buyers, More Arbitrage Because there are fewer buyers specializing in Fund Secondary and because many sellers are competing for liquidity, buyers have greater leverage relative to sellers. Fund Secondary is a buyer’s market. Basket of Assets, Harder to Value Fund Secondary is often heavily discounted because it’s more complex to evaluate a basket of assets than just a single company. As former managers and LPs in over 40 venture funds, PVC has extensive experience evaluating multi-asset portfolios. Fund Secondary is a buyer’s market… but only for buyers who know what they’re doing. Unicorns Matter, Horses Discounted Larger companies close to IPO or acquisition are in greater demand; smaller companies that are still growing are in less demand. Multi-asset portfolios are valued primarily based on current unicorns; future unicorns and other non-IPO winners are more heavily discounted.
  6. LPs and GPs need liquidity and partners for multiple reasons (not just distress). Why do LPs and GPs Sell Winning Portfolios Early? • HNWIs and family offices need liquidity when change happens (death, divorce, retirement) • Corporate LPs change strategy every few years, just as CEOs/CFOs come and go • LPs may need liquidity when purchasing a major asset (e.g., real estate) • Market volatility and uncertainty may increase the need for cash Non-institutional LPs may sell because: • Sell a portion to show realized gains as they raise their next fund • Sell to generate cash for operational expenses, recycling, or distributions • Sell to hedge and take (some) money off the table • Partner (raise capital) to exercise pro-rata rights • Partner (co-invest) to increase investment in follow-on rounds Early-stage GPs may sell (or partner):
  7. Secondary Market Growth: Venture Capital vs. Private Equity PE Secondary: 10x Growth from 2000 to 2020 VC Secondary: 10x Growth from 2010 to 2030 2000 2020201520102005 2025 2030 $10B $100B+ $80B* (2018) $38B** (2019 e)$26B Dot-com crash US financial crisis EUR sovereign debt crisis China-US Trade War / CFIUS / Coronavirus $10B Company Secondary (Direct) VC Fund Secondary * https://settercapital.com/media/reports/Setter_Capital_Volume_Report_FY_2018.pdf ** https://www.industryventures.com/estimating-the-size-of-the-secondary-market-for-venture-investments
  8. Case Study: Venture Secondary SPVs (Q1/20): $5M secondary in 500 Startups Fund I (2010) • Purchased $7M in LP interests @ 30-45% discounts (42% avg) • 4 Unicorns: Talkdesk, Lucid, Intercom, Udemy (~80% of portfolio) • Previous IPOs: Twilio (2016), SendGrid (2017), The RealReal (2019) > 3x Projected net return to LPs: in 5 years 1X 2X 3X 4X 2021 2022 2023 2024 2025 est. 1x principal returned in 2-3 yrs 1.5x immediate markup (due to discount) 0.47 0.45 0.54 0.87 1.27 3.60 1.0x invested capital 2020 Total Source: PitchBook, July 2020 * Undisclosed. Company Val Latest Funding Round, Lead Investors $3B Q3 / 20 $143M Series C, Franklin Templeton $1.0B Q2 / 20 $52M Series D, ICONIQ, Spectrum, Meritech $1.2B Q2 / 18 $125M Series D, Kleiner Perkins $2.0B Q1 / 20 $50M Series E, Benesse Holdings, IVP $300M * Q1 / 20 [ Undisclosed ] $300M * Q3 / 20 [ Undisclosed ] ** Q2 / 20 $251 Series C Itochu, Visa, Soros, PayPal [ other ] - Notable: Smule, Flywire, KiwiCo, Conekta 5-Year Projected Distributions and Returns 2.2x gross after Q2 FMV Realized Returns Unicorns Non-Unicorns
  9. 1 We buy secondary interests in top- performing VC funds and portfolio companies, from LPs and GPs who want early liquidity. 2 We buy VC portfolios at 5-10 years maturity, after winners are already winning and growth is accelerating. 3 Our portfolios contain pre-IPO unicorns, after they have raised Series B/C/D financing from top- tier institutional VCs. 4 We have invested in thousands of companies across 20 VC funds with over 100 exits, 15 unicorns, and 5 IPOs. Forbes Midas List, 2016 and 2017. 5 We are experienced investors and startup veterans who worked at PayPal, eBay, Founders Fund, and 500 Startups. We’ve spent 50 years in Silicon Valley. 6 We buy VC portfolios after losing assets are written off, when distributions are already happening. We expect a quick 1X return of principal within 3-5 years, and 3X or better in 5-7 years. Reasons to Invest with Practical Venture Capital Established Portfolio WinnersVC Secondary @ 25-50% DiscountsSilicon Valley Network Forbes Midas List Top 100 VCs Access to Pre-IPO Unicorns Faster Liquidity, Returns in 5 Years
  10. TOP 100 GLOBAL VCs 2017 (#68), 2016 (#96) 15+ UNICORNS / 5 IPOs Dave McClure General Partner BS, Engineering, Applied Math Johns Hopkins University Aman Verjee General Partner FORMER COO 500 STARTUPS FORMER CFO SONOS (NASDAQ: SONO) FORMER CFO EBAY NORTH AMERICA (NASDAQ: EBAY) FINANCE & STRATEGY PAYPAL (NASDAQ: PYPL) BA, Economics Stanford University JD, Harvard University Stephanie Shorter Investor Relations Jake Block Senior Advisor NEUROSCIENCE PROFESSOR VANDERBILT UNIVERSITY PhD, Behavioral Neuroscience Washington State University HOW TO VC VC Book Co-Author BRAIN + BEHAVIOR CHANGE EXPERT Consultant to 50+ startups ACCELERATOR NEUROTECH LEAD Transformative Technology Academy + Conference MANAGING PRINCIPAL JBB CAPITAL MBA, Finance London Business School EXECUTIVE DIRECTOR, EUROPEAN INSTITUTIONAL EQUITY SALES NOMURA SECURITIES PRIVATE BANKER + DIRECTOR DEUTSCHE BANK San Francisco office ASSISTANT VP, ACQUISITIONS MARCUS & MILLICHAP / SOVEREIGN INVESTMENT CO. DIRECTOR OF MARKETING PAYPAL (NASDAQ: PYPL) VC, FOUNDERS FUND INVESTOR, FACEBOOK fbFUND Taught “VC Unlocked” at Stanford University FOUNDER MANAGING PARTNER $500 AUM / 20 VC funds JBB
  11. For illustrative purposes only, not drawn to true scale. Based on fund financials, as at 6.30.20. 18 UNICORNS FLYWIRE TALKDESK INTERCOM CANVA IPSY UDEMY REDDIT GITLAB FABFITFUN THE REALREAL 4 UNICORNS CREDIT KARMA SENDGRID TWILIO LYFT 2004-09 2010-15 DMC angel FF Angel Founders Fund II 500 Startups F1 500 Startups F2 500 Startups F3 $85M $2.5M $1M $175M $40M $180M 20% >50% >50% $44M $29M $226M $124M 23.6% 12.8% 12.1% 5X 65X 40X 5.6X 2.4X 1.8X Net IRR Net TVPI AUM $1.6M NAV ~20% $325K PORTFOLIO PERFORMANCE Dave McClure / Founders Fund / 500 Startups 2004-09 2008-09 2009 2010-11 2012-13 2014-15 Facebook fbFund Founders Fund II, Accel X CREDIT KARMA SENDGRID TWILIO GRAB STRIPE BUKALAPAK LUCID VTS

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