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Protocol Pipeline
The inside story of the venture capital and startup world by Biz Carson.
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The new math in ventureland

The new math in ventureland

Hello and welcome to Pipeline. This week: how the "bonkers" new VC industry math works, debating politics on Clubhouse and the Plaid/Visa split.

Overheard

  • Cash here, no meeting required: VC firms are sending term sheets with no meeting required, Gokul Rajaram said. (See below for more on this.)
  • Multiples, schmultiples: You don't value high-growth, early-stage companies based on their revenue, one VC told me this week. OK, I said. Adjusted CSOI, anyone?
  • Where's your VC firm's CAC to LTV? If you don't have an online marketing plan, you should have one, Elizabeth Yin said.
  • ICYMI: VCs on Clubhouse were debating their areas of deep expertise Thursday night: crime and policing. Founders Fund's Mike Solana and Delian Asparouhov debated with some VCs' current enemy No. 1: San Francisco District Attorney Chesa Boudin. If you want the complete play-by-play, check out what Eric Newcomer had to say. My question: Will venture investors get more involved politically in San Francisco and elsewhere? Or is this just a Twitter/Clubhouse thing?

The Big Story

Heat check

I wrote this week about the scorching heat in the VC market now. TL;DR: Rounds are getting done much faster, deal sizes and valuations are climbing in some sectors, traditional venture firms are investing more than usual and more nontraditional investors are coming in earlier. A few more important things to note:

It's not just hedge funds. "Huge amounts of hedge fund capital [are] coming into venture," said Sunil Dhaliwal of Amplify Partners. "Not to mention mutual funds, insurance companies, sovereign wealth money, pensions, family offices and every other investor class you can think of."

But some sectors are struggling. This frenzy is focused on specific areas, such as enterprise, remote work, DevOps and infrastructure, while some areas of biotech and consumer that were once hot are struggling to find funding. "It's not across the board," said Wesley Chan of Felicis Ventures. "It's heavily nuanced."

Diligence is dropping across the board. It's not just private equity and hedge funds that are throwing down term sheets after one initial "get to know you" meeting or even before a meeting; traditional venture firms are doing it, too. "Traditional firms are throwing down term sheets after a first meeting," Chan said.

And then there's new math: It's not quite a Steve Jobs reality distortion field, but the math of venture funds has shifted, particularly in the past six months or so, some investors say.

  • Previously, a typical $300 million venture fund would buy 20% of 20 to 30 startups, looking to back at least one company that could lead to a big $5 billion exit.
  • But now, with companies such as Snowflake and Roblox seeing potential exits at upwards of $50 billion valuations, that math has changed.

So on the front end, some investors are increasing their bets by an order of magnitude.

  • "Now the whole model is wrong," said Zach Coelius of Coelius Capital. "Instead of spending $10 million [on a deal] they could afford to spend $100 million to buy 20% of the same company. That's f---ing crazy."
  • As a result, instead of investing in a startup at, say, a $40 million valuation, an investor could now invest at a $400 million valuation. The expectation of virtually every company becoming the next Roblox or Snowflake is driving a lot of the spiking valuations and round sizes, investors say.

Is it this easy? Behind this all, venture capital returns are way up.

  • Coelius says many firms are seeing massive returns that are way higher than other asset classes. "We're all making way too much money," Coelius says. "I've been running at over 30% IRR every year for six years. Compare that to any other asset, that's insane. I'm not even a VC who's been doing this my whole (professional) life."

But how many Snowflakes having IPOs at over $60 billion market caps are there? If you believe that SaaS is eating the world, and Roblox is the first of many EA or Activisions, then there can be some others.

So is this a crazy spike or the new normal? "So f---ing hard to tell," one investor says.

  • "Are we in a bubble with prices abnormally high and so it's going to revert to the mean — or are we in a long-term tech cycle, which means $50 billion outcomes are here to stay and might even go up?" Coelius asked. "If you believe [in the latter], you should go gonzo."
  • That's the calculation investors are making. Some believe in the former and are staying in their lanes, but many others believe this time is different. What do you think? My inbox is here for your thoughts.

A MESSAGE FROM MICRON

Micron A MESSAGE FROM MICRON

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.

Inside Track

  • Uncovering the biases in venture and startups: From day-to-day interactions to funding to women founders, there's a long way to go, said Lux Capital's Deena Shakir.
  • Founders in New York looking for venture funding or advice can check out the NYC Founder Guide from Primary Venture Partners. It includes a directory of NYC angel, pre-seed and seed investors.
  • When was the last time you saw a VC concerned about a startup paying frontline employees a living (or minimum) wage? Brooklyn Bridge Ventures' Charlie O'Donnell reflects on ethics and says "it's kind of hard to make money if the long-term consequences of your investments threaten the free and open democracy that underpins our society."

Need to Know

  • Fintech frenzy: Affirm went public and venture capital rained down on companies like Blend, MX and Checkout.com in the fintech sector. (That's my actual beat, so please send me your fintech tips, rants, data points, etc.)
  • Splitsville: Plaid and Visa called off their acquisition after the DOJ suit. Will this affect other fintech startups? Fintech VCs I've talked to say no. But: "I do think we'll see much more of an enforcement regime and a more robust CFPB in the Biden administration," said Ryan Falvey, managing partner at Financial Venture Studio. For what it's worth, Plaid is now likely worth much more than when the deal was announced.
  • Victory laps: Affirm and Poshmark's IPOs both performed well. I admit it: I'm a sucker for a good emotional "front-row seat" blog post, especially if there's some revealing personal history or embarrassing old photos. Mayfield's Navin Chaddha first met Poshmark CEO Manish Chandra in 2004. GGV's Hans Tung on Poshmark and social commerce. Jeremy Liew co-led the first institutional round in Affirm.
  • New CEO: Techstars, the firm behind SendGrid, DataRobot, ClassPass, Remitly and DigitalOcean, has named Maëlle Gavet as new CEO, taking over from David Brown. Founder and managing partner David Cohen will become chairman.
  • From Protocol: Many of today's tech leaders emerged from an unexpected place.
  • This week in VC history: Foursquare raises new funding at roughly half its last valuation.
  • Your weekend reading: Startups fixing AI bias in your company.

Five Questions With...

Threshold's Chirag Chotalia

Chirag Chotalia is a partner at Threshold and invests in vertical software, real estate and marketplace startups. He's on the board of AutoLeap, BentoBox and Loftium and works with Threshold investments in Front, LaunchDarkly and Divvy. Previously at Pritzker Group, he led deals for Casper and Honest Company.

What problem do you want to see a startup solve?

Tech services for broader Americans. Most startups emerge serving the top 10%. Look at companies like Honey: People didn't get why you need a savings app. But eventually they sell to Visa [for] $4 billion. Similarly, for a lot of ecommerce investors with Wish, they didn't get it. They said, why should we wait three [weeks] to get a product? But Wish has done very well. It's a broad category I watch on how to help everyday Americans live life better and cheaper and remove friction for them in things like health care, housing and other big buckets of spend.

What's the craziest thing you've seen in a pitch — and did it work?

Memphis Meats and their cell-based meat. I was extremely skeptical going in. But they nailed everything: the texture, flavor profile, smell. It felt like a 10x product, comparable to Beyond Meat or Impossible. At that point it was maybe $2,000 a pound to produce. It convinced us.

What company, outside of your portfolio, have you been most impressed to watch this year?

Hopin is an amazing product. They're not only reimagining what events look like but also they very smartly built a discovery marketplace on top of events. The second one is SmartRent. It makes dumb apartments smart. If you look at the average apartment, there's no smart devices. With this, you control lights, temperature, locks on your phone. There's water leak detection. They partner with the biggest multifamily building owners. One of the biggest problems in residential real estate is you leave town and then the toilet's leaking.

What's one of the worst predictions you've ever made?

My prediction in 2013 was direct-to-consumer would be successful across every consumer category. While there are categories that are really successful there are also categories where the model just doesn't make sense. For example, oral care. Many players tried direct-to-consumer toothpaste companies. But it's a lot easier to buy from an aggregator like Amazon. Your product needs to be substantial enough or the pain point needs to be such that you're willing to have the friction of having another merchant outside of Amazon.

What's a secret obsession of yours that most people don't know about?

I did diaspora studies and I did economics in college. For my thesis I studied the South Asian diaspora in Trinidad. They were brought there as indentured servants, which is very different from those in the U.S. who migrated for better career opportunities. For founders, I'm fascinated by context and how it shapes them. I typically start meetings with founders asking the "why" before the "what." That contextual understanding motivating them is equally important to what they're actually working on. If I wasn't a VC, I'd be a sociologist or journalist looking at the narrative or story of people.

A MESSAGE FROM MICRON

Micron A MESSAGE FROM MICRON

For Raj Hazra, who is senior vice president of corporate strategy and communications at Micron, there has never been a more thrilling time than this golden age of data. In this interview, Hazra describes how "we are now at the doorstep of taking things that we thought were science fiction and making them real, and it's only going to be exponentially faster going forward". Read more from Micron's Raj Hazra.

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