If you feel confused about the state of startup investments, join the club. Shares of publicly traded companies have been hammered relentlessly in recent months amid mounting fears of a recession, but seed funding seems as vibrant as ever and, more surprisingly, to us, VCs are still routinely announcing huge new funds, as they have for many. do for years.
To better understand what’s going on, we spoke this week with Index Ventures co-founder Danny Rimer, who grew up in Geneva, where Index has an office, but now splits his time between London and San Francisco, where Index also has offices. has. (It just opened an office in New York, too.)
We happened to catch Rimer — whose bets include Discord, 1stdibs, Glossier, and Good Eggs — in California. Our conversation is lightly edited for the time being.
TC: This week, Lightspeed Venture Partners announced $7 billion across multiple funds. Battery Ventures said it’s closed $3.8 billion. Oak HC/FT almost announced $2 billion. When the public market is that far down, institutional investors tend to be less able to raise new funds when the public market is low, so where is this money coming from?
DR: It’s a great question. I think we need to remember that there have been extraordinary gains for many of these institutions over the past few years — actually call it the last decade. And their positions have really exploded during this period. So what you’re seeing is an allocation to funds that have probably been around for a while. . . . and have even delivered very good returns over the years. I think investors want to put their money into institutions that understand how to allocate this fresh new money in each market.
These funds are getting bigger and bigger. Are there new sources of financing? It is clear that sovereign wealth funds have played a greater role in venture capital funds in recent years. Does Index seem further away than ever?
There is certainly a split in the market between funds that are likely more into pooling assets and funds that seek to continue the artisanal practice of entrepreneurship and we are in the latter camp. So relatively speaking, our fund sizes have not grown very large. They haven’t grown dramatically because we’ve been very clear that we want to keep it small, keep our craft alive and keep going that route. What that means is that when it comes to our institutional investor base, first and foremost we don’t have family offices and don’t take money from sovereign wealth funds. We’re really talking about endowments, retirement funds, nonprofits, and funds of funds that make up our investor base. And we are fortunate that most of those people have been with us for almost 20 years.
You have quite a bit of money under management, you announced $3 billion in new funds last year. That’s no small amount.
No, it’s not small, but relative to the funds you’re alluding to – the funds that have grown a lot and done sector funds or crossover funds – if you look at how much Index has raised [since the outset] compared to most of our peers, it’s actually a very different story.
How much has Index prepared on the history of the company?
We have to check. I wish I could have 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? It feels like it’s been a year on and a year out for most companies in terms of fundraising, and this isn’t changing.
We are not in the market to raise money. We to be clearly in the market to invest.
We see many companies resetting their valuations. Do you consult with your portfolio companies to do the same?
We conduct all kinds of conversations with companies within our portfolio; nothing is off the table. We definitely don’t want to suspend disbelief when it comes to the reality of the situation. I wouldn’t say it’s an overarching discussion that we have with all our companies. But we consistently try to ensure that our companies understand the current climate, the circumstances that are specific to them, 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 and we can’t count on the crossover funds coming back. . . they have to defend their public positions. So some of these companies just have to weather the storm and make sure they are prepared for the tough times ahead. Other companies really have a chance to lean in and gain significant market share during this period.
Like many VCs, you say you’d prefer a startup to do a “down-round” rather than agreeing to tricky terms to maintain a specific valuation. Do you think founders got the memo that down rounds are acceptable in this climate?
It really depends. I think you probably have some new funds that started up during this time – you have some new sector funds – that complicates things because [they’re] don’t invest in the best things. [They’re] investing in the best business, or trying to finance the best business, within that sector. So there is probably some pressure regarding some of the VCs that is being felt by some entrepreneurs.
I would like to emphasize that not all companies have to take a cold shower with regard to valuation. There are many companies that are doing very well, even in this environment.
Fast, an online login and checkout company, quickly shut down earlier this year, and Index was somewhat derided online for quickly removing the company from its website. What happened there and, in hindsight, what else could Index have done in that situation? I’m guessing your team did an autopsy on this.
I didn’t realize we had taken it off our website. I think it’s probably there, but probably harder to find I guess. We promote the companies that are doing well.
You’re right, we’ve digested it as a company and really tried to learn the lessons from that. There are some factors that we’re still processing or don’t know about, but what was probably difficult during COVID was evaluating talent and understanding the people we worked with. And I’m sure my partners, who were responsible for the company, could have spent more time and understood the company’s entrepreneurial culture in much more detail if we had been able to spend more time with them in person.
(We’ll have more of this interview in podcast form next week; stay tuned.)