Top VCs have expanded into broader asset managers; is the model sustainable? • TechCrunch


Last week at TechCrunch’s annual Disrupt event, this editor sat down with venture capitalists from two companies that look similar in some ways over the past five years or so. One of these adventurers was Nico BonatsosD., a managing partner at General Catalyst (GC), a 22-year-old company that started as an early-stage venture venture in Boston and now manages tens of billions of dollars as a registered investment advisor. Bonatsos joined on stage by Karen Maroney, a partner in Cotoi, who started his life as a hedge fund in 1999 and now also invests in growing and early stage startups. (Coty runs more billions than General Catalyst – over $90 billionin one report.)

Due to the lack of clarity on what it means to be an investment company, much of the talk has focused on the outcome of this development. We wondered: Does it make complete sense for companies like Cotoi and GC (and Insight Partners, Andreessen Horowitz, and Sequoia Capital) to now handle nearly every stage of tech investment, or would their investors be better off if they stayed more specialized?

While Bonatsos has dubbed his company and its competitors the “products of the era,” it’s easy to wonder if their products will still be wholly attractive in the years to come. Most problematic at the moment: the exit market is completely frozen. It is also challenging Deliver huge returns when you leverage the amounts we’ve seen pouring into investment firms over the past few years. General Catalyst, for example, is closed $4.6 billion Back in February. Meanwhile, Cotoi closed $6.6 billion For its fifth growth and investment strategy from April, it is said to be in the market for a period 500 million dollars Early stage fund at the moment. That’s a lot of money to double or triple, not to mention a tenfold increase. (Traditionally, venture capital firms aim to sell 10 times investor dollars.)

Meanwhile, not a single company – that I know of, anyway – has expressed plans to return investors some of the massive amounts of capital it has raised.

Today I was thinking about last week’s conversation and had some additional thoughts on what we discussed on stage (in italics). Below are excerpts from the interview. To catch the entire conversation, you can watch it around the 1:13 minute mark in the video below.

TC: For years, we’ve seen a blur of what a “project” company really means. What is the outcome when everyone does everything?

Note: Not everyone has the right to do everything. We are talking about 10 to 12 companies [are now] able to do everything. In our case, we started from being a company at an early stage; The early stage is still our core. And we’ve learned from serving our clients – the founders – that they want to build lasting companies and want to keep their privacy for longer. As a result, we felt raising growth funds was something that could meet their demands and we did. Over time, we decided to become a registered investment advisor as well, because it made sense. [as portfolio companies] went to the audience and [would] They are growing very well in the general market and we can continue to stay with them [on their] Journey for a longer period of time rather than going out early like we used to do in earlier times.

Smy: I feel like we’re now in this place of interesting change. . We are all moving to meet the needs of the founders and LPS who trust us with their money [and for whom] We need to be more creative. We all go where the needs and the environment are. I think the thing that has probably stayed the same is the venture capital jacket. The Patagonian jacket was pretty standard but everything else changes.

Maroney was joking, of course. It should also be noted that the Patagonian jacket has fallen out of fashion and been replaced by an equal piece more expensive jacket! But she and Bonatsos were right to meet the demands of investors. By and large, their companies only said yes to the money that was handed over to them to invest. Stanford Management CEO Robert Wallace said for info Just last week, if it could, the university would be mobilizing more capital into some project coffers while seeking our superior returns. Wallace explained that Stanford has its own scaling problem: “As our endowments increase, the amount of capacity we receive from these very carefully controlled and disciplined early stage funds is not going up proportionately. . . We can get more than we got 15 or 20 years ago, But this is not enough. “

TC: LPs had record returns last year. But this year, their returns are poor and I wonder if it owes in part to the overlapping bets they have at the same companies that they all converge on. [founding teams]. Should LPs worry that you’re now running into each other’s corridors?

Note: I personally don’t see how this is different from what it used to be. If you’re a limited partner in a high-end financial institution today, you’ll want to have a portion of the top 20 tech startups starting every year that could become the next big thing. [The difference is that] Now, the results in recent years have been much greater than ever. . . . What liquidity providers have to do, as has been the case over the past decade, is invest in the different pools of capital that VC firms give them an allocation to. Historically, it was in early stage funds; Now you have options to invest in many different vehicles.
In real time, I moved on to the next question, and asked if we’d see”right size“For an industry with shrinking yields and cold exit pathways growing. VC remains a very dynamic ecosystem,” Bonatsos replied, “like other species, it must go through a cycle of natural selection. It would be survival of the fittest.” But perhaps it made sense Stay longer on the cross-investment issue because I’m not sure I’d agree that the industry works the same way it does. It is true that the exits are bigger, but there is no doubt that many private companies have raised a lot of money in valuations that the public market has never supported because many companies with a lot of money have been chasing them.

TC: In the startup world, power goes from founders to venture capitalists and back again, but until very recently, foundation has become founder-friendly to an amazing degree. I’m thinking of Hopin, a virtual events company founded in 2019. According to the Financial Times, the founder has managed to cash out nearly worth 200 million dollars of stock and still owns 40% of the company, which I find amazing. what happened?

NB. Well, we were one of the investors in Hoppen.

TC: Both companies were.

Note: For a while, it was the fastest growing company of all time. It is a very profitable business. COVID also happened and they had the perfect product at the perfect time for the whole world. At the time, Zoom did really well as a company. And it was the start of the crazy VC acceleration period that started in the second half of 2020. So it piqued the interest of many of us because the product seemed perfect. The market opportunity seemed so great, the company wasn’t consuming any money. And when you have a very competitive market situation where you have a founder who receives like 10 different offers, some offers need to fine-tune the deal a little bit to make it more persuasive.

TC: Nothing against the founders, but people who have been laid off from Hoppen since then must have been pissed off, reading [these details]. Were any lessons learned, or will the same thing happen again because that’s how things work?

SM: I think people who started businesses now are no longer under this proverb [misperception that] Everything rises to the right. I think the generation starting now on both sides will be much more straightforward. I also think there was a feeling like, “Oh, I just want money with no strings attached.” . . . That has changed dramatically [to]”Have you seen any of this before because I could use some help.”

Note: Certainly. Market conditions have changed. If you’re raising a growth tour today and you’re not from anyone [type of company] Or significantly overshoot your plan, it will probably be more difficult because a lot of crossover funds or late stage investors open their brokerage account at Charles Schwab and can see what terms are there and they are better. They can buy today. They can sell out next week. With a private company, you can’t do that. In the very early stage, it’s a bit more about how many funds are out there eager to write checks and how much capital they’ve raised, so in the initial stage we haven’t seen much of a difference yet, especially for the first checks. If you’re a seed company that sprang up last year or the year before, and haven’t made enough progress to earn the right to raise a Series A, it’s a little trickier. . As far as I know, I haven’t seen companies decide to raise a Series A on really bad terms. But of course we saw this process take longer than before; We have seen some companies decide to upgrade the bridge [in the hopes of getting to that A round eventually].

For what it’s worth, I think the liquidity of the early founders is a bigger and more complex problem than venture capital wants to allow. In fact, I later spoke at Disrupt with an investor who said he had seen a number of founders in social circles whose companies were floundering but since they were able to part with millions of dollars initially, they aren’t quite as well. They are killing themselves trying to save those companies.

TC: The exit market is now cooked up. SPACs are out. Only 14 companies have chosen direct listing since then [Spotify used one] In 2018. What are we going to do with all these many companies that have nowhere to go now?

Note: We are very fortunate, especially in San Francisco, that there are so many tech companies that are doing really well. They have a lot of cash on their balance sheet and hopefully at some point, especially now that valuations are more reasonable, they’ll need to innovate with some mergers and acquisitions. In our industry, especially for big companies like ours, we want to see some smaller exit, but it’s about permanent companies that can really go the distance and produce 100x the return and pay for all the legacy products or the entire portfolio. So it’s a fun time, what’s happening now in the exit landscape. With terms rationalizing, I’m going to assume we’ll see more mergers and acquisitions.

Of course, there will never be enough acquisitions to bail out most companies that have received funding in recent years, but to Bonatsos’ point, venture capitalists are betting that some of these exits will be large enough to keep institutional investors as keen on venture capital as they are. I slept. We’ll see over the next couple of years if this gamble turns out the way they expect it to be.

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