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💸 "How Big Funds Change the Startup Ecosystem"

This Week in Startups

Photo by Randy Tarampi / Unsplash

Table of Contents

Hosts: Jason Calacanis & Molly Wood
Category: 💸 Venture Capital

Podcast’s Essential Bites:

[5:32] JC: “Most people think that a milestone based funding environment is optimal. […] Somebody goes to friends and family, they raised 25 to 100k, they get an MVP going. […] They get into an accelerator, they get 100-150k. They do a seed round for a million or two. They get a Series A for 3 to 10 [million]. And each step along the way, they prove some stuff. And if they don't prove stuff, then they get eliminated. They get cut, just like a professional sports team.”

[6:30] “If you believe in the milestone based funding system as a device, then that would argue for appropriate sized funds along the way. You don't want to have a fund that makes 30 or 40 bets at $30 million, which means you've got a billion dollar fund, if you're doing Series A. Because the Series A should be 5 to 10 million. […] So if you're a seed fund, do you want to have a $300 million fund if you're doing 100 names and it's 3 million? No. You need a $100 million or $50 million fund, so you can put 250 or 500 into these. So there's this appropriateness for the bet sizing.”

[7:15] “Why do people say 30 names, 100 names? It's based on the number of winners at each stage. So in the earliest stage, you're gonna say, one out of 50, or one out of 100 might become a unicorn. And those would pay off 200, 500, 1,000 to one. That economics makes sure one investment returns the whole fund. So you can have a lot of losers and two winners and still have a great fund. […] A Series A fund […] need[s] to have of the 30 bets […] maybe three winners that pay off 50 to one. Three winners pay off 50 to one, you get 150 times your money. […] Now you've got a 4x fund, 5x fund.”

[11:13] JC: “If you're trying to get product market fit, and you got 100 million in the bank, you can't get product market fit with more than 10 people in a company because there's too many people around the table. It's not going to help find that little magic of making a great product when you're in the laboratory.”

[14:52] JC: “If you can make a $100 million bet, and you only double your money, that would seem to be terrible. Because we're trying to do three, four, or five times cash on cash in 10 years. But if you double your money in three, that on a percentage basis is still pretty high. So the latest stage funds theoretically return the money faster. But then weird things can happen, which is people start overpaying for startups, they start competing at such a crazy level. Like we've seen with SAS companies getting 75 times top line revenue, or 100 times top line revenue, that when that retreats, all of a sudden you can be underwater. […] It's no longer theoretical that these late stage funds could get ahead of their skis. They're now ahead of their skis. We'll see if they catch up. What they said publicly was, we're just gonna go earlier.”

[16:51] JC: “When we talk about advice for investing, the market is dynamic. And what worked last year may not work this year. So if […] for the last 10 years making late stage bets worked and then suddenly, this year, with the public market compression of multiples, these late stage deals don't work anymore. And there's indigestion at that stage where these companies […] have to work through all this excessive capital and then catch up to their valuations. Now, where are you going to put the money?”

[17:31] JC: “Why would Tiger Global want to invest in seed funds? […] That would be for access. So it's a very savvy move. Now we're seeing more and more of the late stage venture funds […] [that] want to get downstream deal flow. […] So for Tiger to go put money to work in those, [is] something that Sequoia did a long time ago.”

Rating: 🚀🚀🚀

🎙️ Full Episode: Apple | Spotify | Google
🕰️ 1 hr 6 min | 🗓️ 03/13/2022
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