Key Moments
E141: State of Series A's, VC dry powder, IPO window opens + more with Bill Gurley & Brad Gerstner
All-In PodcastKey Moments
VC market stabilizes, IPO window reopens, dry powder myths and macroeconomics discussed.
Key Insights
Series A rounds are returning to pre-pandemic normalcy, with median raises and valuations decreasing year-over-year.
VC dry powder is not readily available cash but committed capital, with incentives to delay mark-ups and maintain paper valuations.
The IPO window is beginning to open, with several notable companies preparing to go public, some potentially at significantly lower valuations.
The venture capital industry is cyclical, with significant returns often driven by brief periods of market fervor.
Inflation is cooling, and concerns are shifting towards potential deflationary risks and the impact of aggressive quantitative tightening.
Despite market stabilization, a period of distress is expected for companies that raised capital at peak valuations in 2020-2021.
STATE OF SERIES A FUNDING
The Series A venture capital market has seen a notable decrease in funding activity compared to previous years. Data from the first half of 2023 indicates that median Series A rounds have fallen 26% year-over-year to $7 million, with pre-money valuations down 17% to $40 million. This trend suggests a return to more normalized market conditions after the peak valuations of 2021. While AI deals may skew these numbers, the overall Series A landscape indicates recalibration and a greater emphasis on fundamentals.
DRY POWDER MISCONCEPTIONS AND MARKING INCENTIVES
A significant misconception surrounds 'dry powder' in venture capital. This capital is not sitting in VC bank accounts but is committed by Limited Partners (LPs) that GPs have not yet drawn down. Consequently, only a fraction of the reported dry powder is readily deployable. Furthermore, there are incentives for GPs and LPs to delay accurate 'marking' of private company valuations, as lower marks can impact bonuses and future fundraising opportunities, creating a dynamic where perceived value can be maintained over tangible performance.
THE OPENING IPO WINDOW AND DOWN ROUNDS
The IPO market is showing signs of life, with several large tech companies reportedly preparing to go public. However, this reopening is accompanied by the expectation of significant valuation resets, a phenomenon referred to as 'down round' IPOs. Companies that raised capital at peak valuations in 2020-2021 may need to go public at substantially lower figures. This trend is driven by complex cap tables, a need for liquidity, and a regulatory environment perceived as less amenable to M&A, forcing some companies towards public markets as the clearest path to resolution.
CYCLICAL NATURE OF VENTURE CAPITAL
The venture capital industry is inherently cyclical, with performance heavily influenced by specific market windows. Bill Gurley emphasizes that outsized returns are often generated during periods of extreme market exuberance, which are typically brief. The ability of VC funds to achieve superior returns compared to public markets like the Nasdaq relies on capturing these peaks. However, many firms and investors get caught holding positions too long, failing to exit during peak valuations, leading to evaporated returns. A disciplined approach to liquidity, especially at market tops, is crucial.
MACROECONOMIC SHIFT: DISINFLATION AND TIGHTENING
The macroeconomic picture is shifting from concerns about hyperinflation to a growing possibility of disinflation and even deflation. Recent CPI data shows cooling inflation, and global indicators, such as China's economic performance, suggest downward price pressures. This, combined with aggressive quantitative tightening and rate hikes, has led to a significant increase in effective borrowing costs. The market is increasingly signaling that central banks may have overtightened, potentially leading to an economic slowdown as the lagged effects of monetary policy take hold.
STRUCTURAL CHALLENGES AND FUTURE OUTLOOK
A looming challenge for the venture ecosystem is a potential one-to-two-year period of distress for companies that raised capital at peak 2020-2021 valuations. Many of these firms may struggle to raise further capital due to insufficient revenue growth, high burn rates, or the inability to secure funding without substantial down rounds. This environment, coupled with reduced LP commitments and a more constrained capital cycle, suggests that the bar for new investments will remain high, requiring greater discipline from both founders and investors in the coming years.
Mentioned in This Episode
●Products
●Software & Apps
●Companies
●Organizations
●Books
●People Referenced
Median Series A Funding & Valuation Trends (H1 2023 vs. H1 2022)
Data extracted from this episode
| Metric | H1 2022 Value | H1 2023 Value | Year-over-Year Change |
|---|---|---|---|
| Median Round Raised | 11 million (dollars) | 7 million (dollars) | Down 26% |
| Pre-Money Valuation | 48 million (dollars) | 40 million (dollars) | Down 17% |
US IPO Activity (2020-2023)
Data extracted from this episode
| Year | Total US IPOs | Monitored 'Quality' Tech IPOs |
|---|---|---|
| 2020 | 480 | 46 |
| 2021 | 1035 | 100 |
| 2022 | 181 | 3 |
| 2023 (YTD) | 123 | 0 |
Value of Venture Capital Investment in the U.S. (2006-2022)
Data extracted from this episode
| Period | Annual Deployment (Billions USD) |
|---|---|
| Before 2014 | ~50 |
| Several Years Post-2014 | ~100 |
| Pre-Pandemic (2018-2020) | ~150 |
| 2021 (Peak) | 350 |
| 2022 (Start of Decline) | 250 |
| Current (2023 Estimate) | ~150 (2019 level) |
Record Household Debt Levels
Data extracted from this episode
| Debt Type | Amount (Trillions USD) |
|---|---|
| Total Household Debt | 17.1 |
| Mortgage Debt | 12 |
| Auto Loans | 1.6 |
| Student Loans | 1.6 |
| Credit Card Debt | 1 |
Common Questions
Bill Gurley is currently working with nine existing Benchmark boards, dabbling in angel investing, and actively writing a book derived from a speech he gave at the University of Texas business school. The book focuses on how to chase and succeed in one's dream job, offering career advice.
Topics
Mentioned in this video
Suggested as a winning publisher for a business book by Bill Gurley, specifically their Harper Business imprint.
Mentioned as an example of companies from earlier days when Series A rounds were typically smaller in value.
A high-quality company rumored to be going public at a significantly lower valuation than its last private round, signaling a 'down-round IPO'.
Mentioned as having a five billion dollar valuation and being in line for an IPO.
A popular restaurant chain founded by Danny Meyer, mentioned in the context of Meyer's career journey.
A large investment fund whose size and spending habits by younger partners might contribute to overvaluation in deals.
A company offering short-run air shuttles that did a direct listing but did not perform well.
Mentioned as a high-quality company expected to go public following the IPO window re-opening.
Mentioned as undergoing a transition during which Walter Isaacson observed Elon Musk, and later as a company that significantly downsized, impacting its vendors.
Owner of ARM, which is looking to IPO, suggesting market pressure to seek liquidity.
David Sacks's former company, which he was running in 2011 when he read the Steve Jobs biography.
Cited as a company that went public relatively early in its lifecycle, affecting venture capital deployment patterns.
A company frequently mentioned as being in line for an IPO, used as an example for complex cap structures and valuation issues in private markets.
One of Danny Meyer's acclaimed restaurants in New York City.
A Greek food chain that went public with a market cap of five billion dollars.
Its consensus estimates for CPI were mentioned, aligning with the Fed's own estimates.
Mentioned as a high-quality company expected to go public, possibly with a discount relative to its last private valuation.
Cited as a company that went public relatively early in its lifecycle, affecting venture capital deployment patterns.
Reported on the 'effective funds proxy rate', indicating the total impact of quantitative tightening and rate hikes on the economy.
Mentioned as an example of companies from earlier days when Series A rounds were typically smaller in value.
David Sacks's former company, during which time he sought business education.
The original name of Carta, a company that manages cap tables for startups and provides funding data.
Hosted a conference in Deer Valley discussing potential IPO buyers and market conditions.
Released a Series A funding map for H1 2023, providing data on median round size and pre-money valuations for venture capital.
Mentioned as a company that experienced community problems but was also in line for an IPO.
A 'non-traditional' company that went public with a market cap of 4.3 billion and experienced a 40% pop.
Ran a headline 'Summer of Disinflation', reflecting recent economic trends.
A company owned by SoftBank, anticipating a large IPO at a high valuation, potentially the largest of the year.
Podcaster and public figure, mentioned as someone who popularizes the cold plunge for success.
Author of the autobiography 'Born Standing Up', which Bill Gurley recommended.
Actor in 'The Magnificent Seven', which was a remake of Kurosawa's 'Seven Samurai'.
Owns the rights to Akira Kurosawa's film 'High and Low', preventing its remake by the host.
The author of the Steve Jobs biography, which significantly impacted David Sacks' management style, and also the author of a biography on Elon Musk.
The founder of Nike, whose biography inspired a focus on 'doing stuff that matters'.
Mentioned in the context of Scorsese modeling his collaborative relationship with him after Kurosawa's work with his lead actor.
Antitrust regulator, described as opposing mergers and acquisitions, making the M&A market difficult for company exits.
The former head of Yale's endowment, whose investment model led to oversized investments in illiquid assets, widely adopted by other endowments.
Mentioned as having talked about the number of important companies created yearly in Silicon Valley.
Subject of a new biography by Walter Isaacson, for which David Sacks provided anecdotes, and also mentioned in the context of Twitter's employee layoffs.
Author of 'On Writing', a book highly recommended for aspiring writers, with his personal story of persistence highlighted.
Renowned New York City restaurant owner and founder of Shake Shack, whose career journey inspired Bill Gurley's book theme about pursuing dream jobs.
Cited as an inspiration for his 'man in the arena' philosophy, encouraging action and doing things that matter.
Cited as a disciple of Akira Kurosawa, indicating Kurosawa's influence on his filmmaking.
A venture capitalist and guest on the podcast, discussing his career shift to angel investing and writing a book on career advice.
Cited as an inspiration for engaging in meaningful endeavors.
Cited as a disciple of Akira Kurosawa, indicating Kurosawa's influence on his filmmaking.
His biography, written by Walter Isaacson, impacted David Sacks' approach to management, highlighting his directness and decision-making style.
Famous Japanese film director whose autobiography and films deeply influenced the host; his films are recommended for their persistence themes and storytelling.
His music was listened to by the host in a cold plunge, implying his association with the scores of Kurosawa or Western films.
Actor in 'The Magnificent Seven', which was a remake of Kurosawa's 'Seven Samurai'.
Founder and CEO of SoftBank, inferred as the 'Masayoshi-san' pushing ARM for a large IPO.
The actor who delivers the famous monologue in the film 'Margin Call'.
Blamed for inflating markets with 'free money' via quantitative easing, creating a bubble in public and growth stocks.
A venture capital firm with which Bill Gurley is still associated, sitting on nine of its boards but not participating in its next fund.
A venture capital firm mentioned as competing in Series A rounds and having a philosophy of holding investments for long-term power law returns.
Included in a news story about endowments with incredible returns during the 'golden hour' of venture capital.
The institution where Bill Gurley previously gave a speech that inspired his upcoming book on career advice.
Included in a news story about endowments with incredible returns during the 'golden hour' of venture capital.
Also mentioned as tightening regulations on mergers and acquisitions, similar to Lena Khan in the US.
Its unconstitutional student debt forgiveness plan was overturned by the Supreme Court.
Its endowment, run by Dave Swenson, set a playbook for investing heavily in illiquid assets, influencing other endowments.
Overturned the Biden administration's student debt forgiveness, impacting student loan repayments.
Highlighted for having a high percentage of renewable energy, cited as a positive example in the climate change discussion.
Mentioned as an example of extreme global temperatures, reaching 155 degrees Fahrenheit.
Mentioned as experiencing extreme temperatures, highlighting parts of the Earth becoming unlivable without amenities.
Compared to Texas in terms of renewable energy percentage.
A beautiful town in Maui that was completely destroyed by wildfires, highlighted as a tragic consequence of extreme weather.
Mentioned for experiencing 90-degree ocean temperatures off its coast, contributing to concerns about extreme weather.
Reported actual disinflation, with CPI down, posing a major problem for its role as a global engine of growth.
Mentioned as experiencing extreme temperatures, highlighting parts of the Earth becoming unlivable without amenities and as attracting investment from sovereign wealth funds.
A book written by one of the hosts (Jason Calacanis) that discusses investing techniques and personal anecdotes.
A book by Danny Meyer, mentioned as a key book related to his journey in the restaurant industry.
Mentioned as an amazing non-traditional biography about following one's passion.
Stephen King's book on the craft of writing, highly recommended by the host for its insights and inspiring story.
Shakespeare's play, adapted by Akira Kurosawa into 'Throne of Blood'.
A seminal business book David Sacks read during the PayPal days, which he found too theoretical without situational context.
Stephen King's first published novel, whose early treatment was almost discarded, illustrating his journey to success.
Steve Martin's autobiography, recommended for its insights and appeal, having been listened to twice by the host.
Akira Kurosawa's adaptation of Shakespeare's Macbeth, noted as a good film to watch.
A Western remake of Akira Kurosawa's 'Seven Samurai', starring Steve McQueen and Yul Brynner.
An exceptional Kurosawa film the host once wanted to remake, but found Steven Spielberg owned the rights.
A Kurosawa film recommended as an exceptional watch for startup founders due to its themes of persistence and character.
Akira Kurosawa's adaptation of Shakespeare's King Lear, noted as a good film to watch.
A Kurosawa film listed as one of the host's favorite genres by the director.
A film containing a famous monologue about selling securities to 'willing buyers at the current fair market price', used to illustrate rationalizations in finance.
A poignant Kurosawa film about a man who finds purpose after learning he will die, inspiring the TV show 'Breaking Bad'.
A TV show inspired by Akira Kurosawa's film 'Ikiru'.
Film series influenced by Kurosawa's 'Hidden Fortress', particularly the characters of R2D2 and C-3PO.
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