Venture capital distributions are down 90% in the first quarter, according to Industry Ventures, an LP in 450 funds – TechCrunch

If you’re trying to take the pulse of what’s happening in the venture capital market right now, you could do worse than speak with 22-year-old investment firm founder Hans Swildens. Industry companies.

Industry Ventures now manages $5 billion in assets — including nearly $1 billion raised last year — across numerous strategies and vehicles. The company makes both direct investments and invests in venture capital funds. It participates in smaller technology buyouts. He’s a limited partner in the buyout funds of others. And he has a vibrant side business, so he knows when people are ready to sell stakes in companies, when they’re not, and where the market is pricing just about everything.

We caught up with Swildens yesterday, whose firm has offices in London and Alexandria, Va., but is based in San Francisco, where he spoke from his office near the iconic Transamerica Pyramid. Responding to our questions, he spoke animatedly about everything from venture capital distributions, to the secondary market, to the reappearance of deal terms designed to protect investors (and which all but disappeared until recently, when that VCs eager to make deals threw caution to the wind).

Below are some highlights from that discussion, which offer useful insight into current conditions that other investors – and founders – could benefit from knowing, although Swildens himself suggests that this moment could be a blow. hard. For readers who work outside of VC, we’ve overlaid some of our own notes in parentheses to explain some of the terms he uses.

TC: Since January, we’ve been hearing a lot of late-stage investors taking more interest in publicly traded stocks whose prices have plunged. Do you see a decline in late-stage venture capital?

HS: With the pre-IPO unicorn rounds at an advanced stage, we see them continuing to happen, but with structure.

You mean the terms of the deal? What kind do you see?

Like one and a half times the investors money, plus the stake. [Translation: VCs are now asking for so-called preferred shares, where they get their money before anyone else gets paid — including the founders —  in a liquidity event.]

Or senior 1.75x with an anti-dilution ratchet in an IPO. [Anti-dilution provisions are clauses that allow investors the right to maintain their ownership percentages in the event that new shares are issued.]

Or minimum compound return thresholds of 20% IRR. [The hurdle rate is the minimum rate of return on an investment that will offset the investor’s costs. The basic gist here, of course, is that investors are starting to require downside protection.]

There’s a lot going on at this stage of the market where companies may have $100 million in revenue, but their last round was made with a $5 billion valuation. So new funding is happening, but it’s happening with a structure that looks a bit like a high-yield debt instrument.

When did these provisions start appearing in term sheets?

It started a month or two ago. In January things were [still operating much as they have been]. And then February and March were the two months when people started to experience daily declines in their public equity portfolios. About a month ago, a large number of cross funds and hedge funds readjusted either where they invest or the terms and conditions of their funding. So mutual funds, hedge funds, private equity firms – they’re mostly losing their structure in securities now.

Don’t VCs insert these same terms into transactions?

So far we haven’t seen too many traditional funds like IVP, Meritech, DFJ Growth, [or] Iconiq drops just as much in structures. I think now that this is happening and the CEOs are on board and all the other market players who are venture capitalists are seeing these titles, you’ll probably start to see [the terms] arise [including from] some of them. But a lot of venture capital firms and growth companies that are more venture capital-focused have come to market in Series B and C deals and avoided those high-priced rounds.

We hear a lot about Tiger Global. How many players do you think have come into the market in recent years from the hedge fund world and other parties?

There are so many hedge funds with parallel funds that are 10-year crossover vehicles. There are about 30. Then on the private equity side there are another 20 buyout funds or mutual funds that have growth teams. It is therefore well 50 to 75 people who abandon the structure everywhere.

I think right now, if you’re a CEO, and you’ve raised your turn and it was at [a valuation of] $10 billion and you’ve got $100 million in revenue and you don’t need to raise funding, you’re not going to [raise again]. If you need to raise funds and want to retain your “overall value”, there is a 75% chance that you will structure.

There are still upward rounds, but most of the upward rounds that have happened were already underway in the fourth quarter.

You are an LP in other venture capital funds. What do you see from a yield perspective?

There has been a massive decrease in venture capital fund stock distributions because all stocks have been hammered [and] venture capital funds simply decide not to distribute when stocks go [down]. Some [shares] are half of what they were in January right now, so all venture capital funds are trying to figure out whether they’re holding up or not and generally they’ve held up. Few venture capital funds have made distributions in the past three months. It was a huge drop. We received distributions every other day. I’m in 450 venture capital funds, so I see like a third of the whole market as an LP, and we used to get a check every day, every other day. Now, in this trimester, it’s like one every two weeks; that’s an 80% to 90% drop from an exit payout perspective, both cash and stock.

Wow, although in fairness last year was relatively high in terms of distributions.

Last year was huge. Every day or every other day you have stock – something has been bought out or something has gone public. So in terms of money coming back for LPs, this year has been bad. And then the things that [has] distributed this year, most have been cut in half. Didi and Robinhood were both distributions that took place in January, February – these are the two largest stock distributions this year [for many investors] – and Didi was unlocked and distributed at three or four dollars and now it’s two dollars; Robin Hood [was distributed] at $15 and now it’s at $11 and its IPO price [in August] was $35.

Wearing your fund manager hat, are you doing the same, clinging to your stocks in the hope that prices rebound?

We had a policy last year where we automatically sold things over a period of time, but at the end of last year and in January when things started to get [more turbulent] and we didn’t know if the market was going to rebound or not, we had two stocks of significant value which we should have sold but which we held and which we still hold. So we’re kind of in the same boat, where we have two things we’re clinging to that we don’t want to sell or distribute.

Do you see more opportunities to buy discounted secondary stocks of companies or even fund portfolios given what happened in the first quarter?

Report on venture capital funds [their net asset value] quarterly, and I have Q4 [reports] through everything and I’m waiting for Q1 [reports, which reflect performance through March 31].

If a fund held public stocks – literally any of them in the first quarter – that’s going to be a markdown on those things. But that won’t register in your capital account for a month or two from now. So we’re waiting to see how this all clears up and [these other fund managers] you want to see him flush out, don’t you?

I mean, if you own a house and it was worth ten million dollars in December, and now, four months later, it’s worth six million dollars, do you sell? You’d be like, ‘What happened? How is it possible?’ If someone comes and buys your neighbor’s house for $5 million, you’re like, ‘Okay, I get it, it’s true. He actually fell. It was swollen.

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