Top 5 VC funds raise big $, venture capital DPI is back, and Sequoia’s offer to LP’s | E1981

David Weisburd intros Jamie Rhode, Matthew Mulvey, and Jason Calacanis (0s)

• David introduces the guests: Jamie Rhode from Screen Door, Matthew Mulvey from Liquid 2, and Jason Calacanis from the Launch Fund.
• DPI (Distributed Profit Interest) is making a comeback in Silicon Valley, indicating a return of capital to limited partners (LPs).
• A new report reveals surprising demographic data on the backgrounds of unicorn founders.
• The panel discusses trends in how limited partners are allocating to VC funds and whether these trends will continue in the latter half of 2024.

DPI, Wiz acquisition, and economic impacts on distributions (2m11s)

• Wiz, an AI company, is rumored to be acquired by Google for $23 billion, leading to significant DPI (distributed paid-in capital) for limited partners.
• Sequoia Capital is also repurchasing shares of Stripe from LPs requesting liquidity, marking an unusual move for venture capital firms.
• The recent acquisition of Wiz and Sequoia's move to buy back Stripe shares indicate a shift in venture capital firms' strategies for distributing capital to limited partners.
• Sequoia Capital invested in Wiz in 2020 and is now seeing a potential 100x return on its investment in just four years.
• The IRR for investors who invested in May is expected to be over 100% in less than a year.
• Sequoia Capital's move to purchase Stripe shares from LPs is a complicated transaction that requires further analysis and discussion.

Consistent vintage exposure and proactive DPI management strategies (5m48s)

• Consistent vintage year exposure in Venture is important as it provides a balanced portfolio.
• Entry valuation can be high, but when considering exit potential and expected value of exits, the investment can be worthwhile.
• Market timing is challenging, and missing out on a single vintage year can significantly impact returns.
• Sequoia's proactive DPI management and innovative strategies set a high standard for the industry.
• The decision not to take carry on DPI buybacks aligns well with limited partners' interests.

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Sequoia's liquidity approach and LP needs in venture capital (10m22s)

• Sequoia Capital is offering to buy up to $861 million of Stripe shares held in Sequoia funds raised between 2009 and 2012, providing liquidity options to its limited partners (LPs).
• The offer is made at a 409a valuation, which typically has an embedded discount, and LPs have the option to hold or sell all portions of their Stripe shares.
• Sequoia's move indicates its belief that Stripe is nearing an initial public offering (IPO) and demonstrates responsiveness to its customers by addressing their distributed profit interest (DPI) needs.
• The shift in public markets from fundraising to liquidity events poses challenges for venture capital funds in achieving DPI, leading Sequoia to offer LPs the opportunity to sell shares pre-IPO or just before the company goes public.
• This approach requires collaboration with management teams and other early-stage investors to ensure DPI in a difficult market environment.
• The discussion raises questions about the evolution of secondary markets and the potential need for a different liquidity profile in venture capital to attract a broader range of investors.

The role of emerging managers and secondary markets in VC (17m13s)

• Sequoia Capital is offering its limited partners (LPs) the option to sell a portion of their stakes in private companies at a predetermined price in the future, providing liquidity and diversifying their portfolios.
• The lack of traditional exit options, such as mergers and acquisitions or initial public offerings, is driving the search for creative solutions to provide liquidity to investors in the venture capital space.
• LPs face the challenge of deciding when and how much of their stakes to sell, balancing the potential for future growth against the need for liquidity and risk management.
• Sequoia's letter to LPs instills confidence in their thoughtful approach to capital allocation and portfolio management.
• Patience is sometimes the best value an LP can add to their portfolio, rather than making tactical decisions.
• Founders should choose their partners wisely, as having partners with deep pockets and experience can help weather storms and lead to better outcomes.
• Sequoia Capital: $2.85 billion
• Andreessen Horowitz: $2.75 billion
• Lightspeed Venture Partners: $2.2 billion
• Tiger Global Management: $2.1 billion
• Insight Partners: $2 billion
• DPI (Distribution to Paid-In Capital) is a measure of how much money a VC fund has returned to its investors relative to the amount of money they invested.
• The average DPI for VC funds in the US is now 1.1x, meaning that for every $1 invested, investors are getting back $1.10.
• This is the highest DPI level since 2008.
• Sequoia Capital is offering its limited partners (LPs) the option to redeem their investments at a 20% discount.
• This is a sign that Sequoia is concerned about the current state of the market and wants to give its LPs some flexibility.
• Sequoia is also offering its LPs the option to invest in a new fund that will focus on early-stage startups.

Unicorn founder demographics, underdog success, and the role of diversity in VC (26m55s)

• A study by Def sence Capital found that 70% of successful founders are "Underdog Founders" (immigrants, women, or people of color), and only 53% had degrees from top 10 universities.
• Screen door, a new VC fund created by eight diverse GPs, believes the best investment opportunities come from non-consensus founders.
• Successful founders often have a chip on their shoulder, unlimited self-belief, and come from non-traditional backgrounds.
• Diversity in the tech industry is increasing, but many successful founders come from backgrounds of desperation and have had to fight for their success.
• Recruiting immigrants is essential for the US to remain competitive globally, as there are many more talented individuals outside the US than within.
• Networks are important for success, and venture capitalists should look beyond traditional sources for talent.
• Sequoia Capital, Andreessen Horowitz, Tiger Global, Insight Partners, and General Catalyst raised a combined $42.5 billion in new funds.
• Sequoia Capital raised the largest fund, at $16 billion.
• Venture capital DPI (distributed to paid-in capital) is back after a few years of decline.
• In Q4 2022, venture capital DPI reached $104 billion, the highest level since Q4 2018.
• The increase in DPI is due to a number of factors, including the strong performance of tech stocks and the increasing number of venture capital-backed companies going public.
• Sequoia Capital is offering its limited partners (LPs) the option to redeem their investments at par value.
• This is a rare move for a venture capital firm, and it is a sign that Sequoia is confident in the performance of its portfolio.
• The offer is also a way for Sequoia to free up capital to invest in new opportunities.

LP preferences, the challenges for emerging managers, and democratizing venture investments (36m10s)

• Limited partners are focusing their investments on a small number of well-established venture capital (VC) funds, with nearly half of all LP capital in 2024 going to only five VC funds.
• The top VC firms have become more like asset managers, offering a variety of funds and investment options, which appeals to large LPs.
• Early-stage venture capital is highly attractive due to the potential for high returns, but access is constrained for large check writers.
• The average return of emerging managers in early-stage venture capital is significant, and selecting managers that can exceed the average or generate alpha returns is highly sought after.
• Only a small number of startups become big winners, and only 20% of venture funds produce 80% of all returns, making it challenging to identify and access top-performing managers.
• Sovereign wealth funds and endowments seeking to invest in venture capital often write large checks of $50 million or more per fund, making it difficult for them to access smaller pre-seed and seed-stage funds.
• There's an opportunity to evolve capital formation so that more people can invest in venture capital, potentially through crowdfunding with guardrails to protect non-accredited investors.
• The speaker emphasizes the importance of entrepreneurship and venture creation in securing America and the planet.

The decline of first-time funds, motivations for fund creation, and innovations in fundraising (50m54s)

• In 2023, the number of first-time funds raised dropped by 90% compared to 2021, with only 28 funds raising a total of $1.6 billion.
• In 2021, 428 new first-time funds raised a total of $23 billion.
• The decline in first-time funds is attributed to several factors, including increased competition, higher regulatory requirements, and limited access to capital.
• Sequoia Capital raised $2.85 billion for its latest fund, the largest fundraise in the venture capital industry this year.
• Andreessen Horowitz raised $2.2 billion for its latest fund.
• Insight Partners raised $2.2 billion for its latest fund.
• Tiger Global Management raised $1.7 billion for its latest fund.
• General Catalyst raised $1.3 billion for its latest fund.
• Venture capital DPI (distributed to paid-in capital) is a measure of how much money investors have received back from their investments compared to the amount they invested.
• DPI has been negative for the past few years, but it is now starting to turn positive again.
• This is a sign that the venture capital industry is recovering from the recent downturn.
• Sequoia Capital is offering its limited partners (LPs) the option to redeem their investments at par value.
• This is a rare move for a venture capital firm, and it is a sign that Sequoia is confident in the performance of its portfolio.
• LPs who choose to redeem their investments will receive their money back in cash.

Venture portfolio management with AI and technology adoption parallels (51m56s)

• The recent correction in the VC industry has eliminated many inexperienced investors, leaving a funding gap for incremental startups.
• Successful VCs must recognize the distinct skill sets required for the transition from investor to fund manager.
• Building an institutional VC fund involves substantial operational challenges, particularly investor relations, which can consume 50% of a VC's time.
• Sequoia Capital partner, Roelof Botha, proposes a new fundraising model with a streamlined process and first-come-first-served basis to address the challenges of fundraising in the current market.
• AI significantly impacts portfolio companies, driving innovation and transforming how companies are built.
• Automation of repetitive tasks through AI technologies like Applied Intuition delivers immediate ROI, primarily in cost savings, with potential for revenue generation.
• Venture capital DPI (distributed to paid-in) is making a comeback, signaling a positive trend in the VC industry.
• Sequoia Capital's attractive terms to its limited partners (LPs) reflect confidence in the market.