If you’re confused about the state of startup investing, join the club. Public company stocks have been hammered relentlessly in recent months amid fears of a recession, but startup funding seems as brisk as ever and, more surprisingly, VCs are still regularly announcing huge new funds for us, as they have been for years.
To better understand what’s going on, this week we spoke with Index Ventures co-founder Danny Riemer, who grew up in Geneva, where Index has an office, but who now splits his time between London and San Francisco, where Index also has offices. (Simply opened an office In New York too.)
We caught up with Riemer, whose credits include Discord, 1stdibs, Glossier, and Good Eggs, among others, in California. Our conversation has been lightly edited for length.
TC: Lightspeed Venture Partners announced this week 7 billion dollars with several funds. Battery Ventures said it has closed 3.8 billion dollars. Oak HC/FT almost declared 2 billion dollars. Typically, when the public market is this low, institutional investors are less able to commit to new funds, so where does the money come from?
DR: That’s a great question. I think we have to remember that there have been extraordinary achievements for many of these institutions over the last few years, call it the last decade actually. And their positions have really mushroomed during this time. So what you’re seeing is an allocation to funds that have likely been around for a long time. . . . and have actually generated very good returns over the years. I think investors are looking to put their money into institutions that understand how to deploy this fresh new money in any market.
These funds are getting bigger and bigger. Are there new sources of funding? We’ve clearly seen sovereign wealth funds play a bigger role in venture capital in recent years. Is the Index looking further ahead than before?
There’s certainly been this dichotomy in the market between funds that are probably more in the business of consolidating assets and funds that are trying to continue with a professional venture practice, and we play in the latter camp. So, in relative terms, the size of our fund has not become very significant. They haven’t grown dramatically because we’ve been very clear that we want to keep it small, keep our craft alive, and keep going that way. That means that when it comes to our institutional investor base, primarily we don’t have family offices and we don’t take sovereign wealth fund money. We’re really talking about endowments, pension funds, non-profits and foundations that make up our investor base. And we’re lucky enough that most of those people have been with us for nearly 20 years.
You have quite a lot of money under management, last year you announced $3 billion in new funds. That’s not a small amount.
No, it’s not small, but it’s relative to the funds you’re referring to, the funds that have grown a lot and done sector funds or crossovers, if you look at how much the Index has raised. [since the outset] unlike most of our peers, it’s actually a very different story.
How much? has Has the index risen over the company’s history?
We have to check. I wish I could have the exact number on the tip of my tongue.
It’s kind of refreshing you don’t know. Are you in the market now? It seems like it’s a year on and off in terms of fundraising for most companies, and that doesn’t change.
We are not in the market to raise funds. We are obviously to invest in the market.
We’re starting to see a lot of companies reset their estimates. Are you in talks with your portfolio companies to do the same?
We have all kinds of discussions with companies within our portfolio. nothing is off the table. We absolutely do not want to suspend disbelief when it comes to the realities of the situation. I wouldn’t say it’s an umbrella discussion that we do with all of our companies. But we consistently try and make sure our companies understand the current climate, their specific conditions, and make sure they are as realistic as possible when it comes to their future.
Depending on the company, sometimes valuations are way ahead and we can’t count on cross-fund returns. . . they have to defend their public positions. So some of these companies just need to weather the storm and make sure they are ready for the tough times ahead. Other companies do have a chance to gain a foothold during this period and capture significant market share.
How is it? many VCs, you say you’d rather a startup conduct a “down round” than agree to onerous terms to retain a certain valuation. Do you think the founders got the memo that next rounds are acceptable in this climate?
It really depends. I think you probably have some new funds that started around this time. [they’re] not investing in the best business; [They’re] investing in the best business or trying to finance the best business in the field. So there’s probably some pressure on some VCs that some entrepreneurs feel.
I want to emphasize that not all companies need to take a cold shower when it comes to valuation. There are many companies that do very well even in this environment.
Fast, an online login and payment company, quickly shut down earlier this year, and Index took a bit of a beating online for quickly removing the company from its site. What happened there and, in retrospect, what more could Index have done in that situation? I’m guessing your team went postmortem on this one.
I was not aware that we had removed it from our website. I think it’s probably out there, but probably harder to find, that’s what I suspect. We promote companies that are doing great.
You’re right, we digested that as a firm and really tried to learn the lessons from there. There are a number of factors that we’re still digesting or may not know about, but probably what was difficult during COVID was really valuing the talent and understanding the people we were working with. And I’m sure that my colleagues who were responsible for the company would have been able to spend more time and really understand the company’s entrepreneurial culture in more detail if we could have spent more time with them personally.
(We’ll have more from this interview in podcast form next week – stay tuned.)