October Notes From The Trenches
Welcome friends! As we grapple with pretending, for the sake of our kids, to be excited about turning another year older (October birthdays for both Chris and Matt), we have a bunch of exciting things to share, including a new investment, highlights from our recent annual LP and founder meeting, and several big commercial wins for our portfolio companies.
But first, John Thornhill, Innovation Editor of the Financial Times, took some shots at the venture capital industry last week in an article titled, “The VC industry needs to rip up the playbook and start again,” and we felt compelled to respond.
Really? The Whole Playbook?
In an effort to make this digestible, we’ll skip a full review and just comment on a few of the main talking points.
“Ideology as usual”
Thornhill’s characterization of the average outsider’s reaction to a recent Marc Andreessen blog post evangelizing tech and shaming any and all critics is certainly not off base, nor do we think a cynical reaction to this “manifesto” is unwarranted.1
We would, however, just like to point out:
We (as an industry) didn’t choose any of these commonly quoted folks as our spokespeople. In fact, we’re fairly certain that we roll our eyes at their commentary more often than you do.
If you want to know what those in the industry think, it might be worth seeking opinions from those who actually work in the industry rather than picking up social media posts from those who just spend all day producing social media posts. Just a thought.
“The storytellers need a new story”
Well, it depends on whose story we’re talking about here. A lot of our issues with this piece are the way in which it paints the whole industry with one incredibly broad brush. Many of Thornhill’s critiques seem to be reactions to the various failings of late-stage/mega-fund/get-rich-quick strategies (and if that’s the case, he’ll get no argument here), but attributing these failings to the entire industry is both factually incorrect and disappointingly lazy. The traditional, patient, early-stage strategies that made venture capital an attractive asset class in the first place have and will continue to thrive.
For a practical illustration of how this bifurcation between venture segments is playing out in real-time, we’d highly encourage you to read Matt’s case study on the recent Instacart IPO and the variance in returns among the company’s venture backers. The data is pretty eye-opening.
“We might be nearing the end of the VC-driven entrepreneurial age”
“Many VCs have been quietly… recognising that the uniquely favourable conditions that benefited their industry over the past two decades are never going to occur again.”
This is where the piece goes off the rails for a while, with a combination of misunderstood economic drivers, regulatory risk hyperbole, and a smattering of sensationalist rhetoric from people who don’t strike us particularly well qualified to intelligently comment on the dynamics of this sector.
The “Cheap Money” Fallacy
Mr. Thornhill is not the only financial commentator who attributes far (far, far) too much of venture funding and returns trends to interest rates, so let’s set the record straight here once and for all. Interest rates have almost no influence on venture capital.
From a funding standpoint, institutional LPs measure VC performance relative to other equity asset classes, not relative to fixed income. This means that a VC’s “cost of capital” is really an opportunity cost, calculated by taking the expected return of your equity market benchmark of choice and adding a risk premium, and thus arguments like this make little sense:
The extraordinarily loose monetary conditions after the global financial crisis of 2008 let VCs raise cheap money and hurl it at fast-scaling companies, such as Uber and Airbnb.
From a performance standpoint, there is nothing to suggest any link whatsoever between interest rates and VC returns. The correlation between median VC IRRs provided by Cambridge Associates and average Fed Funds rates from 1981 to 2014 was 4.5%. Of the top 10 best-performing VC vintages in this period, 7 were years with a higher average Fed Funds rate than 2023’s (same for 15 of the top 20, and so on).
So this assertion doesn’t make sense either:
This capital-as-a-strategy model, prioritising revenue growth over cash or profit generation, is a lot harder to make work now that money costs something.
Of course we agree that the “growth at all costs” strategy isn’t sustainable, but that’s because it’s a bad strategy, not because rates have increased. It was just as bad a strategy 3 years ago at 0% rates as it is today at 5%.
The Regulatory Boogeyman
The second pillar of the “venture is dead” argument:
The permissive regulatory environment in the US has tightened, too. No longer will it enable start-ups and VCs to cash out to voracious tech companies, indirectly recycling money into new investments.
No question the FTC has ramped up its antitrust scrutiny of late and the 20 suits filed since 2021 is a historically large number, but 1) the FTC is only batting about .500 in these suits (so only a handful of mergers blocked each year), and 2) over this period there were 2,609 startup exits via M&A (per Pitchbook reporting).
So instead of 1,000 startups able to “cash out to voracious tech companies” each year, maybe we’ll be down to 996? I think we’ll manage.
Questionable Sources
The source cited for much of this “death of venture” argument was the newsletter of another journalist, who was, in turn, reporting arguments made by “geopolitical strategist Peter Zeihan.” We don’t doubt that Mr. Zeihan is a very bright and thoughtful individual. On the other hand, so are we, but that doesn’t mean you should lend much weight to our thoughts on the current Middle East crisis.
Ending on a High Note
We’ve been a little hard on Mr. Thornhill (though hopefully not unfair), but we have to give him credit for really landing the plane at the end of his missive, with some nicely nuanced perspective. We just wish he had started this way.
Given this bleaker outlook, many of the so-called “tourist” investors who flooded into late-stage private markets in the late 2010s, have gone back home.
We suspect it was more the bleak “in-look” (at the massive write-downs on almost everything they bought in the last 3 years), but no arguments on this trend; we’ve seen the same.
VC is returning to its origins as an artisanal cottage industry after failing to become an institutional asset class. That suits some VC firms just fine.
“Cottage industry” seems a little extreme (and maybe a tad pejorative?). It also might be a bit optimistic to think that everyone has learned their lesson and will respond accordingly, but we’d like to believe it’s true (it would certainly suit us).
Finally, quoting Danny Rimer, partner at Index Ventures:
“We think it is a great time to invest. We love to be contrarian.”
Amen, Danny. Couldn’t have said it better ourselves.
New Investment - Tributary Fund
After years of searching for an investible startup that can harness the potential of AR (“augmented reality”) tech in a practical application with a big TAM, we finally found one! Argyle, the latest investment in our pre-seed Tributary Fund, uses AR to overlay 3D engineering blueprints onto construction sites in real-time.
The 3D overlay saves significant daily setup and planning time, removing the need for dozens of manual measurements, and perhaps more importantly, it dramatically reduces the need for reworks caused by incorrect interpretation/application of engineering plans and site-specific issues that are undetectable in static blueprints, which collectively costs the commercial construction industry an estimated $500 billion a year in the U.S. alone.
Written to run on leading AR headsets (e.g., MagicLeap, Hololens) as well as iOS, Argyle’s software solves two critical issues that plagued earlier attempts to provide a similar solution: model orientation and upload speed.
Orientation
Predecessor platforms require a fixed reference point that never changes to properly orient blueprint overlays (generally an object stamped w/a QR code that is placed in the field of vision). The problem, of course, is that these fixed markers are not part of the final structure; they have to be moved constantly, and this has to happen with dozens (if not hundreds) of markers as often as daily at each job site. Argyle’s software is built to solve this with a patented design that automatically locates and selects new reference points from fixed structural elements as they are built and installed in a project, so users can dispense with the initial markers almost immediately after starting work.
Speed
3D BIM models are massive files that can take upwards of 30 minutes to load, even on faster desktops, so they must be segmented into many small pieces to run on a mobile device. Previous AR applications required users to manually switch their overlay or deal with significant lag issues as they went from room to room. In addition to putting a lot of early development work into optimizing the file loading process, Argyle’s dynamic orientation process eliminates the biggest cause of this lag (i.e., models reorient themselves as the user’s field of vision changes), allowing its design overlays to seamlessly adjust to user’s change in the visual field in real-time.
If this didn’t get you excited enough about Argyle’s prospects, we’d also encourage you to check out co-founder Maret Thatcher’s interview with Jason Calacanis (which includes a product demo video as well).
C2V Watercooler
Every year, C2V holds its annual LP and Founder Summit, bringing our community together to cover fund performance macro trends and hear from the stars of the show, which are our founders.
Looking back at how far we have come, we are beyond proud, grateful, and humbled.
This year, we leveled up across the board thanks to our incredible partners at Spotify, Fidelity Investments, and Goodwin Law and have grown our community to over 200+ strong, including our world-class investors.
We have never felt more confident and bullish on our investment thesis of investing in Dirty, Dull, and Dangerous sectors and are only just getting started.
Watch the roundup video below.
Portfolio Highlights
Paladin Partners with the Department of Justice to Expand its Pro Bono Technology to all DOJ Attorneys
Today, Paladin and the Department of Justice’s Office for Access to Justice launched a partnership called the DOJ Pro Bono Portal that will provide every DOJ attorney with access to Paladin to boost pro bono engagement as a part of the DOJ Pro Bono Program. Integrating Paladin across the Department will amplify existing branches' programming and scale the program more quickly across the country. Through the tech platform, prospective volunteers can search for local opportunities that are vetted for federal employees, sign up for individual matters or clinics, and connect with legal services organizations and the ATJ pro bono team more quickly to get started.
Is Your AI Model Going Off the Rails? There May Be an Insurance Policy for That
Armilla Assurance, a Toronto-based startup launched this year, offers what it calls a product warranty backed by reinsurers, including Swiss Re and Chaucer, that AI models will work the way their sellers promise. Jerry Gupta, Swiss Re’s senior vice president of property and casualty research and development, said its partnership with Armilla Assurance, which focuses on model accuracy, is the first of its AI-related insurance products that could be designed to address more complex issues like bias, copyright, and data privacy. “As we learn, as we get more data, then we’ll figure out the next steps,” he said.
IHPlans Partners with Medmo for Member Imaging Solution
IHPlans [IHP], a national alternative health insurance company, launched Medmo as part of their healthcare plan options, delivering provider partners and members with comprehensive medical imaging services and support.
"This was a huge win for our members," said Mike Feeney, Managing Partner, IHPlans. "It allows them to more quickly and easily schedule imaging appointments that meet their needs, whether it's the most affordable price for self-pay or finding the best in-network center. Medmo's support team can walk them through the entire process."
Driver Technologies Selected for the 2023 PropertyCasualty360 Insurance Luminaries Awards
Driver Technologies, Inc. (Driver), an AI-based mobility tech company that delivers a safer driving experience, has been named to PropertyCasualty360's Insurance Luminaries Class of 2023 in the category of Claims Innovation.
The Future of Work in the Pet Health Ecosystem
In the United States, just over 1 million active physicians attend to the medical needs of a population of 330 million people. Meanwhile, a fraction of this number—120,000 veterinarians—serve 200 million pets and counting.
“The divergence between the two is very high, especially when you consider just how massive the pet health ecosystem in the U.S. is,” says Vivian Graves, MBA ’19, founder and CEO of Otis, a pet health company.
Steelhead Technologies Unveils the Steelhead Hatchery: A Groundbreaking Showcase of Manufacturing ERP Excellence
“We are excited to open the doors to our Steelhead Hatchery and invite the industry to explore the future of manufacturing with us," said Jeff Halonen, Chief Executive Officer at Steelhead Technologies. "Just as a hatchery fosters the growth of steelhead trout, our Hatchery nurtures the growth of knowledge and expertise within the Steelhead ecosystem. We believe this initiative will revolutionize how businesses perceive and leverage ERP solutions."
Innovations That Will Change The Forestry Industry
Second place winner, Eskuad, an operating system that took second place in the contest. Max Echeverría, one of the founders of this program, explains that Eskuad allows the digitization of existing summaries and also provides corporations to generate reports tailored to their needs. It even facilitates the incorporation of FSC and ISO certifications. Most importantly, it automates all processes related to reporting, data submission, and task assignment, saving time and resources.
Read the full article.
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A billionaire who made all of his money in tech complaining that our society is anti-tech is right up there with members of the prohibitive Super Bowl/World Series/Stanley Cup favorite trotting out the “nobody believed in us” mantra in post-title-game interviews every year.