The venture world is swimming in capital these days, and the flood doesn’t appear to be abating.
That’s changing the game for venture capitalists and their firms, which transformed from solo practitioners focused on one stage and a single geographical area to covering all startups in all geos in all industries in just a handful of years.
One firm that has navigated those changes for decades is Index Ventures, one of the first funds to launch in Europe that has evolved into a multi-stage firm in recent years. The firm last raised a total of $2 billion this past April to continue doubling down on all the deals springing up across the world.
This week on Extra Crunch Live, I interviewed Nina Achadjian and Sarah Cannon, two SF-based partners at Index, to discuss what they are seeing in the market, how VC fundraises have changed and continue to change and how they are adapting to the rise of rolling funds and other new seed vehicles. This was the first time that the two came together for a panel, and our conversation was a real blast.
Index raises $1.2B growth fund and $800M to invest in emerging startups
Here’s an edited and condensed version of the conversation, with highlights of the best insights from the panel.
“It’s not easy to just sit on the sidelines and wait till things sort themselves out.”
TechCrunch: September is traditionally a time for fundraises to kick off for the fall, but in this COVID-19 world, everything is different. Who is fundraising right now and what do you see going on?
Nina Achadjian: Well, there are two things. One, there was an incredible pull from the market for technology tools. So many businesses that had put off buying technology or investing in technology really all of a sudden found themselves in a digitally-first world or a digital-only world and therefore, there was a massive pull for technology products. It’s the reason why companies like Shopify and others in the public markets have had just amazing, record quarters.
The second thing is, in venture when we raise these funds, we have a certain time period to deploy them, usually anywhere from two years to five years. So for us as investors, it’s not easy to just sit on the sidelines and wait till things sort themselves out.
So actually, a lot of venture investors have piggybacked off of this incredible pull from the market side and have been investing, I would say, at the same pace, or even a faster pace than we were before.
“There’s basically an infinite bid for these companies.”
Are those paces the same for all stages?
Sarah Cannon: I think there’s a bit of a barbell in terms of activity — you’ve seen a plethora of IPOs and you’re seeing a lot of seed activity. I actually would argue that this fall or back to school, we’re seeing a real kind of activity on the two sides and less maybe in the middle, because the companies in the middle, the good ones raised when they could when they needed it earlier in the spring.
Achadjian: For growth-stage companies, we’ve seen a lot of them pull forward fundraising, because let’s be honest, with what’s going on in the market (with the exception of maybe the last couple of trading sessions), it’s been an incredible market. There’s basically an infinite bid for these companies, and I’ve come to the conclusion of, actually a lot of companies that have thrived in COVID are able to raise now because they figured out how to [grow] in this very tough environment.
How is Index adapting to this world?
Achadjian: If you think about the world of venture right now, there’s basically two models. There’s the model of, “Hey, we just do one thing, and we do it really well.” And then there’s the model of, “Hey, actually, we’ve realized that entrepreneurs and companies need a whole spectrum of things. And we’re going to offer an A-to-Z package for what you need for your journey.”
For Index, we really started as a venture fund and a contrarian one. We started first in Europe, when there were no funds really investing outside of the United States in a big way.
And what about growth?
Achadjian: We took a venture mindset and applied it to growth. And I think that’s helped us in quite a few ways.
I actually think today, being able to do both makes you better at both jobs. So when I’m looking at a seed-stage company, I think to myself, “Wow, well, you know, I sit on the board of a couple of companies that are doing hundreds of millions of ARR, that are very much growth-stage companies, can I see this founder becoming a leader like that?”
And then on the flip side, if you’ve been able to see the early stage, and kind of fast-forward to the future, when you’re looking at growth-stage deals, you can ask, “Oh, does the founder have that magic? Or that vision? Or are they just like an execution machine at this point?” Being able to balance both is really helpful.
Cannon: A lot of funds will have venture and growth practices, but they’re separate teams. We’re one partnership. Nina and I are looking at deals in Europe and the European partners are equally looking at all deals. And so being global enables us to see what’s cutting edge around the world. It makes my job a lot more interesting and fun when you have to think multivariate, multi-geo and multi-stage.
Achadjian: You know, Danny, maybe one tactical thing, if there’s anybody that’s listening who is interested in a career in venture, being able to do both stages is actually a secret weapon.
If you do seed stage as a new investor, it takes a long time to know if you were right, and such a big part of the job is building confidence as an investor. So one of the things that has been really helpful, at least in my career, is being able to do, let’s say, a later-stage investment, like a Series C, or even a Series D, and have a much faster feedback loop. From a career progression standpoint, I think it’s very helpful if you work at a firm that enables you to do all stages.
“We’ve seen an explosion of angel investors.”
We’ve talked a lot about rolling funds the past few weeks on TechCrunch. How is that changing the game for VCs?
Achadjian: We’ve seen an explosion of angel investors. There’s also been an incredible number of new seed funds that are less than $100 million. And then more recently, we’ve seen these things that we call like super angel funds.
The competition has become really fierce in angel investing. I mean, sometimes I have to do references for angels that we want to bring into deals because there are so many angels that are willing to invest.
It hasn’t really competed with us yet, because I think most of these funds, they’re not going to write a $2-3 million check to go in and lead. The other thing is, I think founders are being much more aware and thoughtful about what kinds of angels they have on their cap table. That also goes with all the initiatives around diversity and social responsibility of “who’s the end dollar that you’re taking?”, that you’re going to make money for as a founder.
Cannon: I think it’s great in the sense that it’s democratizing venture, which has been a very niche and closed industry for a very long time. And so to have more people who have been effective operators get access to companies who have relevant expertise, it is opening the funnel.
I think there is a question though of how those funds scale, because to deliver value to a huge portfolio and as companies scale, I think some of those other arrangements, which are innovative and make sense at the early stage, I’m just not sure how they’re going to scale later-stage. How are you going to deliver value to those companies as a one-person operation or as a syndicate who’s doing other things?
As Nina said, competition is good, it puts pressure on us, since you need to actually deliver value to earn the right to stay in the game. The founder references [become even more crucial]. One founder I spoke with a couple of weeks ago told me he did 20 references on me before we even had the conversation, including a high school classmate of mine.
“You have a very short window to own that greenfield opportunity.”
As valuations have increased, so have the amounts of capital being invested in startups at the earliest stages. What advice do you offer to founders on how to spend that capital wisely?
Cannon: We’ve been having a real discussion as a firm about Snowflake, which obviously spent more on sales and marketing than traditionally other companies have. When you’re spending that much, it will typically look unattractive. However, in very large markets — and that’s my caveat — spending that much does make sense.
I think it’s always nuanced, right? Being more aggressive and spending cash can be a real advantage, depending on how you spend it and what market you’re in. It can also be very dangerous, because you can subsidize a business where you subsidize demand, but then when you actually charge the real price, the demand ends up being lower.
I think the question that I think about the most for some of my companies is, how can we be creative in sales and marketing spend? Are there differentiated channels that you could pursue?
Achadjian: Capital is a tool, and there are many different tools you have in your tool set. So you need to just make a decision on what the opportunity cost is of raising $5 million versus $10 versus $20.
And then the second thing I’d say, I think the reason why, in addition to there being more capital available and funds jamming more money down your throat, is that there are no proprietary ideas anymore. Every company we’ve invested in, we’ve heard the same idea five or six times in a slightly different way. And even if there was and you were the first person to think of it, you have a very short window to own that greenfield opportunity.
I think for that reason, a lot of founders are like, “Well, you know what, I know that there could be a competitor who’s more capitalized than I am, that’s going to hire more salespeople, that’s going to call my customer list faster than I am.” And I think that dynamic has led to a lot bigger rounds as well.
“Tech is just relatively more attractive.”
Given the amount of capital flowing into venture these days, have you noticed any LPs starting to pull back from the market?
Cannon: They’re not pulling back. In fact, it’s like, “Could you potentially take more allocation? And what do you think of these other seed managers?”
I think the way that I’ve got my mind around this is, where else would these dollars go? What are the alternatives for the dollars that are rushing into tech? I don’t know the latest numbers, but it was something like 40% of stock market returns are actually concentrated in Apple [and FAANG]. And then we’re seeing IPOs perform the same.
We’re in a global pandemic that could easily cause [another] recession. A lot of industries like airlines and travel have more exposure. Tech is just relatively more attractive. So if the interest rates are low, which they are, and [economists] have said that they’re going to be low for the coming decades, then you’re going to have lots of capital chasing returns.
Achadjian: I think generally, every decision is a choice among alternatives. And Sarah said it: Tech has been a great asset class, and will remain so. If you think about how many businesses you interact with today that still use pen and paper, like school registrations, healthcare, a lot of taxes, so many things, I think a lot of LPs have the view that we’re still in the fourth or fifth inning of technology and software taking over the world. That’s why they’re excited. And that’s why we’re excited.
Zoom has become the new default for startup pitches. How have you tried to create signal out of the medium for investing?
Achadjian: Sarah actually pioneered this for us at our firm, but we do fireside chats with founders, instead of having them do a formal pitch. And that was great, because it was much more of a conversation, rather than just talking to a quiet screen for 40 minutes, and then they get grilled.
The other thing that I really like that we did with a group of entrepreneurs is we had everybody think ahead of time what they were most proud of in their personal life. That really opened the conversation to be intimate. I couldn’t have forecasted that people would be tearing up over Zoom, going through some of these stories. But it was one of those things where we sent it in advance, there was a whole bunch of different spectrums of what people had done.
“I’m like, let’s bring back the hug.”
In terms of reproducing an in-person pitch, how good is Zoom today from your perspectives?
Cannon: I’d say 50%. My brain initially went higher than that, but then I realized that 70% of communication is nonverbal, and I don’t think that’s transmitted effectively. They’re also fatigued, right? Your brain is constantly trying to connect in the way that you’re used to, as we’ve done as humans for thousands of years.
I am a fundamental believer that no technology will be able to replicate real life, this experience of being around another human being. I’m like, let’s bring back the hug.
Achadjian: I’ll take a slightly different approach to answering this. So if you think about it, 90% of any sales happens over the phone. If you’re cold-calling someone, you have to be a phenomenal storyteller and quickly be able to capture their attention.
Now, pitching a VC fund for a partner meeting is, you know, 180 degrees different from cold-calling someone, but you still have to convey your story, your conviction and why you’re excited about this business and why you’re the right founder. And I think the best entrepreneurs actually have the ability to sell no matter what medium or forum.
It’s an acquired skill, it takes a long time to get there. But at the end of the day, you are convincing people, whether it’s your team, your customers or your investors. So I actually think it’s a great opportunity for entrepreneurs to really up-level their ability to sell on whatever medium and yes, if your body language and signals are taken away, well, then your voice or how you tell the story just has to be that much better.
I agree with Sarah, I don’t think we’ll be 100% remote pitch session forever. But I think it’s going to be this omnichannel ubiquitous thing where you just have to be good.
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