One easy complaint to make when it comes to venture capital is that it’s mostly not. Venture-ous, that is. It’s definitely capital.
During the last decade, for example, a huge portion of venture capital investment went into software-as-a-service companies, some of the least risky private technology companies out there. Sure, some fail, but the SaaS model tends to be durable, and its performance trackable to the point that anyone with a pencil can model out future growth and come to a valuation conclusion.
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Where are the venturesome gambles on space factories, superfoods and the like? Sorry — you got DocuSign instead.
But not all funds are timid, even if we find the present lack of material wagers on mega-projects disappointing. No, some funds are bucking the downturn by raising new, huge venture vehicles to invest in markets that don’t appear healthy from an outsider’s perspective. In a sense, this is actual venture capital activity, as the investors are taking their money on an adventure into parts — and market conditions — unknown.
That makes recent funds from Sequoia Capital China and a16z all the more interesting to talk about. And why their returns could be all the sweeter.
Zagging while others zig
Briefly, the news: Sequoia Capital China is raising a huge new fund. That means that the Sequoia crew is gearing up to expend a bank’s worth of cash in the country. Welcome news, assuredly, to the beleaguered Chinese technology ecosystem that has seen slowing growth and increasing layoffs. But why now? One reason could be that the Chinese tech market is just that: beleaguered.
Next up: a16z’s massive new crypto fund. Worth some $4.5 billion, it’s the company’s biggest yet, and, like the Sequoia fund, it could represent a material portion of the coming venture funding for its chosen market, namely web3.
As China’s venture capital market and technology industry suffer and the crypto industry endures rapid climate change from NFT Summer to Meltdown Winter, investors with a thesis about both areas of investment are raising new, huge funds.
Why do the opposite of the market? Because that’s — potentially, at least — where the money is.
Don’t be a chump
You could say that it is ironic that consumer interest in bitcoin and other cryptocurrencies rises as their price appreciates; after all, if consumers didn’t wait for a strong price upswing to get involved, they could likely make more money. Venture capitalists have a similar investing bent: When the venture market is hot, venture capitalists lower their standards, pay more for deals and generally put more capital to work. They do this at what you could say is precisely the worst possible time; it’s akin to a consumer buying into bitcoin at $60,000.
Doing the opposite takes guts, as you could wind up sledding uphill for a very long time. If the crypto market remains depressed for too long, a16z could wind up putting money to work that doesn’t appreciate much. That would be bad, although not from a fees perspective. Anyway, in a similar vein, if the Chinese technology industry doesn’t come back to life, Sequoia Capital China could wind up not only firing capital into projects that have limited upside, but also locked out of other markets that it might have sought for expansion.
But. But, if you believe in the long-term future of crypto. as a16z does, or in the Chinese technology sector, as Sequoia appears to, why not work to buy more when prices are cheaper? Right?
Yep. And the fact that such a wager is risky is why it’s fun to watch, and fits under the venture capital moniker. Ironically, Sequoia and a16z are now registered investment advisers instead of traditional venture firms, but let’s not let that get in the way of our larger point.
If your thesis is correct, and you could suddenly pay 2022 Klarna prices (reportedly around $6.5 billion) rather than 2021 Klarna prices (around $46 billion), why not do it?
Ironically then, the potentially most profitable venture funds could be those raised off-cycle — or off-peak, to be more precise. Why follow the crowd of consumer crypto investors venture investors buying when prices are high instead of when they are low? (Put another way, venture investors need to rejigger their incentive structure so that they can put less money to work when it’s less efficient to do so, but let’s tend our own garden.)
They say that great companies are founded and built in hard times. That is sometimes true. But the same could be said about the returns profile of the funds backing them. At least some VCs are able and willing to keep betting even after the table goes cold.