Industry Ventures prides itself on trying to zig when others zag. When the outfit was first founded in San Francisco in 2000, the startup market was red hot, and its first product — a secondary fund — was a curiosity more than anything. The idea of selling one’s shares to another buyer wasn’t yet seen as a smart way to take some money off the table. It was viewed as a way to quietly dump distressed assets. Of course, the next year, when the market famously crashed, Industry Ventures was able to pick up some of the pieces on the cheap.
So it has been over the years, with Industry launching product after product, including many more secondary funds, funds to make direct investments and funds to invest in other funds. According to firm founder Hans Swildens, Industry Ventures now has stakes in a stunning 600 other firms, including, per the firm’s website, Cowboy Ventures, Blumberg Capital, Bling Capital and Boldstart.
Because Industry Ventures more recently delved into the world of smaller tech buyouts — it just closed on $260 million in new capital commitments for a second fund to invest in smaller software companies — we wanted to talk with Industry about the opportunity it sees bubbling up. We also talked about its brand-new secondary fund, which boasts $1.45 billion in capital commitments. (Altogether, the firm’s assets under management are now a little more than $7 billion.) We’ll have the longer conversation for you in podcast form later this week; in the meantime, edited excerpts of that chat follow.
TechCrunch: When I last talked with you, a year-and-a-half ago, you had stakes in 450 funds and you’d said that distributions were down 90%. After some boom times, you said that you were no longer receiving checks from your investors every week or two weeks.
Hans Swildens: That’s right. Our distributions at one point dried up. Now, I would say that it’s probably 75% off from 2021, so distributions are happening, but they’re smaller. They’re less frequent than in 2021 or 2022 or even 2018, just because the IPO market has been closed.
Are the checks you’re still receiving coming from secondary sales, meaning the funds you invest in are selling off some startup holdings?
We’ve had distributions coming from secondary sales. We’ve had distributions come in from IPOs that were done two years ago with a GP still holding the securities but who, if they’re on the board, they can’t get out of their position. A lot of the VCs who had big holdings in companies that went public two years ago couldn’t sell their whole stake, so they got stuck with selling and distributing in windows. So we still have shares of companies that are being distributed to us from prior IPOs.
I forget that board members of publicly traded companies can’t just give their investors their shares when the company goes out.
They have a double lockup right? There’s [often] a lock-up for six months, and because they are an insider, a board member — and sometimes on the comp committee and things like that — there are further restrictions around their holding of their securities.
With stakes in so many funds, does that annoy you? Do you wish VCs would just get off the board of startups once they’ve gone public?
We’ve gone back and forth on that over the years. A long time ago, we thought it was their job to just distribute [our shares] right after that six-month lockup and move on. But what we’ve learned over time is that it’s not that easy. I think it’s a case by case situation. We like certain companies. We like the fact that the managers are holding the securities and either not selling or dripping the securities out in a good way to us, compounding the value [of these] companies. In other instances, it’s actually pretty harmful because if they get caught in a drawdown era where their stock goes down 75%, obviously all those VCs wish they would have sold.
Right. Sequoia Capital reportedly should have exited from Snowflake and DoorDash sooner.
Most VCs who had large portfolios with lots of publicly traded holdings and board seats were in that position. Sequoia was definitely not the only one.
[The good news is that] when we buy into funds [acquiring the stake of another institutional investor], we will also pick up the public stocks in those funds, and we picked up a large number of funds with public stock in them last year that were being distributed in a more kind of dripping manner, and this year, we’ve benefited from some of our purchases of these funds [as stock prices have bounced back].
Who is selling their interest in venture funds right now?
Every segment of the LP market: endowments foundations, pension funds, family offices, insurance companies, fund of funds that are winding down. Pretty much everyone. There’s always a need for this. The secondary market has been compounding every year pretty much for the whole time we’ve been in it. A lot of it is related to portfolio management today. [People] sell part of their stake and reinvest that money in something else.
You’ve meanwhile found a new sweet spot with smaller tech buyouts. You just closed your second buyout fund.
We’re starting to see fatality happen. So up until about a year ago, there was fatality at the seed stage and A-round stage, because there always is. But we’re starting to see fatality now even in these later-stage businesses. Obviously FTX was a big one, and that was across a lot of people’s portfolios. But we’re starting to see fatality happening more, with the VCs getting themselves in a situation where they’re looking at doing an ABC or assignment for the benefit of the creditors or sort of the wind-down of the business. That’s one reason why we have this tech buyout fund, so we can go into those situations and see if there’s an opportunity to buy it out. I think in the next three years that [shift] will accelerate because a lot of the businesses that have got themselves into bad cap structures or are levered are not bad businesses. They’re just badly financed, or badly run, and or they just had bad things happen to them and there was nothing they did wrong. They just got caught in the wrong spot.
What size software companies are you targeting?
On the low end, $15 million in revenue, and on the high end, about $50 [million]. The enterprise values of the companies on the low end are about $30 million and on the high end, about $250 million.