When I was in Business School almost 20 years ago (yikes) I took a VC/PE course. There was basically only one major lesson from that class: vintage year is almost everything. This got me thinking big picture about the recent vintages of early stage funds. I'm trying to succinctly describe what went on in a way that is generalizable for the next boom/bust cycle. I think it can be summarized by 2 points. 1. Late-cycle markets create a mad scramble to capture all remaining rents. Early stage investors are kind of powerless to deal with this. Prices go way up, existing companies get massively over-capitalized and often ruined. The play is to sell into this frenzy if you can. But.. 2. Early-stage has a long time horizon. Your 10-year-old vintage can sell successfully late in the cycle. But a 3-5-year old vintage is stuck. Companies aren't mature enough to capture their full value. Selling now would be selling short, if that's an option at all. 2b. But many companies that don't get out are in no-man's land. There is a new economic cycle that starts based on some new technology. Many companies should be coming of age, but are less relevant to the new cycle. So, for those vintages, the options are: a) Become financially valuable. You may not have enough strategic value to get an outsized multiple, but there is a market for valuable financial assets. Just hope that you didn't raise too much money at too high a valuation. b) Pivot into the new tech cycle. Hopefully, your head start with customers overcomes the technical debt you have accumulated by building for the prior cycle. This is a difficult maneuver, but is probably do-or-die for many companies. The problem for investors is that you can't really predict when a cycle is ending. There are lots of micro boom and bust periods along the way. If you are too conservative, you might miss a huge boom on the other end of a smaller correction. Back to my B-school learning - the ultimate lesson was to deploy steadily in all cycles. Timing the market was futile. Trying to lean-in out of greed when the market got hot was disastrous. But pulling out when the market corrected was almost equally bad. So, don’t panic. Enjoy the ride!
Antithesis Capital
Bilal Zuberi
3w
Very thoughtful take.
Joe Moriarty
3w
Nice. Yes I have thought about 2b lately; have seen some good series B stage companies use their loads of cash to build AI into their products (Gorgias is one I follow/use comes to mind)
This is spot on and cogent advice. So well articulated Rob Go So many folks miss the forest for the trees.
Rob Go There is also another corollary to your main point. Don’t time your exit. (And here many will disagree with me.) During the cycle there are large laggards who will want to buy immature companies at a premium because they will allow them to catch up. Often VCs (and some founders) say they are not ready to sell. Ok, but then get ready to stay in for a long time till you have built a sustainable business, which may never happen due to a new tech cycle that will make you obsolete. What are you good at? Innovating fast or building a business?
Ronak Shah
3w
You really cannot control winning or losing. Like you said, market forces and timing cannot be accurately predicted. You can only control how you’re learning, growing, and improving each day.
Oded Ran
3w
That was a great EC class. Didn’t we also find out that VCs forcing participating preferred 3x dilution protection fared well? 🤣
Yes, And underscore the importance of betting on the right founding team, who can rIde the waves in your point 2b and position for options a) and b), even if it means to step down/ aside.
MBA graduation year also tends to have an outsized impact on lifetime earnings.
Managing Partner @ Eberg Capital
3wSuper smart Rob. The only other thing I'd add is the focus on getting to cash flow breakeven and controlling your destiny ex-outside funding. If there is one thing I've taken away from my 20 years in the business is that this is actually a goal I think about now at the pre-seed stage. It doesn't mean that I expect pre-seed, or even seed funding to get a company there, but by having this as a north star helps create a forcing function for thoughtfulness and efficiency early in a company's life when growth is paramount for demonstrating success (and access to further outside funding). Anyway, well done!