Join the club if you are confused about startup investing. Despite rising fears of recession and hammering public company shares, startup funding is still brisk. We are surprised that VCs continue to announce huge new funds regularly, just as they have done for many years.
We spoke with Danny Rimer, Index Ventures cofounder, to better understand the situation. Danny grew up in Geneva where Index has an office. He now divides his time between London (where Index also has offices) and San Francisco (where Index also has offices). It just opened a New York office.
Danny Rimer, whose betting options include Discord and 1stdibs as well as Glossier and Good Eggs among others, was spotted by us in California. We have edited our conversation lightly to make it more concise.
TC: Lightspeed Venture Partners announced this week that it has raised $7 billion in several funds. Battery Ventures announced that it closed on $3.8 million. Oak HC/FT reported almost $2 Billion. Institutional investors are often less willing to invest in new funds when there is a decline in the public markets. So where is the money coming from?
DR: It’s a great question. It is important to remember that many of these institutions have seen extraordinary gains over the past few years, or in fact the last ten years. Their positions have also risen significantly over this time. What you see is an allocation of funds that has been there for quite some time. . . . They have provided excellent returns over the years. Investors are seeking institutions that can allocate fresh money to any market.
These funds continue to grow in size. Is there a new source of funding? In recent years, we’ve seen venture funds take on a greater role than ever before because of the increased involvement of sovereign wealth funds. Index is Index looking further afield now than it did in the past?
This bifurcation has occurred in the market between funds who are more in the asset aggregation business and funds that want to continue the artisanal venture practice. We are in the former camp. Our fund sizes have not increased in absolute terms. Because we have been clear about our desire to keep them small, keep the craft alive, and keep going down this path, they haven’t grown in a dramatic way. This means that we don’t have any family offices and don’t accept sovereign wealth fund money when it comes down to our institutional investor base. Our base of investors includes endowments, pension funds and nonprofits. We are fortunate that many of these people have been with us for over 20 years.
Your money is well managed. Last year, you announced $3 billion worth of new funds. It’s not an insignificant amount.
It’s not small, but it is relative to other funds. If you compare how much Index has raised since the beginning to most of our peers it’s a very different story.
What Index has raised in the past history of the company?
It is important to check. I would love to know the exact number on my tongue.
It’s refreshing to know that you don’t know. Are you on the market right now? It feels like there has been a gap of one year between the last year and the present in terms fundraising for most companies, and this isn’t changing.
We are not looking to raise funds. We are clearly in the market to invest.
Many companies are starting to reset their valuations. Do you have any conversations with portfolio companies about doing this?
We are having many discussions with companies in our portfolio. Nothing is off the table. When it comes to the reality of the situation, we don’t want to suspend our disbelief. It’s not a general discussion we have with all of our companies. We make it a point to make sure our companies are aware of the current climate and the specific conditions they face. And we make sure that their future plans are as realistic as possible.
Depending on which company you are working for, the valuations can sometimes get ahead of themselves. We cannot count on the cross-border funds coming back. . . They must defend their public positions. These companies must weather the storm, and be ready for any challenges ahead. Others have the chance to seize significant market share and lean in.
You say that you, like many VCs would prefer that a startup conduct a down round’ instead of agreeing to terms that limit their ability to maintain a certain valuation. Are founders aware that down rounds are okay in this environment?
It all depends. It really depends. They’re trying to invest in the best sector or fund the most successful business. Some entrepreneurs are feeling pressures from VCs.
However, I want to emphasize that not all companies have to take a cold bath when it comes to valuation. Many companies are doing well in this environment. Also Read
Fast, an online checkout and login company, was quickly shut down in the spring. Index was then razed online to remove the company’s website. How did it all end? In retrospect, was there anything Index could have done to help in this situation? Your team probably did a postmortem.
It wasn’t my knowledge that it was taken down from our website. It’s possible it is there, but I think it will be harder to find. We promote companies doing well.
Yes, it was digested as a company and we tried to learn from the experience. While there are many factors we still need to digest or don’t know about, the most difficult part of COVID was evaluating talent and understanding those we worked with. My partners, who were responsible for the company, would have been able spend more time understanding the entrepreneurial culture and spending more time with them personally.