When others zag, industry ventures is dedicated to trying to zig. The idea of selling one's shares to another buyer was not yet seen as a smart way to make some money on the table. It was seen as a way to dump distressed assets, he said. The next year, after the market was infamously crash-prone, industry ventures were able to pick up some of the pieces on the cheap.
Over the years, industry has been launching product after product, including many more secondary funds, funds to make direct investments and funds to invest in other funds. The firm now has a stunning 600 other firms, per the firm's website, Cowboy Ventures, Blumberg Capital, Bling Capital and Boldstart.
Because industry ventures more recently delved into the world of small 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. The new secondary fund is $1.45 billion in capital commitments. We'll have the longer conversation in podcast form later this week, and edited excerpts of that chat follow.
When I last talked with you, a year-and-a-half ago, you had stakes in 450 funds and you'd said distributions were down 90%. After a few boom times, you said you were no longer receiving checks from your investors every week or two weeks.
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 the IPO market in 2021 or 2022, or even 2018, just because the IPO market has been closed.
Are checks you receive from secondary sales, meaning that the funds you invest in are selling off some startup holdings?
distributions have come from secondary sales, he said. 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 entire holding, so they were stuck with selling and distributing in windows. So we still have shares of companies that are being distributed to us from prior IPOs, he said.
I can't just give my investors their shares when the company goes out, I forget.
Is it true that they have a double lockup right? There is a lock-up for six months, and because they are an insider, a board member - and sometimes on the comp committee - there are further restrictions around their holding of their securities.
Does having a lot of stakes in such a large amount of money annoy you? Over the years, we have gone back and forth on that. A long time ago, we thought it was their job to just distribute our shares right after that six-month lockup and move on. What we have 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 cases, it's actually pretty harmful because if they are caught in a drawdown era where their stock goes down 75%, all those VCs wish they had sold.
Sequoia Capital reportedly should have exited Snowflake and DoorDash earlier this year.
The majority of VCs in that position were large portfolios with lots of publicly traded holdings and board seats. Sequoia was probably not the only one, as he did not appear to be the only one.
We will also pick up the public stocks in those funds, and we bought 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 rebounded.
Every sector of the LP market includes endowments foundations, pension funds, family offices, insurance companies, fund of funds that are winding down. We have been in the secondary market for over 25 years, and every year it has been doing very well. Today, a lot of it is related to portfolio management. People buy part of their share and then reinvest that money into something else.
You've also found a new sweet spot with smaller tech buyouts. Now you've closed your second buyout fund.
We're getting more and more fatalities happening. Up until about a year ago, there was fatality at the seed stage and A-round stage, because there always is. But we are starting to see death now, even in these later-stage businesses. Obviously, FTX was a big one, and that was across many people's portfolios. But we are 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 that 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 company are you targeting?
On the low end, $15 million in revenue was about $50 million, on the high end, about $50 million. The firms' enterprise values on the low end are about $300 million and the high end is about $250 million.