TLDR: If you’re in VC, you simply have to start following Peter Walker and Carta
A couple weeks ago, I was invited to talk about the state of pre-seed with Carta’s Peter Walker and Haley Bryant from Hustle Fund.
We covered a bunch of topics from the most recent Q2 fundraising data to tools and tactics for early stage founders like the Advisory Board 2.0.
Carta quickly followed-up that August 7th event with the August 8th State of the Private Markets for Q2 2024, that indicated the New York Metro Area continued to be on the rise accounting for $3.6B of the $20.9B invested in Q2. Down rounds decreased to a six-quarter low, seed and series A saw modest gains, with valuations rebounding even though deal volume is still lagging a bit.
The mini rebounds and modest gains from this report may be signs we’re on the up and up again, but on the flip side, Q2 and Q4 always seem to be a bit busier. We joke in VC, somewhat seriously however, that it’s driven by the classic venture capitalist vacation seasons of New Year’s and July 4th. We’ll see what Q3 holds though—not everyone is sitting on their hands. Hadley at Eniac is putting his foot on the gas in August, and Antler continues to be the most active VC in the world according to Pitchbook. In the US for example, my fund has already done 60+ deals in 2024.
And then maybe the most interesting of all the Carta data, for the investors side at least, was the VC Fund Performance from Q1 2024. Capital deployment is slow, graduation rates from seed to series A are declining, and distributions back to LP’s are basically non-existent with less than 10% of the 2021 funds having any DPI after 3 years.
What shocked me was how low the IRR’s ran, with even the 75th percentile only reaching 4.6% from the 2021 vintage. TVPI was arguably more dismal with medians only reaching 1.78x as far back as 2017, and 1.00x - 1.08x for 2022 and 2021 respectively.
These numbers are precisely why I choose to operate at inception stage. You can read in greater detail about the philosophy and mathematical approach to VC in my previous posts like The Early Stage Game, The Early Stage Game Part II, Inception Funds vs. Early Stage VC, and The Hidden Years of Inception Stage. The net of it though is standard valuations, with an underwriting model matched by no one, and a focus on graduation rates produces a model whereby systematic alpha can be created for LP’s.
Valuation / Fund-Through Rate (FTR) = Risk Price
Average Follow-On Valuation - Risk Price = Systematic Alpha
Together, along with a portfolio construction of 150-250 companies, you create material advantages in producing outsized IRR’s, TVPI, and DPI.
Looking at this data, I’m insanely proud of what Antler is building. We blow away every single one of these metrics on a leading indicator basis.
In New York City, 85% of my investments are raising additional capital within three months of our residency, and they’re doing so at valuations that range from $8.9-$13.2m which is a 3.56x - 5.28x MOIC just one quarter after investment. LP’s are very happy. Even at a conservative 65% graduation rate and 250 investments, that’s 162 companies reaching a 3-5x valuation with a much more diversified fund than our seed fund counterparts.
Said differently, a typical seed fund has 25 investments at $10-15m valuations marked at 1x. Antler US will aims to have 250 inception stage investments that become >162 seed stage companies already marked at 3-5x. At 162 vs. 25, that gives us 6.5X as many shots at a true Power Law outlier with a materially lower entry price than our seed stage peers. It’s no wonder our performance appears to blow the Q1 VC Fund Performance data out of the water. It’s mathematically a better model. The real key to pure dollar returns is going to be to educate LP’s, raise pro-rata protection funds, and continue to rebalance and deploy into the winners.
Net of all of it, you have to start following Peter Walker and Carta’s insights team. They’re pumping out amazing work.
See you Monday.