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With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

VC Valuations - Up or Down? AngelList’s Data Wizard Makes Bold Predictions

Posted on: 12/10/2023

Abe Othman

Abe Othman

Head of Data Science - AngelList

Abe Othman of AngelList - Podcast Summary

Abe Othman of AngelList discusses the current status of the startup ecosystem and talks about how the venture market is trending, based on extensive analysis of data from startups, venture firms, private equity firms, investors, and fund managers.

Abe Othman of AngelList - Podcast Transcript

Singer: (singing) It’s Kruze Consulting, Founders and Friends, with your host, Scotty Orn.
Healy: Hello and welcome to the Kruze Consulting Podcast. I’m your host, Healy Jones. I’m here with Abe Othman of AngelList. Abe is AngelList’s resident data scientist and has published some amazing research on the metro capital market and where valuations and deals are going. We’re really excited to have this conversation with him. First, a quick word about our sponsor. Hey, this is Healy Jones, VP of Financial Strategy here at Kruze Consulting, andI want to say thanks to our podcast sponsor, ARC. At Kruze, we’ve got a number of clients successfully using ARC to manage their deposits, payments, access financing, all in one place. One of the things that ARC provides that’s really great is over a quarter of a million dollars in FDIC coverage. Their insurance program goes beyond the standard limit and it secures up to five and a quarter million dollars. So, startups that have even more cash than that can go and access treasury solutions to provide yield and safety. If you’re a startup looking for a secure financial solution that can help you scale, please check out our sponsor ARC at ARC.tech. Abe, thank you so much for coming to the podcast. It’s a delight to have you here.
Abe: Thank you so much for having me.
Healy: So let’s learn a little bit about who you are and what you do with AngelList. Give us a little bit about your background and a little bit about what you do for AngelList.
Abe: Sure. Yeah, so I started the data science team in AngelList back in 2019, a few months before AngelList’s current CEO, Avlok, started. I’ve been doing venture investing for, at this point, about a decade. Some friends and I have a small investment partnership and have mainly focused on FinTech and I don’t know what you call it, frontier tech or deep tech investing. I live in Seattle now, but lived in the Bay Area in San Francisco for almost a decade. Prior to that, I did a PhD in computer science at Carnegie Mellon and did my undergraduate degree in applied math from Harvard. I moved outto the Bay Area originally to start a company with one of my college roommates and got involved in venture capital and venture investing just through my experience with being a venture-backed startup founder. At the start of last year, moved to Seattle. So, I live in Seattle now.
Healy: Well, you wrote a report that caught my eye. It was The State of U.S. Early-Stage Venture & Startups in Q2 2023 and you basically said that Q2 was the worst that AngelList has seen since 2023. I think the first question I had was, okay, what kind of data do you have to back that up? Do you want to talk a little bit about the data that you’re swimming in and what you’re able to do with that and what you’re able to see?
Abe: So AngelList, as you know and as your listeners may know, is described as the world’s largest startup investing platform. The number of deals that goes through the platform is very high. So, when we do these quarterly reports now, I think it’s up to we’re tracking what happens on a very, very timely basis, because we’re on the cap table. So, we see what financings are happening and what the price per shares are of something like 17,000 active venture-backed companies. So, it’s like a very, very large slice of the startup universe that we get to very timely close in perspective on. We don’t have to wait for people to do their fundraising announcements in six months down the line. We see it when the docs get signed.
Healy: You’re seeing the docs, you’re seeing the money flow, you are in the mix there real time.
Abe: Correct, because AngelList is… What is AngelList? One way of interpreting what AngelList is many, many, many thousand LLCs. I guess they’re actually series LPs, but many, many, many of these little companies. Each of which holds a fund or an investment through an special purpose vehicle (SPV). So, those are the things that are on the cap table, and ultimately, those cap table resources point back at AngelList. So, anything that requires investor consent or whatever, it goes through AngelList and is updated on the AngelList platform. For those quarterly reports, it’s interesting that that started as a pandemic project back in the second quarter of 2020, just so we could get an understanding of what the heck was happening to the venture universe during the pandemic. Actually, wen we did the first report per second quarter of 2020, that was the worst venture capital had ever been. There’s a stretch in April there where just everyone thought the world was ending.
Healy: Everything stopped, right? Yeah. Nothing happened for 60 days and we all thought the world was ending and then all of a sudden, boom, things went crazy, right?
Abe: That’s right. I think one of the funniest things about that was that we started doing that. So, that was our first quarterly report that we did was second quarter of 2020. At the time, I remember talking with our comms person, Matt, who writes a lot of the report. I was like, “My biggest concern about doing these quarterly reports is that most quarters by definition are just typical.” That’s what being typical means is that maybe you see a little bit more activity, but it’s a little bit worse. Maybe you see a little bit less activity, but it’s a little bit better. Most quarters are just normal. That’s what being normal means. I was like,”This first report in the second quarter of 2020, and we actually even got some Wall Street Journal coverage on it. It was really interesting because we’re talking about all these down rounds and where is venture relative to where it’s been over the past decade.” I was like, “We should not expect this. This is a very much a one-off. I’m not sure if this is going to be a sustainable thing we do, because eventually, people are going to get bored of this.” Ever since the second quarter of 2020, literally, every single quarterly report we’ve ever done has been interesting. Either the best in something or the worst in something. Venture has not been normal for a very, very long time since before the pandemic. So, what happened in a nutshell, we know this because we’re doing the quarter reports, is that obviously, activity fell off the cliff and the pandemic then came roaring back. We had a long stretch of life, seven quarters or something of the best quarter ever. It’s also worth talking about, “What do we talk about when we talk about how good the venture market is doing?” So we look at two axes. One is how many companies change their price per share over the quarter? The second axis is how many of those price changes were positive? As a general rule, the rate of positive changes goes somewhere between 55 to 90%. So, it’s usually tilted up to be positive. One of the reasons why, there are a number of reasons why, but I think the cleanest explanation is that like a company tends to do a succession of when times are good, companies do a succession of rounds where their valuation increases 2X or 3X or whatever. So, you get more frequent smaller positive updates. Then when a startup company, we have some research on this, when a venture investment goes bad, it goes bad very, very quickly. The valuation loss is really severe. The typical money losing seed investment loses 80% of its value, 90% of its value. So, it’s an escalator up, elevator down the trend. So, as a result, if you look at any individual timeframe, the results tend to be fairly positive. That doesn’t really say anything about asset class returns, which is fine. We’re not trying to make a returns. This is not about returns. It’s about the health of the ecosystem. So, those are the two dimensions that we have and in normal. So, again, those are amount of activity and what we call the tenor of the activity, how positive that activity is. In normal times, which have not happened for 4+ years, but in normal times, what you would see is there was a very clear linear trade-off for typical behavior where if you observe more activity, that activity would tend to be a little bit worse. If you observe less activity, that activity would tend to be a little bit better. I attribute that trade-off to just noisiness in terms of when we learn about companies shutting down, because if a company is dead, what quarter do you actually attribute that company being dead to is pretty much a fuzzy toss-up. So, it tends to be like if you hear about more companies doing stuff, that activity tends to be a little bit worse because you’re hearing about a bunch of companies that you’re attributing a shutdown to in that quarter. So, that’s the typical relationship and what we’ve seen for the last four years doesn’t hold on that at all. In the bubble of 2021 or something, there was a lot of activity and that activity was very, very, very positive. Now, when we look at what’s happening today, we see we’re at record low rates of activity and that activity is very negative, actually approaching 50% positive for the first time.
Healy: Wow, okay. Wow. So, down roads are hard. They’re much harder to pull off. So, the fact that you’re seeing really high activity for down roads that shows-
Abe: No, no. So, there’s not much activity and the activity-
Healy: Oh, not much. Okay, okay, got it.
Abe: Yeah. So, we attribute that to actually be very bad because our perception is that our observed activity tends to be just with startups, things are going well, you hear about it. If they’re not going well, people tend to… I think Paul Graham has a line about crawling under the porch and dying. You don’t hear about things that are not going well. So, our sense is that everything we’re not hearing about is worse than everything we’re hearing about. Right now, we’re not hearing about much stuff and the stuff we’re hearing about is not particularly good. I believe it was last year, like fourth quarter last year, we had actually matched where we were second quarter of 2020 in terms of activity and tenor and now we’re much worse.
Healy: So you’re saying last year was as bad as you had seen and we continue to go worse.
Abe: That’s right. That’s why what I’m saying is that we’ve had superlatives every single quarter since we started these quarterly reports. I was expecting it to just get really boring and instead it’s never been boring. It’s always been something exciting, either excitingly positive or excitingly negative.
Healy: You just got to have a bottle of antacids if you’re in this industry, I guess. One of the things that you showed in that report was that valuations dropped again, that the median seed valuation you saw was 16 million. The median series A was 45, 46 million. Where do you think valuations are going?
Abe: Yeah. So, there’s a larger phenomenon that’s happening here, and I think this is one of the interesting things we’re able to look at. So, AngelList’s real strength, the real strength of the platform from a data perspective that literally nobody else has is this price per share changes on a monthly basis in all of these companies. We can actually track time effects in a way that you just can’t do. Any other source won’t give you those time effects. So, what we were able to look at is we wanted to see the relationship between public markets and early stage venture. What we disovered is, so we had known there was some discussion in literature about the time lag between public markets and private equity being about 6 to 12 months. What we discovered was that actually the time lag between public markets and early stage venture is longer than that. So, we think it’s actually like 9 to 21 months, so like three to seven quarters. So, what that means-
Healy: So the NASDAQ drops and it won’t be a year or so until early stage field set, is that what you’re saying?
Abe: Correct. Which is why seed round prices kept. You can think about it as a whip, right? The public markets drop is part of the whip that you hold in your hand and the seed round prices are the very tip of the whip. So, what’s happening is that wave is going through the whip right now and it still hasn’t fully hit seed run pricing, which is remarkable when you think about it, because I think public markets now are pushing back against record highs. They’ve forgotten what happened in the first quarter of last year in the public markets. But what our data suggests is that the early stage venture is still digesting what happened in January and February of last year. Everyone else has forgotten about it, but startups haven’t. That is stil being worked through and that it won’t be become fully digested until the start of next year. So, what that means practically is, so I think that is a cause of the stubborn persistence. One of the things that’s happened is you saw late stage rounds got crammed down first, then series B, then series A, and then finally seed, which went from… It was unusual above the top quartile of seed deals to have a $20 million pre-money seed valuation. In 2021, that became typical. So, you got the shift from maybe 85th or 90th percentile became the 50th percentile for pricing. That has been reduced. That has been tempered a bit, but it’s still much higher than it was at the start of the pandemic.
Healy: It’s not anywhere near the drop that the series B and series C had, right?
Abe: Correct.
Healy: It’s really been pretty stubborn at that level.
Abe: Well, part of it, and this is worth being explicit about because I think other folks who’ve reported on this have missed this. Part of it is a category readjustment between seed and pre-seed. As I’m sure you know from your accounting practice, a lot of seed and pre-seed rounds are done on SAFEs of venture-backed companies. They’re not on SAFEs. If you think about it, what is the difference between a pre-seed SAFE and a seed SAFE? It’s like, “Well, in neither case, [inaudible 00:14:40],” right? It’s in some sense an arbitrary distinction.
Healy: It’s whatever the lawyer types for the name of the financing round. If they type pre-seed, they put-
Abe: Whatever the investment associate is like, “Oh, that looks like a seed round, that looks like a pre-seed.” Are you sure that’s a pre-seed? Because that seems like a pretty high valuation. So, what you end up seeing is that essentially, the categories have just been redefined. So, that more or less, everything that’s cheaper than 10 million, maybe 12 million pre-money is now just called a pre-seed. So, you do have this category mix shifting. Whereas before, pre-seed rounds were relatively rare on the AngelList platform and seed valuations were low. Now we’re almost seeing parity between the number of pre-seed and seed deals. Actually, the pricing in both of those categories has increased. But if you just take the whole bucket on pre-series A investments, we have seen a substantial price rise. That has remained persistent. So, it’s not quite a category effect like entirely that’s happening. The category effect does explain some of it of what you categorize as a seed deal is just more expensive, because more expensive rounds are called seed deals more frequently.
Healy: So you wrote another research piece that I thought was fascinating that may actually answer that question. So, I’m going to ask the question that is the title of the blog post here. Okay, so here’s the question. Do startup valuations matter for investment returns?
Abe: Yeah. So, this is actually a topic of some contention and I think a lot of VCs think that they do.
Healy: Yeah. Explicitly, what we’re saying is your entry price, like the price that the VC pays when they make that first investment, does that price matter? So it’s like you walk into the store and you pay $2 for the can of corn or $5. Does it make a difference?
Abe: So intuitively, it should, right? Because your return multiple on your investment is a function of both exit price and entry price. So, if you hold exit prices constant, if you pay twice as much as your entry price, your return should be half as much.
Healy: It should be half. Just the math.
Abe: This is actually I think very interesting because we actually looked at temporarily in time. So, I think there’s two dimensions. So, if you look at market trends over the time, we do think that these high prices that we had in the pandemic are causing a dramatic decrease in the number of markups that are happening now. So, in some sense, yes, market prices do affect rate of markups. If you’ve paid very high seed prices and series A prices end up coming down when your companies that you invested at seed try to raise series A, that will affect returns. But what doesn’t affect returns in our data, because we look at a lot of holding time constant and looking at the differences between deal prices within a fixed amount of time. So, look at the second quarter of 2019, the first half of 2018. Look at all the deals that happened in that time window and investigate them based on price versus performance. What we saw there is that actually there doesn’t seem to be any link that actually the band on this is quite high. So, we looked at quintiles. For a typical stretch of time, a typical quarter, the typical top quintile by price deal, C deal is 5X the price of the typical bottom quintile. So, think like 30 million pre-money versus 6 million pre-money. You might think, “Well, okay, it seems like intuitively if the model of… Well, all the exits are going to be the same or all these companies are competing for the generic series A or something. You’d expect the lower price deals to do better.” What we found was that both looking at markup rates as well as the typical multiplier of marked up deals, there was really no relationship. We could not find a relationship between them.
Healy: So you’re saying that the typical seed deal, that super cheapo, six million bucks gets more or less marked up the same way that the typical seed deal that’s 50 million bucks or what do you say?
Abe: Correct. Yeah, that’s correct. That’s essentially what we’re saying and this is I think one of the most surprising things from our research is that early stage venture appears to be fairly efficient.
Healy: The pricing gets rational?
Abe: Right. If you’re paying five times as much… Well, I’m not sure I would go that far, but I’m saying that there’s no… So, I want to be specific about what the efficiency here is. If you’re paying five times as much for a seed deal, that seed deal is actually… I suppose in some sense, it’s five times better and it may even be six times better. The prices are reflecting the available information. What I think is interesting about that, and are the prices rational, seed deal investing is really interesting from a market efficiency point of view, because if you think about it, I mean zero investments like this. You make a seed deal investment, and then five years later, you look back on that seed deal investment. You’re like “Yeah, I made 15% a year IRR on that seed deal investment. I’m pretty happy with that. That was a pretty good investment.” That never happens. Five years down the line, that company is either worth zero or close to zero or it’s worth several times as much as you paid for it. The outcome of, oh yeah, we got pretty good market return plus some illiquidity premium, that never happens for a stage venture. So, in some sense, the pricing is super not efficient, but within a pricing demand, I do think that the information on an early stage company can be about founder backgrounds, as well as the information that the financials of the business, their retention rates, whatever. All of anything you’d put in a deck, that information appears to be more or less priced in any deal. I think when I started at AngelList, there was a sense of like, “Oh, is the secret to invest in people who worked at McKinsey or maybe we invest in people working at Google?” or “I only back repeat founders or something.” The answer is what I think our research has shown is that the answer to all that is yes. Do McKinsey founders do better than founders who didn’t go to McKinsey? Yes. Do founders who work at Google do better than founders who didn’t work at Google? Yes. Do founders who have really, really strong metrics do better? Their companies do better than companies that don’t? Yes. Do second time founders do better than first time founders? Yes. The challenge is every single one of those signals, you’re paying for. This is super hard to estimate, but my own guess is that probably about 75% of that boon of any positive signal that you can observe is actually captured in terms of valuation for the company. So, yeah, someone going to GSB, it’s a very positive signal. It’s still a positive signal. You still want to invest in that person, but it’s not obvious easy money.
Healy: There’s not deal signed around. That McKinsey person who then went to Google who founded a company and they’re founding their second company, that’s priced into the price.
Abe: Yeah, that’s a 25 million valuation seed round. It’s not going to be cheap and it is a good idea to invest in. Yeah, it’s probably a good idea to invest in, but it is accurate reflection. It’s not some amazing opportunity. Honestly, if you see a deal like that, that does look like the pricing is pretty bad, it’s probably because the company is operating in a terrible space or there are a bunch of reasons that somebody who worked at McKinsey and Google and went to GSB or whatever might start a company that has a low valuation. I think it’s probably well-balanced.
Healy: Hey, this is the VP of financial strategy at Kruze jumping in to thank our sponsor of this podcast, ARC. At Kruze, we have a number of clients who are successfully using ARC's FinTech tools to store deposits, manage payments, get financing, earn yield, all in one place. But another thing that’s important about ARC is that they have a heightened security and safety feature. Because they partner with globally recognized banks, they’re able to offer an FDIC coverage over $250,000. In fact, they offer up to $5,250,000 in FDIC coverage. And if you have more cash than that, they have treasury solutions that can provide yield and safety for even more money. So, if you’re looking for a comprehensive financial solution, they can help you scale. Check out ARC. Go to ARC.Tech. Thanks again to our sponsor ARC. I would don’t know if I can challenge you because I have data, but it’s too anecdotal, but we have over 800 clients and we are seeing a slew, an unusually large number of companies that have either just exited or who are about to exit for what the venture community would consider pretty modest amounts, like 20 million bucks, 50 million bucks. They don’t make the Wall Street Journal or they don’t get on CNN when this happens, but these companies are able to do this because they raised a modest amount of money at a modest valuation. So, they can exit. Their investors can get a little bit of a markup and perhaps they sold more of their company than they would have if they had raised at a higher valuation, but because they did a round at $20 million, they can exit at $40 or $50 million and have their VCs say, “Okay,” and they’re walking away with tens of millions of dollars. But if they had raised at the top quintile of valuations, they may not be able to go and figure out how to do a $30 million exit that puts a ton of money in their pocket. How does that intersect, or is that too anecdotal?
Abe: No, no. I think there’s actually a couple of factors at play. So, there are examples of where the VC versus founder retention can be there, but I also think there may be something specifically maybe with some folks, you work with where it’s like what is a venture-backed company. So, one of he pieces of research that I’ve done that was I think the most inflammatory and hopefully has resulted in the biggest changes in the overall venture universe was a publication a couple of years ago called Startup Growth and Venture Returns, where I feel like we assembled enough data to argue that early investments done in the first year and a half of a company’s investible life, so pre-seed, maybe seed rounds, draw their return multiples from alpha less than two power law, which is a very special probability distribution that has an undefined expectation. It provides a mathematical case for why you’d want to broadly index very early stage investing. But what does broadly index mean? Does that mean I’m going to invest in everything, I’m going to invest in some restaurant? No, the caveat that we had there was that you should broadly index in every credible deal. Then the pushback that we got, which was very fair, was that, well, that seems like you’re banging a question around “What is a credible deal?” We provided some text about what that could look like, but that from a quantitative basis really did not feel particularly solid. So, what is a credible deal for early investing? Here’s where our thinking has gone on this based on the research, which is that there is some rank order list or fuzzy rank order list of startup quality. At the very top are mostly the most expensive deals that have the absolute best signals. So, the deal I would attribute that I would say is the absolute best deal for early stage investing would be a company like Samsara, which is like Meraki founders second go at things in the same space, but better with all of the enterprise connections like Meraki, which was a billion plus dollar exit, but run the same playbook but better by someone who’s now a second time founder. I believe their seed round was 30, 35 million pre-money. That’s the best deal. In my opinion, that’s the very top rank order list where you just look at all the features and you’re like, “Yeah, that’s better than every other company you’ve seen.” It has everything. It’s at the very top. Then as you go down the list, the deals get cheaper, but what happens is the distribution of exits falls faster than deal price. So, the return multiples that you’re drawing from get less and less wild. Then at a certain point, the exits fall so much that you’re no longer drawing from this alpha less than two power law. So, what I like about this is that this is not just, oh, the Samsara guy went to MIT or whatever. It’s like everything about the company. So, it’s everything that would be presented in a slide deck about their stage investment opportunity. As that gets worse and worse, the price does fall, but it doesn’t fall enough to compensate for the decrease in the return distribution these companies are drawing from. So, at some point, you stop drawing from this explosive, wild, undefined expectation alpha less than two power law, and you start drawing from something that looks like a much more conventional return distribution. So, in that sense, that is the quantitative justification for this credible deal threshold. Is the deal good enough to draw from that alpha less than two power law? Now where that is in terms of pricing is a question. I would guess that that’s probably something around five or six million pre-money right now is probably where that threshold is, but I’m not sure. Nothing here is investment advice. I don’t know how strongly that is, but you do see this. The interesting thing about this mental model is that you can actually put every business, every new company that gets started is somewhere on this rank order list, but it’s only a slice of them that’s drawing from this alpha less than two power law that is a credible seed deal. The implication of the math and data we’ve done is that LPs would benefit from having some financial exposure to every single one of those credible deals, because any of them could become the next Uber. Even if the one at the very top of that list, Samsara definitely will, but any one of them could. So, that’s the implication. I do wonder not to your client base or whatever and maybe for a number of those firms, there’s nothing wrong with investing in companies that are not looking to VA “Oh, this is going to be a 100X return off this investment.” There’s nothing wrong with investing in those businesses, but it’s in some sense a different asset class than a lot of-
Healy: At the early stage, you have to invest hoping and seeing some signal that there’s a chance to go really big. I think my key point was that if you go overboard with your valuation and how much you raise, you as a founder, not thinking about the VC, but you as a founder may actually limit your potential outcomes in a way that makes it super binary. Whereas if you’d been more modest in how much you raised and at what valuations, you might’ve been able to have a great outcome for yourself and probably decent for your employees and for your investors.
Abe: This is true. So, I tend to wear the hat much more of the LP or GP side as opposed to the startup founder side when thinking about the ecosystem. So, from that perspective, yeah, I mean for virtually everybody, a few million dollars is a wonderful life-changing outcome. I think a lot of founders would love to have that as the outcome of their business, but their venture investors do not want that outcome. In some sense, the LPs of those funds also don’t want that outcome and it’s worth considering. Now that said, it’s something we’ve looked at as well in terms of the research we’ve done. AngelList operates this access fund, which invests in funds and syndicate on the platform and looking at the syndicate deals that the access fund has chosen to invest in. What’s interesting and unique is that the access fund has actually outperformed, at least in terms of investment selection, this broad indexing idea. So, if you put a dollar into every early stage syndicate on AngelList versus the access fund portfolio, the access fund portfolio has done better, which suggests that there is some selection. Maybe the access fund is pulling from the better reaches of that rank order list. But what is interesting when you look at that portfolio is that the actual has not done better because it has fewer losers. It has the same number of outcomes as the [inaudible 00:32:54]. It just has a higher concentration of bigger winners. That’s what determines success of the venture portfolio. This has come up, because I think a lot of the time when people think about, I mean this is interesting for startup founders as well, when people think about venture returns, so we had a GP on the platform who had an investment of theirs, has gone through a couple rounds. It’s sitting in I think a 3X multiple, and they were like, “Well, I made that investment three and a half years ago. How long does it take for the typical syndicate investment to double or triple? Does it take three years? Does it take five years?” The answer is like no, that’s completely [inaudible 00:33:41]. The question is actually wrong. The typical syndicated deal on AngelList is pretty much flat.
Healy: Until it goes out of business, right?
Abe: Well, I don’t think it’ll go out of business. I think it would probably exit for close to flat, but it would not be impressive performance and it’s not going to double, it’s not going to triple. If you need to get to doubling, you need a 75th percentile deal. Then really with all those deals that do go to zero or go very close to zero, you really need to get to the 85th or 90th percentile before… So, when you think about the success of a venture portfolio, it’s really like, “What fraction of the deals that invest in are ended up in the top decile of seed deals?”
Healy: Yeah, it’s a power law business, right? That’s exactly what you just… Yeah, 100%. How does that contrast with another piece of research you put out that was basically saying larger VC portfolios did better.
Abe: That’s right. So, it is all tied to this power law concept. To first order, it’s like, “Well, okay, what fraction of the deals that you had were in the top decile? Then the next cut is like, “Well, what fraction of deals that you did were in the top 1%?” Then it’s like, “What fraction of deals you had were like the 0.1%?”, which on AngelList would be like Uber, Notion, mega, mega, mega hits. So, the goal of assembling a large portfolio or even just broadly indexing is that the answer to those questions is not zero. Because if you have a venture portfolio where the answer like, “Well, we didn’t have any deals that were in the top 1% of deals,” your venture portfolio will underperform a broad indexer that has “Oh, well, because we invested in everything, 1% of our deals was in the top 1%.”
Healy: Got it. Okay.
Abe: So if you are as broad indexing possible, there’s questions about that. Then access fund obviously does a curated set, but the whole point is access fund invest in Notion. If you invest in only half the deals, but you keep all the top 1% deals and that half that you invest in, hey, yeah, you can absolutely outperform indexing, but don’t miss any of them. So, that’s the reasoning. We would estimate that something like a broad index would outperform maybe three quarters of venture funds. Just because if you only pick 10 or 15 companies or something, you have to get lucky to get one in the top percent. The broad indexing will underperform all the lucky investors and dramatically outperform all of the unlucky investors.
Healy: Amazing. That’s really interesting. So, I know we’re running out of time here. I found this incredibly fascinating. I mean, you know I love data. This is in my jam. This is amazing. But before we wrap up, any parting thoughts? Any kernels of wisdom that you think is particularly pertinent to VCs and founders who might be listening?
Abe: Sure. Yeah, I think a couple things. I think we know how bad it’s out there just from our own data. It is in fact very, very bad. So, the founders out there, just try to stay alive. I think that what I would expect to happen is a turnaround to happen next year as what happened in the public markets at the start of last year begins to wash out finally. What happened this year begins to start to affect early investing. I think there’s something very interesting as well around the phenomenon. For pretty much a huge chunk of the last decade, allocators have been overexposed to venture capital and private equity, and they’ve taken from public markets to put into private investments. I think wha’s going to happen starting the next year for the first time in the past decade is that those allocators are going to find themselves underexposed to their targets on venture because venture is continuing to get written down. Whereas the public markets have come back. So, that will be intriguing. The other thing I just want to say, I think our estimate about where pricing is going to end up for seed deals is that probably the typical seed deal pre-money will go down to something like maybe 12.5 or 13 million pre-money. So, right now, it’s 16 at peak to 20, so we’re maybe halfway through that process. For all the founders out there who are raising money and all the VCs who are looking for it, the reason we did that study is not to hurt founders or hurt investors, but really just say, “This is based on the data we have. This is where we think the prices are going to end up. If we get there faster, the whole ecosystem recovers faster.” So in as much as I think that a 13 million pre-money could be a point of agreement, I would love to see startups get there sooner rather than later because I do think things will end up there and it’s just going to be, I think, a grinding process to get there. So, the reason we publish that piece on where we think valuations will end up is to try to help the market get there faster.
Healy: We want the market to start functioning again. It’s really hard right now. So, the sooner we can get to the baseline, we can recover from there, right?
Abe: Same thing as housing. I think the market dynamics are actually quite similar and for a lot of the same reasons. You have this grinding slow downward process where there’s not a lot of deals being done and people are trying to figure out, “Well, where is the bottom going to be?”
Healy: You’re emotionally attached to your house. As a founder, you’re probably even more emotionally attached to your startup’s valuation. So, these things are sticky. They take time to move.
Abe: Absolutely.
Healy: This was a phenomenal conversation. Thank you so much. Where can people find you, particularly if they want to follow your research? Is LinkedIn the best place or where should they go to find you?
Abe: I would say the AngelList blog. I’m not on any of the social medias at all, including LinkedIn or Twitter or any of that.
Healy: I might have to start sharing your stuff on LinkedIn. Then I’ve got a get bunch of likes. Amazing.
Abe: I’ve always found VC Twitter to be just a complete cesspool. So, try to stay off of that as much as possible.
Healy: Okay. Well, that’s good. You’re probably a healthier person than I’m then. Amazing. Well, Abe, this is wonderful. Thank you so much. Why don’t we have this conversation again in a couple of quarters and see where things are?
Abe: Yeah, would love to hopefully with what I would expect to be better news to share.
Healy: I hope so too. Thank you.
Singer: (singing) It’s Kruze Consulting, Founders and Friends, with your host, Scotty Orn.

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