20VC Explosion of First Time Funds, Only 1 Mega Fund Raised What The Heck Happened in Q1 Venture Markets with Beezer Clarkson, Managing Director @ Sapphire Ventures

In this episode of "20 Minutes VC," host Harry Stebbings interviews Beezer Clarkson, Managing Director at Sapphire Ventures, for a quarterly analysis of venture market performance. Clarkson, with experience from DFJ's global network, Omidyar Network, Hewlett Packard, and Morgan Stanley, also founded OpenLP to foster understanding in the entrepreneur-to-LP tech ecosystem. They discuss the current state of venture fundraising, comparing it to the previous year's "bananas" levels, and note a significant increase in first-time funds and a return to normal for $100-250 million fund sizes. Clarkson emphasizes the importance of differentiation and conviction for VCs in a competitive market and predicts fewer mega funds this year. The conversation also covers the reactivation of the IPO market, the sustainability of private IPOs, and the institutionalization of the seed round. Stebbings also shares insights on bridging the communication gap between European and US VCs, the potential of AR over VR, and the importance of building a personal brand in venture capital.

• Harry Stebbings introduces the episode of "20 minutes VC" and mentions that listeners can find him on Snapchat.
• He expresses his excitement for the type of show they are about to record, which he finds to be one of his favorite types.

Welcome back to another week in the world of the 20 minutes VC with me, your host Harry Stebbings, and you can find me on Snapchat at h stepbings with two b's.

This quote is Harry Stebbings opening the podcast and sharing his Snapchat handle for listeners to follow him.

However, to the show today. I'm one of my very favorite types.

Harry Stebbings is indicating his enthusiasm for the type of show they are about to record, which is one he particularly enjoys.

• Beezer Clarkson is introduced as a returning guest.
• Her role at Sapphire Ventures and her professional background are summarized.
• Beezer's creation of OpenLP is mentioned as a valuable resource in the venture ecosystem.

Now, you might remember we had Beezer Clarkson, managing director at Sapphire Ventures, on the show in the past, and now every quarter we're thrilled to welcome Beezer back to break down the market performance and activity.

Harry Stebbings is reintroducing Beezer Clarkson and explaining the purpose of her recurring visits to the podcast.

• Harry Stebbings talks about the Eight Smart Mattress, emphasizing its sleep tracking technology and the use of data to improve sleep.
• Full Contact is introduced as a contact management solution that helps organize contacts and build relationships.

Eight is a sleep innovation company with their latest product, the eight smart mattress... Full contact is keeping 20 VC team on top form.

Harry Stebbings is endorsing the Eight Smart Mattress and Full Contact as products that have personally benefited him and his team.

• Beezer is welcomed back for her special segment, Beezer's Breakdown.
• The segment aims to analyze market performance and activity.

You have now arrived at your destination. My word, Beezer, it's always absolutely wonderful to have you back on the show for this very special episode of Beezer's Breakdown.

The host is setting the stage for Beezer Clarkson's analysis segment, highlighting its importance and regularity.

• Beezer Clarkson describes her current position as managing director at Sapphire Ventures.
• She explains the two lines of business at Sapphire Ventures: direct investments in growth stage companies and investments in early stage venture funds.
• Beezer oversees the latter, which is the LP (Limited Partner) vehicle.

So I'll keep it short and sweet and just say what I'm doing now. I'm a managing director of Sapphire Ventures... And I manage the latter, which is the LP vehicle, and I oversee our fund investing.

Beezer Clarkson provides a concise overview of her role at Sapphire Ventures, focusing on her management of the LP vehicle.

• Beezer describes the start of 2017 as "decently strong" for venture market fundraising.
• She notes that Q1 numbers can be misleading due to some funds closing in Q1 that were raised in Q4.
• Beezer mentions the sources of their data and clarifies the numbers for funds raised and venture-backed companies.

2017 is off to what I'd call a decently strong start... there's been almost $7 billion raised, and these are all us numbers by 51 funds and about 50 and a half billion raised by venture-backed companies.

Beezer Clarkson provides an assessment of the venture market's performance at the start of 2017, offering specific figures on funds raised and capital invested in venture-backed companies.

• The total amount raised by funds in Q1 2017 is down from the previous year.
• Beezer attributes the decrease to the large funds raised in Q1 2016, which she describes as "bananas."
• Despite fewer funds raised, more money went into venture-backed companies in Q1 2017 compared to Q1 2016.

The total amount raised by funds is down from last year because last year was bananas and eleven and a half billion was raised in Q one just of last year because of all the huge funds that were doing the raising.

Beezer Clarkson compares the venture capital fundraising in Q1 2017 to the exceptionally high fundraising activity in Q1 2016, noting a decrease in funds raised.

• The discussion shifts to the influence of mega funds on the venture market.
• Beezer explains that the large funds raised in the previous year were a response to concerns about a market downturn.
• She also discusses the factors that facilitated fundraising, such as brand recognition and track records.

A couple of funds raised, and there was a big concern that winter was coming... And so, especially if you have a brand name and you've got a track record, and this is off the back of 14 and 15, when there was a lot of markups in companies.

Beezer Clarkson discusses the rationale behind the fundraising by mega funds in the previous year, highlighting the anticipation of a tougher market and the advantages held by established funds.

• Beezer predicts more new managers in the current year due to the mega funds having raised capital in the previous year.
• She notes a decrease in the number of mega funds raising in Q1 2017.
• The conversation touches on the potential for more mega funds to raise capital later in the year.

Correct. Yes. So we are seeing more new managers this year so far, and we are also seeing fewer 500 million plus the mega fund.

Beezer Clarkson confirms that there is an increase in new managers entering the market and fewer mega funds compared to the previous year, suggesting a shift in the fundraising landscape.

• Mega funds are returning to the market for fundraising, which raises questions about their investment periods.
• There's a concern among limited partners (LPs) about the rate of fundraising and whether this implies quicker spending or more dry powder for mega funds.
• Last year, funds were coming back in a two-year pattern, which was shorter than the historical norm of three to four years for larger funds.
• Funds needed to reserve more capital for follow-on investments in existing companies, which consumed a significant portion of their capital.

"Both. So what we saw last year, which was a bit of an anomalous year, was that funds, almost regardless of size, were coming back in about a two year pattern."

This quote explains that funds, regardless of size, were returning for fundraising on a two-year cycle, which is quicker than usual. This anomaly is significant because it relates to the pace at which capital is deployed and the fundraising cycle's length.

• The number of first-time funds has more than doubled this year compared to the same quarter of the previous year.
• The average size of the 17 new first-time funds is around $100 million, with a healthy distribution between smaller and larger funds.
• Raising a first-time fund over $100 million suggests the fund managers have an established track record and connections with LPs.

"Well, Harry, you are going to be happy. So there are more first time funds this year than last year by more than double."

Beezer Clarkson indicates that the number of first-time funds has significantly increased, which is a positive trend for those interested in this market segment. This growth reflects a dynamic shift in the venture capital landscape.

• Micro funds, often defined as funds under $100 million, have become an established part of the market and LP portfolios.
• The institutionalization of the seed round has contributed to the acceptance and growth of micro funds.
• Not all LPs invest in micro funds due to the smaller check sizes relative to their total capital to invest, but it doesn't detract from the micro funds' established status.

"Yes, I do think as far as nomenclature and expectation for their persistence in the market, they've arrived."

Beezer Clarkson affirms that micro funds have become a recognized and expected part of the venture market, indicating their solidified presence and influence within the industry.

• Smaller funds with less capital have to be more cautious with their reserves, leading to quicker fund cycles.
• Advocacy for a minimum three-year investment term is based on the need for time differentiation in portfolios and managing bandwidth for general partners (GPs).
• Shorter investment periods can strain GPs and limit the diversity in investment timing.

"We're advocates of a three year at least investing term for a couple of reasons."

This quote underscores the rationale for preferring a minimum three-year investment term, which includes portfolio diversification over time and manageable workloads for GPs.

• Uprounds are a factor in LPs' decision-making, but cash on cash returns are more influential.
• LPs consider the reasons and sources of a company's fundraising as part of assessing the health of the investment.
• Realizations of returns are the most powerful indicator in the market, but they take time, typically seven to ten years for an exit.

"There's certainly a factor, as you said, and as Chris is just the king of coining terms, the end of the day, the cash on cash speaks very loudly."

Beezer Clarkson emphasizes the importance of actual cash returns over paper valuations, indicating that while uprounds can be positive signals, actual cash returns hold more weight in LPs' assessments.

• The market segment for funds in the $100 to $250 million range is returning to normal levels of activity.
• This segment is typically healthy, with numerous funds raised each quarter.

"Maybe we know what's interesting about this year is, I wouldn't necessarily call it explosive, but back to normal."

Beezer Clarkson suggests that while there isn't explosive growth in all segments, there is a return to normalcy in the $100 to $250 million fund range, indicating a stabilization in the market.

• Disciplined fund sizes around $15-25 million tend to perform well in venture capital.
• A shift back to more traditionally sized funds is observed, with 15 funds raised this year compared to 8 in the previous year.
• The trend indicates a return to normalcy and rationality in fund sizes, which is seen as positive.

"raise this. It's a disciplined size, it tends to perform well. I mean, there's no guarantees of anything in venture, but that's sort of a good denominator."

This quote emphasizes the idea that while there are no guarantees in venture capital, funds of a disciplined size have historically performed well, and the increase in such funds this year is a positive sign.

• The sustainability of the high volume of funds raised in the previous year is questioned due to uncertain macroeconomic environments.
• Last year's fundraising total was $40 billion, following two years averaging $30 billion annually.
• The current year's first quarter raised almost $7 billion, suggesting a healthy annual projection if the trend continues.
• Fundraising tends to slow down after July 4th in the U.S., with a pickup from September to December.

"I have a hard time believing that we're going to raise as much money this year as we did last year."

This quote expresses skepticism about the possibility of matching the previous year's fundraising total, given the historical context and patterns observed in venture capital fundraising.

• A healthy exit market is crucial for all venture capital ecosystem participants, from entrepreneurs to VCs and LPs.
• Last year's IPO market was tepid with only 14 IPOs, but this year's first quarter showed promise with three IPOs raising almost $28 billion.
• The venture market's historical reliance on IPOs for value creation and liquidity is highlighted.
• The impact of the recent trend towards private IPOs and the large amounts of funding taken on by companies is under scrutiny.

"a healthy exit market is critical, and I cannot underscore that enough because it's an incredibly risky area."

This quote underscores the importance of a robust IPO market for realizing returns and the inherent risks involved in the venture capital sector.

• Concerns about the sustainability of private IPO valuations when compared to public markets are raised.
• Private market multiples once exceeded those in public markets, causing concern and leading to a pullback from crossover investors.
• There is a push for more rigorous financial metrics in private funding rounds due to the discrepancy in valuations.

"Well, certainly the multiples paid in the private markets at one point in time were exceeded that in the public markets, and that was caused for a lot of concern late 15 into 16."

This quote addresses the concern over the sustainability of high valuations in private IPOs and the market's reaction to such discrepancies.

• LP optimism in venture capital is driven by the potential for growth and returns, especially in a low-interest-rate environment.
• Venture capital is seen as a sector offering a vision of a better future, which is inherently appealing to investors.

"I think there's two. I think one of it is the practical, while it's the source of growth and returns, and in a low interest rate environment that we've been in for the last few years, it becomes that much more of a signal of where you can make money."

This quote highlights the practical reasons for LP optimism in venture capital, including growth potential and favorable conditions due to low-interest rates.

• The current competitive landscape requires venture capitalists to invest with conviction and make bold bets.
• Differentiation among funds and LPs is critical due to the influx of new funds and capital in the market.
• Venture capitalists should focus on thoughtful investment strategies and be willing to take contrarian positions.

"I would like to see more differentiation and conviction."

This quote calls for venture capitalists to stand out through strong conviction in their investment choices and strategies, emphasizing the need for differentiation in a crowded market.

• The juxtaposition of abundant capital and a recovering exit market raises concerns about the potential for a bubble.
• Intelligent pricing in investment rounds is necessary to avoid unsustainable market inflation.
• The balance between vibrant market activity and financial prudence is being closely monitored.

"But if people just price up rounds but they don't do it intelligently, then you're just going to have a bubble."

This quote expresses the concern that without careful and intelligent investment practices, the venture capital market risks inflating a bubble, which would be detrimental in the long run.

• Building a personal brand is crucial for differentiation in venture capital.
• Choose a specific industry with longevity, such as consumer, SaaS, fintech, or blockchain, and avoid volatile sectors like AR and VR.
• Create content related to your chosen industry to demonstrate intellectual rigor and expand your network and brand.
• Ask each contact for three more referrals to grow a network with a network effect.
• Use immortal content platforms that remain searchable over time, like Quora, rather than ephemeral ones like Snapchat.

"I think the advice for a young person is really the same whether you're already in or looking to get into the industry, because essentially you've got to build a personal brand for yourself in today."

This quote emphasizes the importance of personal branding for young individuals either already in or aspiring to enter the venture industry.

"Speak to everyone you know within that space and then they'll refer people with everyone you speak to. Ask for three more people within the space that they'd most recommend."

Networking is highlighted as a key strategy in this quote, suggesting a systematic approach to expanding one's professional circle in the venture industry.

"The likes of Jason Lamkin have done incredibly well with Quora because it is immortal. You can search for it seven years after he's posted it and still get those conversions back to him."

The speaker underlines the value of using content platforms that have longevity and are searchable, using Jason Lamkin's success with Quora as an example.

• The communication gap between European and US venture capitalists was unexpected.
• Bridging this communication gap can lead to deal flow and follow-on funding opportunities.
• There is a misconception that European venture is a secondary market to the US, but it has unique strengths and potential.

"It's this kind of fundamental communication delta between Europe and the US."

This quote identifies a surprising communication divide between European and US venture capitalists, which can be leveraged as a differentiator.

"If you can bridge that communication gap, much to my delight. It offers both deal flow and follow on funding opportunities."

The speaker points out the advantages of overcoming the transatlantic communication barrier in venture capital.

• European venture is not just an ancillary market; it has a large number of engineers and is growing in funding and exits.
• There is a rise in corporate involvement in Europe, which could lead to short-term liquidity events.
• The emergence of a mega company like Spotify can inspire European entrepreneurs and signify Europe's growing influence in the global market.

"We're beginning to see a massive rise in the amount of corporates entering the space for me, both in the investing and the acquisition market, which is super interesting for me."

The speaker discusses the increasing involvement of corporations in the European venture market, which could lead to more acquisitions and investments.

"Spotify will, to me, undoubtedly be a $50 billion company. And this will create that inspiration and determination within european entrepreneurs."

This quote suggests that the success of companies like Spotify can serve as a catalyst for the European venture ecosystem and inspire entrepreneurs.

• VR is seen as an isolating experience that does not foster social togetherness, making it less interesting.
• AR has the potential to enhance human capabilities further than current technologies like smartphones.
• Innovations in AR, such as integrated devices and contact lenses, are anticipated to integrate with human and social life.

"VR for me, is an isolated experience that detracts from a feeling of social togetherness."

The speaker expresses a negative view on VR, considering it to be antisocial and therefore less appealing.

"AR, on the other hand, being super interesting, essentially the ability to make us even more superhuman than the iPhone made us."

AR is highlighted as a promising technology that could significantly enhance human interaction and capabilities.

• Personal branding and content creation are essential for establishing oneself in the venture capital industry.
• The use of certain content platforms can significantly impact the longevity and reach of one's personal brand.

"Essentially a domain expert is to me, heavily connected and intellectually rigorous in an aspect."

The speaker defines a domain expert as someone who is well-connected and has a deep understanding of their field, which is demonstrated through content creation and networking.

"And then the content element helps to show your rigor and then expand the brand beyond the closed circles that you speak to, therefore generating the deal flow that you'll need once in VC."

Content creation is presented as a means to showcase expertise, expand one's brand beyond immediate networks, and generate deal flow necessary for success in venture capital.

• European venture capital has unique characteristics and potential that are often overlooked.
• The region is gaining traction in terms of investment, acquisitions, and the emergence of significant companies.

"We've got more engineers in Europe than the US by 700,000."

This quote highlights Europe's abundant engineering talent, which is a strength of the European venture ecosystem.

"I think we need a mega company from Europe again, and this is happening."

The speaker expresses optimism for the European venture market, indicating that the emergence of large companies is a sign of its maturation and influence.

• Insights into the venture capital industry are gained through experience and engaging with a wide range of venture capitalists.
• Bridging communication gaps and understanding the dynamics of different markets can provide competitive advantages.

"I'm doing my 10,000 hours quite literally."

The speaker alludes to the concept of mastery through extensive experience, suggesting a deep engagement with the venture capital industry.

"It offers both deal flow and follow on funding opportunities."

The speaker identifies the practical benefits of understanding and connecting different venture capital markets, such as improved deal flow and funding opportunities.