20VC More $ Raised This Year Than The Past 15, War Chests Being Built & Decline In First Time Funds So What The Heck Is Happening In Venture with Beezer Clarkson, Managing Director @ Sapphire Ventures



In this episode of the 20 Minute VC, host Harry Stebbings is joined by Beezer Clarkson, Managing Director at Sapphire Ventures, to discuss the current state and trends of the venture capital ecosystem. Clarkson provides insights into the concentration of capital in fewer, larger funds, the challenges faced by first-time fund managers, and the implications of such trends on the industry. She also discusses the impact of macroeconomic factors like Brexit and interest rates on venture funding. The conversation touches on the importance of a healthy IPO market for tech companies and the potential risks of having too much capital chasing too few deals, potentially leading to inflated valuations. Clarkson emphasizes the need for differentiation among funds and the role of experienced managers in navigating market uncertainties.

Summary Notes

Introduction to Beezer Clarkson and Sapphire Ventures

  • Harry Stebbings introduces Beezer Clarkson from Sapphire Ventures.
  • Beezer has a history with DFJ's global network and Omidyar Network.
  • She leads investments in venture funds at Sapphire Ventures.
  • Beezer also runs OpenLP.com, a resource for LP articles.

"Now, you might remember from a few months ago we had the fantastic Beezer Clarkson on the show from Sapphire Ventures. There we heard her investment thesis, what she looks for in a fund manager and much more."

The quote is an introduction to Beezer Clarkson, highlighting her previous appearance on the podcast and her role at Sapphire Ventures.

The VC Ecosystem Data and Analysis

  • Harry and Beezer plan to analyze VC ecosystem data quarterly on the podcast.
  • The data analysis will focus on funding activity and its impact on the ecosystem players.

"Beezer and I were chatting about the stats and the data of the VC ecosystem and we realized that this discuss and the roundup of this stats and analysis would make a fantastic podcast."

This quote explains the motivation behind discussing VC data on the podcast, indicating its potential to provide valuable insights.

Beezer's Breakdown Series

  • The podcast episode is the first in a series called "Beezer's Breakdown."
  • The series will feature Beezer Clarkson analyzing venture capital statistics and trends.

"My word, Beezer, absolutely fantastic to have you on the show again for the very special first episode, though, of Beezer's breakdown."

Harry Stebbings announces the new series "Beezer's Breakdown" with Beezer Clarkson, emphasizing its significance as a recurring segment for analyzing VC data.

Sapphire Ventures Overview

  • Sapphire Ventures is an international venture firm with two lines of business.
  • One line focuses on growth-stage company investments, and the other on early-stage venture funds.
  • Beezer Clarkson manages the fund investing part of the business.

"So I'm a managing director of Sapphire Ventures, and for those not familiar with Sapphire, we are an international venture firm that has two lines of business."

Beezer Clarkson outlines the structure and focus areas of Sapphire Ventures, explaining her role within the firm.

Venture Capital as the "Game of the 1%"

  • Discussion on the concentration of capital in venture capital.
  • In the first half of the year, $27 billion was raised by 137 funds.
  • By the end of Q3, $33 billion was raised by 157 funds, the highest since 2001, but with fewer funds compared to previous years.

"Well, I do think this is a year of haves and have nots. In fact, I think 2016 is one for the books."

Beezer Clarkson comments on the significant capital raised in the venture capital industry, which she believes indicates a divide between the "haves" and "have-nots."

Implications of Capital Concentration

  • The concentration of capital may not be as severe due to previous years' trends.
  • Larger funds are being raised, but many micro funds have been established in preceding years.
  • The actual impact of capital concentration is nuanced due to varying deployment times.

"It's hard to think of it as super concentrated, to be honest, because even though this year you've seen this shift into more larger funds being raised...it doesn't mean to say there's been concentration every year."

Beezer Clarkson suggests that the perceived concentration of capital in the current year is part of a larger context, with many smaller funds raised in prior years.

Fundraising Timelines for Venture Funds

  • Funds consider raising new capital when nearing the end of investing their current fund.
  • LPAs (Limited Partnership Agreements) often set guidelines for when a new fund can be raised.
  • The goal is to have a new fund ready before the current fund's capital is fully deployed.

"Funds start thinking about fundraising when they can see when they will be done investing their current fund."

Beezer Clarkson explains the strategic timing of when venture funds start the fundraising process for their next fund, ensuring continuous capital availability for investments.

LP Competitive Landscape

  • Sapphire Ventures focuses on series A funds and avoids overly large funds.
  • The firm's competitive landscape is shaped by its specific investment focus rather than general market trends.

"So for us, in our platform, we focus on series A and we tend to use what we call the right size fund."

Beezer Clarkson describes Sapphire Ventures' strategy in fund selection, emphasizing their preference for appropriately sized funds, particularly for series A investments.

  • There has been a surge in sub $500 million funds, even if they haven't all closed in the current year.
  • A recent Prequin report highlighted the presence of over 500 micro funds in the market globally.
  • Funds sized between $150 million to $450 million have also seen an increase in closures.
  • The concentration of capital is spread across various fund sizes, not just those over $500 million.
  • Beezer Clarkson's firm competes with other LPs to invest in these funds, relying on existing relationships with managers.
  • Despite the busier market, their pacing of capital deployment has remained constant without significant increases.

"What's been much busier is all of the funds that are sub 500 million." "In fact, there was a recent precon report that said there is some 500 plus micro funds in the market right now, globally." "So the concentration of capital is not just in the over 500 million dollar funds, but in many funds edged up in size in general."

The quotes highlight the current state of the venture capital market, emphasizing the increased activity in smaller-sized funds and the broad distribution of capital across various fund sizes.

Investment Strategy and Fund Economics

  • Beezer Clarkson's firm chooses not to invest in "super funds" over $500 million to maintain a focus on Series A stage investments.
  • Larger funds tend to diversify into different stages, which doesn't align with their strategy as they have a separate direct growth fund.
  • The firm's LP work is centered on Series A investments, typically managed by funds smaller than $500 million.
  • Fund economics and the desire for specific exposure influence their investment decisions.

"One, since we're focusing on funds that are predominantly series A exposure, many funds, when they get into the 700 billion dollar fund size, are not predominantly series A." "And because on our platform we have our own direct growth fund, we try to work in a complementary way." "So for us, we're not looking for that kind of exposure."

These quotes explain the strategic reasoning behind their investment focus on Series A funds and how it complements their overall platform, avoiding larger funds that diversify beyond their desired exposure.

First Time Funds and Market Dynamics

  • 2016 has been a challenging year for first-time fund managers, with a notable decrease in the number of funds closed.
  • The number of first-time funds closed in 2016 is at a new low compared to previous years.
  • Market dynamics, such as capital market challenges at the beginning of the year, have affected fundraising efforts.
  • Established funds with a track record and existing LP bases have been preferred by LPs in uncertain markets.

"It looks like it's been a tough year for first time fundraisers." "We have 31 that we counted, and sometimes we go through and we curate the data." "There was a real, if you remember, the beginning of the year had a real capital market challenge to it, and there was a lot of dynamics that pushed funds and lps, the established funds raised, and if you are in a fund, so the established fund has an established lp base and they come back to market."

These quotes describe the difficulties faced by first-time fund managers in the current year, the meticulous process of data curation, and the preference for established funds during times of market uncertainty.

Macroeconomic Cycles and Fundraising

  • Experienced fund managers anticipated macroeconomic cycles and raised funds early in the year amidst market volatility.
  • LPs showed a preference for managers with a history of navigating downturns.
  • The behavior of raising funds early in anticipation of market changes was widespread among both funds and companies.

"And people didn't know if a massive recession was coming or if things would write themselves quickly." "So gps who have been through ups and down cycles also understand this." "What also it contributed to, though, is if you have a number of funds coming back to market to raise, it can motivate other people to raise."

The quotes discuss the uncertainty in the market at the beginning of the year, the strategic thinking of experienced managers during economic cycles, and the ripple effect of fundraising in response to market conditions.

Characteristics of Successful First Time Funds

  • Successful first-time funds typically involve managers with prior venture experience.
  • The largest first-time fund raised in 2016 was an outlier at over $400 million.
  • Managers with existing LP relationships from previous ventures had an advantage.

"Of the funds that have raised, they're notably of people that have existing venture experience before." "The largest fund that was raised this year was eight partners, which is Joe Longsdale's new fund and obviously he is an experienced investor." "They may or may not even had existing lp bases from other funds that they could pull from."

These quotes underline the importance of prior venture experience and existing LP relationships for first-time fund managers who were successful in raising funds.

Seed Market Overcrowding and Fund Viability

  • The decrease in first-time funds could potentially counter the notion of an overcrowded seed market.
  • Funds raised in previous years may still have capital to deploy, depending on their investment pace.
  • The data available does not yet indicate whether the seed market is experiencing an oversupply of funds.

"Well, it's certainly going to be putting fewer of them into play this year." "There doesn't seem to be an oversupply of funds."

The quotes suggest that while there may be fewer new players in the current year, the overall impact on the seed market and the question of overcrowding cannot be determined solely based on the number of funds raised this year.

Capital Availability in the Market

  • There is a significant amount of capital present in the market, with no current shortage.
  • Funds ranging from $150 to $300 million could potentially move back into seed investing.
  • The possibility of smaller funds struggling to raise capital could lead to a decrease in available capital.

"I would say this year does not feel like there's a capital shortage here. In fact, there's clearly a ton of capital in the market."

This quote emphasizes the current abundance of capital in the market, contrary to claims of a capital shortage.

Series A Market Performance

  • There is a decrease in the number of deals across all stages, including Series A.
  • Despite fewer deals, the value of deals remains stable, indicating a "flight to quality."
  • Investors are cautious, seeking more metrics before investing.

"Well, you definitely see deal count on the number of funds done. Seed series A growth is down across the board."

The speaker confirms the downturn in the number of deals, which spans various funding stages, including Series A.

Private IPOs and Market Dynamics

  • Venture-backed companies have seen significant investment, though slightly less than previous years.
  • Larger funding rounds for well-known companies have kept investment totals high.
  • The market is experiencing tension due to delayed IPOs, but there is a positive shift towards public listings.
  • The public market offers more capital than the private market, influencing companies to consider going public.

"There's already been some 40 billion that has gone into us venture backed companies this year through Q three."

This quote indicates the level of investment in venture-backed companies, which, despite a decrease, remains substantial.

Regulatory and Public Pressure in IPOs

  • Companies had access to capital that allowed them to remain private, avoiding regulatory scrutiny.
  • The exit from private markets to public markets is logical, as public markets offer more capital.
  • Crossover investors have pulled back, reducing capital available to private companies and influencing the shift towards IPOs.

"There was a number of companies where capital was made available to them to stay private."

The speaker discusses the availability of private capital in the past, which enabled companies to delay going public.

Future of Tech and Exits

  • The speaker is optimistic about the future of tech, considering both inputs (innovation) and outputs (exits).
  • A healthy IPO market is beneficial but the majority of exits occur through M&A.
  • The dynamic between the private and public markets influences the health of the tech industry.

"All of the future of tech is driven by companies being created today, who knows what the exit market looks like when they come through?"

This quote reflects the speaker's view on the importance of current innovations for the future exit market.

Brexit's Impact on Markets

  • Markets struggle with uncertainty, which was evident during the initial Brexit announcement.
  • As more information becomes available, markets can better adjust to the implications of Brexit.
  • The long-term effects of Brexit on European and UK funds are still uncertain.

"Markets don't always tend to do well in uncertainty."

The speaker highlights the challenges markets face when dealing with uncertain political and economic events like Brexit.

European and UK Fundraising Post-Brexit

  • European funds, including those in London, are navigating the post-Brexit landscape.
  • There has not been a significant drop in fundraising for European funds yet.
  • Established funds with a strong LP base may have an advantage during uncertain times.

"Certainly we have a european portfolio, some funds in London, some funds in other countries in uncontinental Europe, and we've certainly been talking to them, and so far they feel like people are working their way through it."

This quote conveys a sense of cautious optimism among European funds about their ability to raise capital post-Brexit.

Backing Managers

  • Harry Stebbings discusses the importance of backing managers who can navigate through various challenges, including significant events like Brexit.
  • Resilience and adaptability in fund managers are crucial for long-term success.

Five years down the road from any sort of level. So you back managers that you feel can figure out how to weather ups and downs. And Brexit will be one of those things that people will have to figure out how to manage.

  • This quote emphasizes the need for fund managers to have the capability to manage through unpredictable economic and political events, such as Brexit.

Opportunity Funds

  • Beezer Clarkson explains that opportunity funds have spiked this year, with 14 closed funds amounting to over $2 billion.
  • Opportunity funds, as defined by Sapphire, are funds raised by a manager to invest in their own portfolio companies at a later stage.
  • This trend is notable and deviates from the historical average of about five opportunity funds per year since 2011.

They've increased this year. We'll know if it continues on when we get to next year, but this year it's notable.

  • The quote indicates that the increase in opportunity funds this year is significant and it is uncertain whether this trend will continue.

The Hard Raise

  • Beezer references Fred Wilson's blog post "the hard raise," which discusses the benefits of a challenging fundraising process.
  • The process of a hard raise forces self-reflection, story refinement, and resilience, ultimately leading to a stronger foundation for the fund.

Fred Wilson wrote a blog recently called the hard raise, and it was just so great for so many levels. But one of the things it really brought home was that a hard raise can actually work out incredibly well.

  • The quote reflects on the positive aspects of a difficult fundraising journey, as shared by Fred Wilson, highlighting that it can lead to better outcomes due to the introspection and determination it requires.

Concerns with Market Data

  • Beezer expresses concern that the abundance of capital in the market and potential for rapid investment if exit markets open up could lead to a bubble.
  • The current low interest rate environment drives investors towards venture capital to seek returns, which could change if interest rates rise.

But there's so much capital available if the exit markets open up, which is a healthy, wonderful thing. I see how there is this potential for a lot of money to come rushing back because you still have a very low interest rate environment, which means people are still looking for something to drive returns.

  • This quote highlights the concern that a healthy exit market, combined with the current low interest rate environment, could lead to an influx of capital that may inflate market valuations and create a bubble.

Interest Rate Market Impact

  • Beezer Clarkson is not overly concerned about changes in the interest rate market but acknowledges their significant impact on investment focus, particularly in venture capital.

Not necessarily. They obviously have a number of different factors they impact.

  • The quote suggests that while interest rate changes have various implications, they are not a primary concern for Clarkson at the moment.

Investment in Sastor

  • Beezer discusses a recent investment in Sastor, which is a first-time fund, but not a first-time investor, focused on post-seed level SaaS companies.
  • Jason Lemkin, who raised the Sastor fund, has built a significant community around SaaS, which provides a competitive advantage in deal flow.

We've recently committed to Sastor, which is a little bit before series a.

  • This quote reveals Sapphire's investment strategy, which includes selectively investing earlier than Series A, as in the case with Sastor.

Differentiation in Funds

  • Beezer emphasizes the importance of differentiation for funds, using Sastor as an example due to its strong community and potential for deal flow.

Sasr to me is a great example of that because the community he built, that's just really hard to replicate and it will deliver a significant amount of deal flow to him.

  • The quote points out that the unique community built by Jason Lemkin for Sastor is an example of a differentiated fund that can attract substantial deal flow.

Conclusion and Gratitude

  • Harry Stebbings expresses gratitude for having Beezer Clarkson on the show and announces the start of "Beezer's Breakdown" for a quarterly deep dive into venture ecosystem stats and data.

Now, I do want to make a special point today in saying how fantastic it was to have Beezer on the show and how excited I am to start Beezer's breakdown once a quarter.

  • This quote serves as a conclusion to the podcast episode, thanking Beezer Clarkson for her insights and looking forward to future segments that will explore the venture capital ecosystem in more detail.

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