If you feel confused about the state of startup investing, join the club. Public company stocks have been hammered relentlessly in recent months amid growing fears of a recession, but startup funding looks faster than ever and, more surprisingly, for us, VCs are still regularly announcing huge news. funds as they have done for many years.
To better understand what’s going on, we spoke this week with Index Ventures co-founder Danny Rimer, who grew up in Geneva, where Index has an office, but now splits his time between London and San Francisco, where Index also has offices. (He also just opened an office in New York.)
We happened to catch Rimer – whose bets include Discord, 1stdibs, Glossier and Good Eggs, among others – in California. Our conversation has been slightly edited for length.
TC: This week, Lightspeed Venture Partners announced $7 billion across multiple funds. Battery Ventures said it closed at $3.8 billion. Oak HC/FT announced nearly $2 billion. Usually, when the public market is this low, institutional investors are less able to commit to new funds, so where does that money come from?
DR: That’s a great question. I think we should remember that there have been tremendous gains for many of these institutions over the past few years—let’s actually call it the last decade. And their positions have also multiplied during this period. So what you’re seeing is an allocation to funds that have probably been around for a while. . . . and have actually provided very good returns over the years. I think investors are looking to put their money in institutions that know how to allocate that fresh money in any market.
These funds continue to grow. Are there new sources of funding? We have obviously seen sovereign wealth funds play a bigger role in venture capital funds in recent years. Is Index looking further ahead than before?
There has certainly been this bifurcation in the market between funds that are probably more in the asset aggregation business and funds that are trying to continue the artisanal practice of venture capital and we play in the latter camp. So in relative terms, the size of our funds has not become very large. They didn’t grow dramatically, because we made it clear that we wanted to stay small, keep our business alive, and keep it that way. This means that in terms of our institutional investor base, first of all, we don’t have family offices and we don’t take money from sovereign wealth funds. We’re really talking about endowments, pension funds, nonprofits, and funds of funds that make up our investor base. And we are fortunate that most of these people have been with us for almost 20 years now.
You have quite a bit of money under management, you announced $3 billion in new funds last year. It is not a small sum.
No, it’s not tiny, but relative to the funds you’re referring to – the funds that have grown a lot and have done sector funds or cross funds – if you look at how much Index has raised [since the outset] compared to most of our peers, it’s actually a very different story.
How much has Clue noted on the history of the firm?
We should check. I wish I could have the exact number on the tip of my tongue.
It’s a kind of refreshment that you don’t know. Are you in the market now? It feels like it’s been a year and a year in terms of fundraising for most companies, and that’s not changing.
We are not in the market to raise funds. We are obviously in the market to invest.
We’re starting to see a lot of companies review their valuations. Are you in talks with your portfolio companies to do the same?
We have all kinds of discussions with the companies in our portfolio; nothing is on the table. We absolutely do not want to suspend disbelief in the realities of the situation. I wouldn’t say it’s a general discussion that we have with all of our companies. But we’re constantly trying to make sure our businesses understand the current climate, their specific conditions, and make sure they’re as realistic as possible when it comes to their future.
According to the companies, valuations have sometimes taken a step ahead and we should not count on the return of cross funds. . . they must defend their public positions. So some of these companies just need to weather the storm and make sure they’re prepared for the tough times ahead. Other companies really have the opportunity to lean into this period and capture a significant market share.
Like many VCs, you say you’d rather a startup “down round” than agree to onerous terms to maintain a specific valuation. Do you think the founders received the note that down rounds are acceptable in this climate?
It really depends. I think you probably have new funds that started during this period — you have new sector funds — which complicates things because [they’re] not investing in the best deals. [They’re] invest in the best company or try to finance the best company in this sector. So there’s probably pressure on some of the venture capitalists that is felt by some of the entrepreneurs.
I want to emphasize that not all companies need to take a cold shower when it comes to valuation. There are a lot of companies that are doing very well even in this environment.
Fast, an online login and payment company, quickly shut down earlier this year, and Index faced some criticism online for quickly removing the company from its website. What happened there and, in retrospect, what more could Index have done in this situation? I assume your team had a post-mortem on this one.
I didn’t realize we had removed it from our website. Guess it’s probably there but probably harder to find, I suspect. We promote businesses that are doing well.
You’re right, we’ve digested it as a company and really tried to learn from it. There are a number of factors that we are still digesting or can’t know, but what was probably difficult during COVID was really assessing talent and understanding the people we were working with. And I’m sure my partners who were responsible for the company could have spent more time and really understood the entrepreneurial culture of the company in much more detail if we had been able to spend more time with them in person.
(We’ll have more on that interview in podcast form next week; stay tuned.)