Gavin Baker @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. No investment advice, views all my own. Jan. 05, 2020 2 min read

1) Investor fear and the absence - temporary or permanent - of the Vision Fund likely creates more attractive late stage opportunities vs. the last 5 years.

Market is semi-frozen, deals are breaking, converts are taking a long time and there are good companies that need funding.

2) VC funding down 17% in Q3 and likely down more in Q4 is a function of the market being semi-frozen.

Market isn’t clearing because companies are trying to avoid down rounds by raising converts and demand is low for these converts.

This will all help better founders/VCs.

3) Investor demand is lower for converts vs. several years ago as returns were disappointing on converts where the return was tied to the IPO price yet liquidity came six months after an IPO.

That “guaranteed” return wasn’t guaranteed after all.

4) The late stage mkt will clear when it becomes “ok” to do down rounds, the structures become more attractive, co’s run out of money or investor fear recedes.

Private markets take a long time to adjust. Deals that were announced in Q3/Q4 were mostly priced before September.

5) Investors are also doing more diligence as no one wants to be embarrassed. *Exact* opposite of logo chasing.

Instead of thinking that investing in this random series G/H is going to make the fund look good, they are terrified of existing land mines and don’t want new ones.

6) Most primarily public equity investors who are newer to late stage venture now understand that almost all private co’s will miss numbers and the annual dilution will be 2-3x that seen in a public company. Strange but true that many deals were priced without these adjustments.

7) Almost every public equity forecast shows decelerating growth while most private company forecasts show accelerating/stable growth.

Therefore critical to adjust the forecast and include dilution before comparing to public comps; often compounds to a 40-50% difference in 2 yrs

8) A really good late stage company told me they had been advised to show a forecast 20% above their board plan to late stage investors and had been told that a miss wouldn’t matter.

It matters. Everyone will remember the miss during the IPO.

9) Capital scarcity will help better founders and VCs because second tier founders and VCs simply start and fund copycat companies that generally lead to deteriorating unit economics for all companies in the space and more dilution for founders/early VCs.

10) @threader_app compile

11) Should also note that @firstadopter wrote the original article, which was great.

You can follow @GavinSBaker.


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