It’s been almost five years since this publisher He sat with veteran VC Harry Nelis and three other investors from Accel’s London office to discuss trends rippled through the venture industry. At the time, our talk was largely focused on Brexit and the feverish pace of investment from SoftBank, which at the time was beginning to push other late-stage funds into early-stage companies.
Of course, a lot has changed in the intervening years. Brexit happened in January 2020. COVID took hold of the whole world soon after. A global recession has also changed the way investors and founders think about their respective roles, pushing SoftBank into the background.
To find out how some of these changes have impacted Accel (thanks to successful bets like Loose and UiPathraised some massive funds just as things were winding down), we chatted with Nelis yesterday in a quick update which has been slightly edited below for length and clarity.
TC: Your seventh fund closed almost exactly two years ago with $650 million as part of $3 billion in capital commitments Accel announced in June 2021. This included funding in the US and a global growth stage fund. How much of that fund have you committed?
HN: I think we’re about halfway to the bottom. After all that fundraising, we raised another “Leaders Fund,” a pre-IPO fund, with $4 billion in engagements in June ’22. But . . .we are now in a period where things have slowed down dramatically.
We have early-stage franchises in Palo Alto, London, and Bangalore, India; We have two global funds: a global growth fund and a global pre-IPO fund. Especially the growth fund and the pre-IPO fund, business for them has been very slow because companies raised so much money in the last few years that they don’t really need more. And they know that if they were to raise more money, it probably wouldn’t be at a higher valuation. So a lot of them are trying to get as far as they can with the money they’ve raised. Even the early stage market was sluggish for a while. . . but that’s been reset now, and the early-stage market really is back.
Accel reduced the size of one of its funds in 2001 after the great dot-com crash. The company was unable to put the money it had raised to work, and meanwhile, the LPs were in a bind due to the recession. Here we are again. Has Accel talked about downsizing these massive pre-IPO, growth-stage global funds?
Overall, I don’t think we’ve seen that. So I haven’t read anything in the news where people have been cutting back stage funding or funding commitments. I also think that we are very close to the market adjusting again. We did an analysis of, well, when did most of the big funding rounds happen, how long ago was that, what are the reasonable assumptions for consumption rates, what does that mean for companies having to raise funds again. And by most of our estimates, it looks like towards the end of the year and definitely early next year, we should see the market normalize again, so I think any kind of talk about smaller funds etc. it would be premature.
Sometimes it feels like a domino effect. Someone does it, then everyone else says it was the right thing to do; we should do that too. It is good that you think that the markets are going to recover; at the same time, the numbers don’t look so good. I occasionally talk to sub stores here in the US and everyone has said it’s like trying to catch a dropped knife here. Nobody really wants to sell their stocks because they have gone way down. At the same time. buyers don’t want to buy yet because they think the stock will fall further. And then yesterday I saw that institutional LPs are selling some of their properties at a price 40% to 60% discount. Do your portfolio companies talk more actively with secondary platforms? Is Accel selling any of its holdings?
No. We’ve been here before, right? So in 1999, 2000, there was a massive funding cycle and then, of course, after 2001, it was very, very quiet again. So booms and busts are part of capitalism and therefore venture capitalism as well, so our focus is really to continue to focus on building big, valuable businesses and over time, those big, valuable businesses. Valuables will end up in windows where there is liquidity and then good things will happen.
Over the last few years, we had a lot of growth, but it was also inefficient growth at times. We’re working to make them efficient and really turn these companies into big, valuable businesses, and then that creates great results for entrepreneurs, and it’s also going to create great venture companies.
Where are you looking in particular to place new bets? I know that fintech is an area of interest for you, and that sector has obviously taken a beating over the last year or so.
What are we looking at? Generative AI of course is a very fertile area for us to fund and look around. Security is always something of a gift that keeps on giving, as attackers and defenders create ever more powerful weapons to fight each other. We’ve been especially focused on security for the larger companies in the market, but small companies haven’t had the benefit of a lot of defense and a lot of security, so there are a lot of companies forming now that help SMBs protect themselves. of cybercrime. We also continue to do a lot on payments. And we’re funding a number of repeat entrepreneurs who have built great businesses before and are still quite young and want to do it again and possibly make it bigger.
How has your pace changed since we last spoke? How long does it take Accel to write an initial check right now?
It’s very different from the boom times. in the real boom [in 2020 and 2021], we usually had three or four days to decide on a deal. And that’s not good for investors, but it’s not good for entrepreneurs either because they end up working together for at least five to 10 years, and when you make a commitment like that, it’s nice to know each other. Now, the time we have to really familiarize ourselves with an investment opportunity and an entrepreneur is two or three weeks or so, which is much more normative and gives us a chance to get to know the entrepreneur but, just as importantly, it gives the entrepreneur an opportunity to get to know us.
Before the boom, a typical implementation period for a fund would be three years and it would be implemented in three years and [feature] approximately 30 to 35 companies per fund. During the boom, that implementation period was definitely two years, and for many companies, sometimes a year and a half, even faster. And you don’t have enough time diversification in a fund like that, which makes venture funds more vulnerable. Now we’re back to what I would expect to be a three-year implementation cycle, with a [more traditional] period to really due diligence an opportunity.
So many bets were made during that period, and the death rate in the startup world is high. Right now everyone is dealing with portfolio companies that are struggling to get through this period and no one knows how long it will last. How do you know it’s time to pull the plug?
We are of the opinion that it is always better for portfolio companies to raise fresh money from abroad, through thick and thin, because that gives an idea of the reality of the external market in terms of the market as a whole. So the first litmus test is, can a company raise money from abroad? It doesn’t matter at what valuation. If they can’t raise money, it’s kind of a market signal.
Are you more inclined to fund a founder who has returned capital return to investors before running out of gas completely?
If an entrepreneur says, ‘Listen, I don’t believe in that anymore because circumstances have changed, it’s a different market, I’d rather close things down and pay investors back and move on’, on a case-by-case basis. on a case by case basis, we would be okay with that. It’s okay to admit that circumstances have changed and that the opportunity you both thought was attractive is no longer. Happens. But it’s not something we actively ask for. Usually with entrepreneurs, we realize they’re in the driver’s seat, so we support them when they go public, we support them when they decide they want to sell. We also support them if they decide that circumstances have changed and it no longer makes sense to truly pursue their dream.
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