Welcome to the latest issue of The exchange! With TechCrunch+ ending this month, The Exchange's column and newsletter are also coming to an end. Thanks for reading, emailing, tweeting, and hanging out with us for so many years.
PS: A special thanks from me to Anna, who has been nothing short of a brilliant lead author of this newsletter since she took over. She deserves endless credit for her work on the email.
Today on The Exchange, we delve into follow-on funds, count down some of our favorite historical entries on the Exchange, and discuss what we're excited to report on for the rest of the year. -Alex
Continuation Funds
The sequel seemed like an appropriate topic from our perspective. It's also very topical: “The largest source of liquidity now will be follow-on funds,” venture capitalist Roger Ehrenberg predicted in a recent report. episode from the 20VC podcast.
In case you are not familiar with the term, let's move on to the Financial Times for a definition:
Continuation funds, which are common in private equity [PE] Although rare in venture capital, they are a secondary investment vehicle that allows them to “reset the clock” over several years on some old fund assets by selling them to a new vehicle that they also control. This helps a venture capital fund's sponsors, known as “limited partners,” renew their investment or exit.
If you've been following the last few months of venture capital activity, the “why now?” It's easy to answer. As the StepStone Ventures team told our colleague Becca Szkutak in her December 2023 Investor Survey: “With portfolios flooded with unrealized value, fewer immediate exit opportunities and longer holding periods on the horizon, GPs are starting to get creative in generating liquidity.”
In practice, a continuation fund allows new investors to invest in existing portfolios, but “reflects current valuations,” Ehrenberg said. This price review and the potential conflict of interest around it sound challenging in theory, but Ehrenberg doesn't think so. “There are net new investors looking at a portfolio, so they are the ones setting the price, not the existing managers.”
It is not just about very large funds like Knowledge Partners and Speed of light who cannot explore this option either. “It's a viable strategy for a decent portion of the venture industry,” Ehrenberg told 20VC host Harry Stebbings.
Whether it is follow-on funds, short-selling or secondaries, there is a clear push for venture capital to seek solutions to its often untimely cycles, as we had already seen with the permanent capital increase and exchange-traded funds. A common thread in today's economy is that projects and companies are not given the time they need to be fully successful, so even if this means a temporary discount, it's good to know that net investors are willing to give Give your wallets more time to shine.
RIP the exchange
The Exchange began its life in late 2019, even before it had a name. It quickly became a daily column during the week and later a weekend newsletter. For those of you interested in the historical quirks of multimedia product creation, The Exchange was a TechCrunch+ product on the site, but its weekend edition was delivered for free via email. Why was that the case? Because at that time we didn't have the technology in-house to send emails only to subscribers!
Over the life of The Exchange on TechCrunch+, we've sent out over 1,000 columns and newsletters, making it the single largest and, if we may say so, most impactful project to drive subscribers to our paid product. Exchange and TC+ were inseparable, so it makes sense that they would retire together. Still, as with any project that combines work and personal passion, he will be missed.
From its inception, the $100 million ARR club and the early days of the pandemic filled with stock market crashes and fear, The Exchange was there to chronicle the startup boom of 2020-2022 and its subsequent conclusion . We went from counting monster rounds and an IPO storm to watching venture capital dry up and startup exits become rarer than gold. It's been crazy.
Ana took over The Exchange newsletter in early 2022, around the time Alex became editor-in-chief of TechCrunch+. The columns remained a group project, but we had to divide and conquer to keep our production at full capacity.
Below is a list of some of our favorite Exchange entries. Of course, we couldn't review the entire file, which you can find here – so consider this a partial download of hits:
- The $100 million ARR club (December 2019). The beginning of a long-running series looking at pre-IPO startups. Many of the participants, such as Monday.com, later went public.
- Why does everyone create OKR software? (January 2020). Our first “startup group” style post, delving into what we consider an unusually busy segment of the tech startup endeavor.
- API startups are very trendy right now (May 2020). API startups would remain active for years to come, leaning on the model that Twilio helped pioneer. It's interesting to think back to May 2020, when there was still a lot of fear in the market. Little did we know what would come next.
- Don't hate low code and no code (May 2020). The low-code and no-code debates have died down a bit as the method of creating software that non-developers manipulate and adapt at their own will has become more of a stakes game than a controversial product choice. Still, it wasn't always like this.
- Startups have never had it so good (July 2021). By mid-2021, it was clear that the startup stock market was in a new era, with investors piling cash into every software company that moved.
- How to make the math work for today's sky-high startup valuations (July 2021). Underpinning the huge funding boom we noted earlier was the expectation that software growth was going to be faster and last longer than previously expected. That ended up not being true.
- What could stop the startup boom? (September 2021). At the end of 2021 we were a little worried that the pace of investment was not entirely sustainable. The market would remain active for a while longer, but our notes on potential disruptors of the startup boom ended up being reasonably accurate. Interest rates really changed the game.
- More transparency is needed on the LP (January 2022). Venture capitalists will tell you what they invest in, but they are often more secretive about their own backers. We argue that startup founders are owed a little more information about where their capital ultimately comes from.
- Why you shouldn't ignore Europe's tech boom (February 2022). An interesting narrative forming in recent quarters is the resilience of Europe's companies and startups during the current slowdown in private market capital investment. We said European deep tech was poised to do well. And well, we were right.
- Yes, startups are finding it increasingly difficult to get financing (July 2022). By mid-2022, it was clear that the boom times were over, even though the exuberance of 2021 extended into early 2022.
- The rise of platform engineering, an opportunity for startups (December 2022). Instead of investing in more developers, why not spend to help them be more productive? Subsequent cuts to developer payrolls made it clear that the era of mass hiring was behind us, making the thesis here even more pertinent.
- The mirage of dry dust (January 2023). After a lackluster finish to 2022, the optimistic view was that venture capitalists had a lot of dry powder (capital to put to work) they were sitting on. Surely those funds would be released and bring back the good times? Anna argued that some of the venture capital that was theoretically on the sidelines was less “real” than it seemed.
- A central pillar of the SaaS economic model is under extreme pressure (August 2023). One way software companies grow is by selling more services to customers over time. However, by last August it was clear that net retention was suffering, meaning that much of the organic growth that startups once counted on was evaporating.
- Will the power of data in the Al era leave startups at a disadvantage? (August 2023). If AI is data brought to life, do companies win with more data? And if so, where does that leave startups?
- Rainbow or storm? (September 2023). After talking about improving fintech outcomes, Anna delved into using AI to fight fraud. It was an interesting twist on the usual AI and fraud narrative, implying that AI reinforces fraudulent activity rather than limiting it.
- Klarna's financial brilliance is my favorite story in tech right now (November 2023). After seeing its valuation cut, Klarna did not slow down and instead continued to grow and improve its financial performance. Alex gave them a thumbs up for the progress they had made.
- WeWork's bankruptcy is proof that its core business never worked (November 2023). What else can we say about WeWork other than that it was a strange leasing arbitrage play that never had a very good core business?
- Why I'm modestly optimistic about cryptocurrencies in 2024 (January 2024). Ahead of spot bitcoin ETFs, this column indicated that this year could be a fruitful one for cryptocurrencies as a whole. So far, everything correct.
- Yes, the rise in tech layoffs you're feeling is real (January 2024). And to close out some of our favorite or most memorable entries, the recent wave of layoffs has been anything but a mirage. Unfortunately.
we are not finished
While The Exchange is closing, we still have big coverage plans for this year. Luckily, we're both still at TechCrunch, so you're far from ditching us. Alex wants to work on the health of unicorns, the state of debt financing in 2024, and how AI will find support at the OS layer. Anna is curious about AI centers beyond San Francisco, investments in GP, and any S-1s we can get.
Thanks again for reading The Exchange post and newsletter. We are very grateful to have been able to spend so much time with you on this project. Onward and upward!