Syndrome Syndrome

SyndromeYou know you’ve watched too much Pixar when your 10-year old can quote lines from Cars the way we all used to quote Caddyshack in college.  (Don’t get me started: I once decided it would be cheaper to rent Pixar flicks a couple of times each rather than buy them; needless to say I’m on the wrong side of that bet.)

And like many parents, my favorite film of the bunch is The Incredibles (aside from Big Hero 6, which I love because Baymax the soft robot reminds me of the cool stuff that my friends at OtherLab are working on.)

For those of you who’ve not seen the Incredibles, the antagonist is a pretend superhero named Syndrome.  Lacking true superpowers, Syndrome builds a Super Suit as part of a nefarious plan to rid the world of the naturally gifted superheroes that he believed had shunned him in his youth.  Explaining his scheme to do away with true superheroes and then commercialize his invention so that everyone has superpowers, Syndrome chuckles:

“When everyone is super . . . no one will be”

And so it goes in VC-land today.  LPs are bombarded by meeting requests from GPs raising funds on the basis of “amazing track records,” or “a bunch of breakout companies.”  Of course, when everyone seems to be touting 50% IRRs, a normally-tasty 20% IRR can seem pretty pedestrian (we even used to say at Old Ivy’s endowment that 15% compounded forever was a lot of money.)

Throw into the mix the fact that many of the funds trumpeting their track records are often too new to have meaningful results.  After all, the true evaluation horizon for private equity is far longer that the fundraising cycle (and even, in some cases, longer than the career arc of the LP who made the commitment).  My buddies Samir Kaji and Paul Martino have done some great work mapping and analyzing of the size of the micro-VC market.  They each suggest that there are more than 200 micro-VC funds active today, up from about 30 a scant four years ago.  Every last one of these funds seem to have great slideware (especially the ones who’ve read Cindy in a Bar), but the preponderance of angel deals sporting major mark-ups makes one raise an eyebrow.

So, I started wondering if my gut and the anecdotes we LPs shared at confabs were validated by the data?  To test this hypothesis, I dove into our fund log from the last couple of quarters and found that the mean IRR (among groups listing one) was over 36%.  To be sure, there are all kinds of issues with the hastily examined data set – and like GPAs, if you don’t list it, it must be average – but the hypothesis under test was one of portrayal.   I’m not suggesting that there are any shenanigans (although some academic studies have suggested that some GPs manipulate IRRs ahead of fundraises)

Rather, in today’s carbonated funding environment for expansion stage deals, people are sitting on some pretty full valuations.  Indeed, Econ 101 tells us that the marginal dollar sets the price – and there are lots of marginal dollars floating around today.  It’s not even all that uncommon to find a single company buoying an entire portfolio with a dazzling up-round.  But the mighty do sometimes fall; down rounds and preference stacks can be a serious buzzkill.  Indeed, there was a time in my career when I saw J-curves turn into N-curves, upside down V-curves, square roots, you name it . . . Until the moolah hits the cooler, a good story can remain just that.

So go ahead: be proud of your accomplishments. Enjoy the moment and the good progress you’re making… Just remember that other people have impact companies, too; everyone seems to have a rocketship to the moon. And in an era of cap tables dense with Angels and individuals, there are some companies that are so widely held that they seem to be on everyone’s brag sheet. Look elsewhere for differentiation, as you’re not getting it from track record today (unless you’re Sequoia, First Round, or Union Square.)

Success has many fathers while failure is an orphan. Some days it seems like Uber is this generation’s Woodstock: everybody was there … Even if they really weren’t.


One thought on “Syndrome Syndrome

  1. Chris – Good stuff. It’s refreshing to hear LPs say something other than “We like to build strong relationships”.
    And The Incredibles is/are my favorite, too! Not my son’s favorite, but mine. Coincidentally I’m one of four people worldwide who watched that AND “Who’s Afraid of Virginia Woolf” in the past year.


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