It’s been nearly five years since this editor sat down with former VC Harry Nelis and three other investors from Accel’s London office to talk about the trends rippling through the venture industry at the time. At the time, our conversations largely revolved around Brexit and SoftBank’s feverish pace of investment, which at the time began to drive other late-stage funds into early-stage companies.
Of course, a lot has changed in the intervening years. Brexit took place in January 2020. Soon after, COVID gripped the world. A global downturn 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 shifts have affected Accel – thanks to big bets like Slack and UiPath, it raised huge amounts just as things were cooling down – we chatted with Nelis yesterday in a quick catch up 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 funds in the US and a global growth fund. How much of that fund have you committed?
HN: I think we’re about half way through the fund. After all that fundraising, we raised another Leaders Fund in June ’22, a pre-IPO fund, with $4 billion in commitments. But . . .we are now in a period where things have slowed down quite 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 have raised so much money over the last few years that they really don’t need more. And they know that if they raised more money, it probably wouldn’t be against 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 equally slow. . . but that has now adjusted and the early stage market is really back.
Accel cut back one of its funds in 2001 after the great dotcom crisis. The company couldn’t put the money raised to work, and LPs, meanwhile, were in trouble because of the recession. Here we are again. Has Accel talked about shrinking the size of these massive pre-IPO and 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 cut stage fees or fund commitments. I also think we are very close to adjusting the market. We did an analysis of, okay, when did most of the major funding rounds happen, how long ago was that, what are reasonable assumptions for burn rates, what does that mean for companies that need to raise money again. And by most of our estimates, it feels like we should get the market back to normal by the end of the year and certainly early next year, so I think any kind of talk about smaller funds, etc. would be premature.
Sometimes it feels like a domino effect. Someone does it, then everyone says it was the right thing to do; we should too. It’s good that you think the markets will recover; at the same time, the numbers don’t look that great. I occasionally talk to secondary stores here in the US and they’ve all said it’s like trying to catch a falling knife here. Nobody really wants to sell their shares because they are so low. At the same time. buyers don’t want to buy yet because they think the stock will fall even further. And yesterday I saw institutional LPs selling some of their holdings at a 40% to 60% discount. Are your portfolio companies more actively talking to secondary platforms? Will Accel sell any of its holdings?
No. We’ve been here before, right? So in 1999, 2000, there was a huge funding cycle, and then, of course, after 2001, that went very, very quiet again. So booms and busts are part of capitalism and therefore venture capitalism as well so our approach is to really keep our focus on building big and valuable companies and over time those big and valuable companies will end up in windows where liquidity and then good things happen.
We’ve had a lot of growth in recent years, but sometimes it was also inefficient growth. We’re working to make them efficient and really build these businesses into great and valuable businesses, and that’s going to produce great results for entrepreneurs, and it’s going to create great venture companies as well.
What are you looking at in particular to make new bets? I know fintech is an area of interest for you, and that sector has clearly suffered over the past year.
What are we looking at? Generative AI is obviously 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 come up with ever more powerful weapons to fight against each other. We’ve mainly focused on security for large businesses, but small businesses haven’t had the benefit of a lot of defense and a lot of security, so a lot of companies are now being created that help SMBs protect themselves from cybercrime. We also continue to do a lot in payments. And we’re funding some returning entrepreneurs who have built large businesses before and are still quite young and want to do it again and possibly do bigger.
How has your pace changed since we last spoke? How long does it now take for Accel to issue a first check?
It is very different from the boom period. In real bloom [in 2020 and 2021], we usually had three or four days to decide on a deal. And that is not good for the investors, but also not good for the entrepreneurs because you will eventually work together for at least five to ten years and if you make such a commitment, it is good to get to know each other. Now the time we have to really familiarize ourselves with an investment opportunity and an entrepreneur is about two or three weeks which is much more prescriptive and it gives us a chance to get to know the entrepreneur but just as importantly it gives the entrepreneur a chance to get to know us.
Before the boom, a typical implementation period for a fund would be three years and would be deployed within three years [feature] about 30 to 35 companies per fund. During the boom, that implementation period took at least two years and for many companies sometimes a year and a half – even faster. And you don’t get enough time to diversify into such a fund, which makes venture funds more vulnerable. So now we’re back to what I’d expect from a three-year deployment cycle, with a [more traditional] period to really make good use of an opportunity.
So many bets have been made in that period and the mortality rate in the startup world is high. Everyone is currently dealing with portfolio companies struggling to get through this period and no one knows how long it will take. How do you know it’s time to pull the plug?
We believe it’s always best for portfolio companies to raise fresh money from the outside, in good times and bad, because that provides a sort of reality check of the market beyond the market as a whole. So the first litmus test is, is a company capable of raising money from the outside? It doesn’t matter what rating. If they can’t raise money, that’s kind of a signal from the market.
Are you more inclined to fund a founder who has returned capital to investors before the gas runs out completely?
If an entrepreneur says, “Listen, I don’t quite believe in it anymore because circumstances have changed, it’s a different market, I prefer to wrap things up and return money to investors and move on.” go’, case basis, we would be okay with that. It’s okay to admit that circumstances have changed and the opportunity you found attractive together is no longer there. It happens. But it’s not something we’re actively asking for. Usually we realize with entrepreneurs that they are 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 when they decide that circumstances have changed and there is no point in really chasing their dream anymore.