E141: State of Series A's, VC dry powder, IPO window opens + more with Bill Gurley & Brad Gerstner

August 11, 2023Bill Gurley venture-capital economics business markets

TL;DR

Series A funding market showing signs of contraction with valuations under pressure and fewer companies raising rounds despite significant dry powder in the VC ecosystem
Dry powder misconceptions exposed: VCs holding large amounts of uninvested capital face marking incentives and time constraints that complicate actual deployment strategies
IPO window beginning to reopen after prolonged closure, but with increased scrutiny and potential down rounds as companies face realistic market valuations
Venture capital operates in cyclical patterns where distribution management and performance benchmarking against public markets remain critical challenges for fund success
Macro economic concerns including inflation cooling trends and potential deflation risks creating uncertainty for both public and private market valuations
Discussion of books, biographies, and films as intellectual capital for understanding business leadership and decision-making under uncertainty

Episode Recap

In this episode of The All-In Podcast, Bill Gurley and Brad Gerstner join the besties to provide a comprehensive update on the venture capital landscape and broader economic conditions. The conversation opens with the typical banter about haircuts and recommendations for biographies and films that shape thinking about business and leadership.

The core discussion focuses on the current state of Series A funding rounds. Despite widespread reports of substantial dry powder in the VC ecosystem, the guests explain that many companies are struggling to raise Series A funding at reasonable valuations. This apparent paradox stems from misconceptions about how venture capital actually deploys capital. The discussion reveals that VCs face marking incentives and limited partnership requirements that influence their investment behavior in ways that don't always align with having large amounts of uninvested capital available.

A significant portion of the conversation addresses the realities of dry powder and its constraints. Venture firms must satisfy their limited partners through appropriate markings of portfolio companies, manage distributions of returns, and navigate time constraints on fund life cycles. These structural realities mean that having uninvested capital does not automatically translate to aggressive deployment at lower valuations, as some market observers assume.

The guests discuss the reopening of the IPO window after an extended closure period. While IPO activity is beginning to resume, the environment remains challenging for many companies. Several IPOs have already experienced down rounds where valuations at IPO are lower than previous private funding rounds. This dynamic creates interesting incentives and dilemmas for founders and boards contemplating public markets versus remaining private longer.

The conversation addresses the cyclical nature of venture capital markets. Both guests emphasize that venture investing operates within broader economic cycles, and understanding these patterns is crucial for managing fund performance and investor expectations. The discussion includes comparisons between venture returns and public market benchmarks, highlighting how VC performance must ultimately be evaluated against what limited partners could achieve through alternative investments.

There is a sobering segment discussing the tragic Maui wildfires and extreme temperature events, providing context for how environmental and climate-related challenges affect business and society more broadly. The conversation then shifts to macro economic conditions, particularly the cooling of inflation and emerging risks of deflation. These macroeconomic factors create uncertainty across both private and public markets, affecting valuations, investor sentiment, and capital deployment strategies going forward.