Mark Suster and Samir Kaji on the 2024 Venture Market, IPOS, and Secondaries | E1899

Episode Summary

Executive Summary: The conversation centered on the VC market reset: smaller fund sizes, fewer LP dollars, longer fundraising cycles, and a renewed focus on DPI, discipline, and liquidity. The panel argued that the 2021 era of inflated valuations and tourist capital is over, and that venture, fintech, and AI investing now require sharper underwriting, better portfolio construction, and more selective secondary/liquidity strategies.

Main Topics: Venture Fund Market Reset and Fundraising (Priority: 5/5): The panel discussed how legacy firms like IVP and Upfront are raising in a more difficult LP environment, with smaller commitments, longer closes, and much more diligence. They framed this as a healthy normalization after the 2021 capital frenzy. DPI, Secondaries, and Liquidity Management (Priority: 5/5): A major theme was the importance of returning cash to LPs through secondaries, strip sales, and selective selling of winners. The speakers argued that good venture firms should actively manage liquidity rather than hold everything to the end. Public vs. Private Market Valuations (Priority: 5/5): The group contrasted inflated private valuations with more rational public-market multiples, arguing that many private unicorns are overvalued and that valuation discipline has returned across stages. FinTech’s Repricing and 2024 IPO Prospects (Priority: 4/5): They debated the state of fintech after its boom-bust cycle, concluding that many wrapper/neobank businesses are weak, while truly novel infrastructure or AI-enabled fintech has stronger prospects. Kleiner Perkins and Firm Rebooting (Priority: 4/5): The panel praised Kleiner Perkins’ turnaround under new leadership, using it as an example of how large venture franchises can renew themselves through apprenticeship, strong operators, and founder trust. Apprenticeship, LP Relations, and VC Craft (Priority: 4/5): The speakers stressed that top VC performance comes from apprenticeship, pattern recognition, and treating LPs like customers with highly individualized expectations and sales dynamics. AI, Hard Tech, and Marketplaces (Priority: 3/5): The closing segment highlighted current investment interests: AI voice infrastructure, healthcare billing, defense, and marketplaces, showing where each speaker thinks durable value is being created.

Key Arguments: Fund sizes should shrink to match today’s market reality; raising too much forces firms into larger checks and less disciplined investing. DPI matters more than paper marks because TVPI does not return cash to LPs. Secondaries, strip sales, and partial liquidity are healthy when used to return capital from extreme winners without fully exiting long-term upside. The 2021 private market was distorted by tourist capital and public-market multiple expansion; many unicorns are likely overvalued or non-exitable. Fundraising now resembles enterprise sales: LPs are heterogeneous, diligence is deeper, and one-size-fits-all pitching does not work. Fintech remains attractive only where there is true infrastructure, regulatory complexity, or AI-driven differentiation; thin wrapper businesses are weak. VC is an apprenticeship business requiring portfolio construction, reserve management, and long-term relationship skills, not just deal sourcing. The best firms actively adapt their platforms over time, as seen in the Kleiner Perkins reset and Upfront’s multigenerational bench.

Data Points: IVP Fund Size Target: $1.3B-$1.5B - IVP is reportedly raising its 18th fund, down from $1.8B in its prior fund. IVP Prior Fund: $1.8B - Referenced as the 2021 vintage that was larger because rounds were larger. Series B Valuation Change: Down about 21% - Samir cited Carta data showing Q3 2023 Series B valuations versus Q1 2021. Series C Valuation Change: Down about 37% - Samir cited Carta data showing Q3 2023 Series C valuations versus Q1 2021. Top 10 Venture Funds Annual Raise: $4.5B per year on average - Mark said the top 10 venture funds raised this much annually from 2019-2022, up sharply from prior years. Increase in Top-Fund LP Dollars: Up 4x / 400% - Mark described how much the top funds raised during the 2019-2022 period versus the prior four years. LP Contributions to VCs: Down 60% in the last 12 months - Mark cited a broad decline in institutional LP capital flows into venture. Emerging Manager Fundraising: Down north of 65% - Mark said new/emerging managers have faced a steep drop in fundraising success. Fundraising Close Time: Back to 6-9 months - Mark said the market moved away from one-and-done closes and fast fundraises. Legacy Firm Liquidity Returned: $1.2B - Mark said Upfront exited or partially exited this amount of positions during 2017-2021. Software Valuation Peak: 24.6x NTM revenue - Mark compared November 2021 public software valuations to long-term averages. Private Software Valuation Peak: 100x NTM revenue - Mark said private software names briefly traded at this level in 2021. 20-year Average SaaS Multiple: 6.2x - Mark referenced this as a rational long-term benchmark for SaaS valuations. 10-year Average SaaS Multiple: 9.6x - Mark referenced this as another benchmark for valuation expectations. Discount on Secondary Purchases: About 60% discounts - Mark said Upfront has been buying secondaries in high-conviction companies at deep discounts. Emerging Managers Since 2010: 2,700 new firms in the U.S. - Samir described the proliferation of venture firms over roughly 14 years. Fund One to Fund Four Survival: 1 in 5 - Samir said only one in five fund-one managers reaches fund four. J-curve Timing: Negative for first 2-3 years - Samir explained how early VC fund returns usually begin with losses because of fees and unmarked investments. New Unicorns in 2021: 723 - Jason cited the number of net new unicorns in that year. Share of 2021 Unicorns Priced by Four Firms: 60% - Jason argued that a small number of large funds priced most 2021 unicorns. Private Unicorn Count: 1,400+ - Jason said there are over 1,400 private unicorns in the market. Expected Non-Exiting Unicorns: At least 1,000 - Mark predicted that most private unicorns will never exit above $1B. Healthcare Share of GDP: 17.3% - Mark used this to justify investing in healthcare infrastructure businesses. U.S. Healthcare Spend to Doctors: 15% - Mark said only this portion of healthcare dollars reaches doctors. Healthcare Administration Share: 35% - Mark cited this as overhead in healthcare billing.

Pivotal Quotes: "VCs are so dumb." — Keith Raboy (as recounted by Jason Calacanis): Used to justify writing large checks into rounds led by trusted firms without taking board seats. "TVPI doesn't pay anyone." — Mark Schuster: He emphasized that paper gains are meaningless without distributions back to LPs. "Be fearful when others are greedy and greedy when others are fearful." — Mark Schuster: He used this to explain why Upfront is buying secondaries aggressively in the current downturn.

Implications: The industry is shifting from hype to discipline: smaller funds, deeper diligence, and more focus on real liquidity. Managers who master underwriting, LP trust, and selective secondaries should outperform in the next cycle.