The Double Effect of the LPs on the Venture Space

Maëlle Gavet and I first crossed paths about a decade ago when she was the CEO of the Russian e-commerce company Ozon. Then, we met up again when she was working as the chief operating officer for the SoftBank-backed real estate tech company Compass. A couple of months ago, I ran into Gavet at a networking dinner in New York City. I interrogated her about her two-and-half years so far as the chief executive officer of Techstars, the global pre-seed investment firm.

I invited Gavet on the Newcomer podcast to talk about her time at Techstars and the state of the early stage market. You can listen on Apple, Spotify, YouTube, Substack’s app or wherever you get your podcasts. I’ve also included some excerpts from the discussion below.

What she said about the state of venture capital firms will strike a chord of fear with many of my readers. Gavet warned that many VC funds are entering “zombie mode.”

She said:

In the VC environment, there is a consolidation ongoing, it’s not visible yet and in my view, the worst is to come. Emerging general partners not being able to raise their next fund. In the venture world, they don’t shut down. It’s not like in the operating company world where a company goes bankrupt and literally fires people, closes the door, and that’s it. In the VC world, it’s more like they move into zombie mode. It’s like we are still managing our last fund, but we’re not raising anymore.

Our conversation covered a range of topics, including Gavet’s book, Trampled by Unicorns: Big Tech’s Empathy Problem and How to Fix It. We concluded our conversation, interrogating how tech has changed since she published the book and discussing what it would mean for brewing artificial intelligence regulation.

Give it a listen

Lightly edited podcast excerpts from my conversation with Maëlle Gavet:

What was the main thing that you wanted to change about Techstars?

I wanted Techstars to become the best and largest pre-seed investor in the world. I thought that there were a lot of really good building blocks. The fundamentals were there, and there was also an opportunity to scale it further, streamline it, strengthen it, and provide more value to entrepreneurs, helping them get better terms, better exits, and better valuations. That’s a long process. The VC industry works in a very, very long cycle. So it’s not like you arrive and then three months later things change. But that was the idea of taking this great company to a whole different level. To start, when I would talk about Techstars, people would actually know who we are and what we do. And I remember announcing that I was joining Techstars to my network, and a few people, including venture capitalists from Silicon Valley who will remain unnamed, saying: Why are you joining a nonprofit? My answer was, this is not a nonprofit, this is an investment business and a pretty good one at that. It’s just that they never really position themselves as an investment business. And so part of the work was to change internally and externally, the image of Techstars to say, we are very large pre-seed investors. And by the way, as for Crunchbase, a few months ago, we officially became the largest pre-seed investor in the world.

What has been the company with the best return for Techstars?

We have some really, really cool companies that I like very much. Companies like Chainalysis made headlines not long ago because they provide blockchain data and analysis to governments, banks and businesses around the globe. And when things like FTX happen, and it’s only the most famous but there have been multiple situations where figuring out what is happening in the blockchain, crypto world has been pretty critical for a lot of institutions. Chainalysis is usually the company that calls.

One that I liked very much is called Remitly. They’re a mobile payments service that enables users to make a person-to-person international money transfer. So that’s the tagline. What they do is that they allow to a large extent immigrants from all around the world to send money in a safe and cheap way to their families and to the people who need it. That's a $6 billion company. They went through an IPO in 2021. This is a company with a mission, which is amazing.

We’re talking about billion dollar plus companies, and we can also talk about smaller companies because we have 3,600 companies in our portfolio. We’ve got a bunch. But the one that I like a lot among our billion-dollar-plus companies is a company called Zipline. They design and manufacture these drones, and then they operate them to deliver vital medical products in Africa. It’s a $3 billion company. They did successful fundraising in April of this year. Again, what they’re doing really makes a lot of sense for the world, and the risk of using a Silicon Valley sentence: to make the world a better place. But the reason why it matters so much is because I deeply believe and so does my team that big money comes from solving big problems. Big problems usually are found in things that make the world a better place. Not always, but it does help. So that’s my $3 billion-plus favorite company, but we got quite a few others.

Are there standard terms for Techstars? If I’m an entrepreneur, what should I expect in terms of money and ownership?

We have standard terms and they’re public. So it’s $20,000 plus $100,000 convertible notes. And depending on the conversion of the note, we ended up on average about 8% of the capital in the company. Basically what we provide to founders is the capital, obviously. But there is what we call the Techstars formula. So it’s the $120k that I've just mentioned. It’s the program. Our programs are very intense. It’s a small class, very small classes — 10 to 15 companies. It’s very hands-on. You have the Techstars team, and these are Techstars employees dedicated to that particular program. These tend to be people who are former entrepreneurs themselves.

What is your read on the funding environment right now?

In the VC environment, there is a consolidation ongoing, it’s not visible yet and in my view, the worst is to come. Emerging general partners not being able to raise their next fund. In the venture world, they don’t shut down. It’s not like in the operating company world where a company goes bankrupt and literally fires people, closes the door, and that’s it. In the VC world, it’s more like they move into zombie mode. It’s like we are still managing our last fund, but we’re not raising anymore.

A lot of venture firms have not yet taken the full write-down on their valuation, which compounds the problem because a lot of institutional LPs have public and private portfolios and the public portfolios have taken the write-down. Valuations has dropped quite dramatically.

We came from a period where it was not abnormal for a venture firm to raise every two years, sometimes every year. And so a lot of the firms are now out in the market fundraising. And if you take a significant write down, then suddenly your performance on paper doesn’t look great. And so it can create a problem for you. So it’s not like they are in denial. I just think that they’re trying to keep the appearances. The institutional LP knows that so there’s like a double effect. The first one is most institutional LPs are over overexposed to VC because the VC hasn’t taken the write-down that the public market has so there’s like a denominator effect. And then the second reason is the LPs know when they look at the GP they invested in that some of them have not taken the full write down, and they’re like, okay, maybe we’re going to wait to see where all of that lands. And so VC environment is very tricky at the moment, and I think what we’re observing is a complete change of the guard, a complete reorganization of the venture space. It’s not over. My guess is that it’s probably another few another couple of years. At the outcome of that change, we're most likely going to see very different players really influencing the markets.

I would assume that over time, there’s less money available.

There’s less easy money available. We have a little over 15,000 investors who have made an investment in Techstars, portfolio companies we’ve been connected with. So we talk to a lot of these people like we are deal flow to the VC industry, we’re not really a VC ourselves. And what we tell our portfolio companies is, it’s not that there is no money. There absolutely is some money, but it’s harder to get because the VC is going back to some fundamentals — you should probably do due diligence before you give a check of a few million dollars to a company. You are going to have to show a clear path to profitability — doesn’t mean that you have to be profitable, but it has to be clear and credible, not like you know, the hockey stick that makes you profitable in year 10 if all the planets align and you have no competition. And so that, by definition makes it a lot harder to create compelling cases. And then in a lot of cases, the VC will now ask, even at an early stage, to see some traction. We have companies that have raised recently very good rounds at seed and Series A levels, but they had a good track record a clear path to profitability, and a great product market fit. I think, if I had to summarize: Gone are the times where you could go and raise $5, $10, $15 million based on a napkin and a barely put together MVP [minimum viable product]. That’s not happening anymore unless you're in AI. And that's a different thing.

Some of the founders think the gloom and doom has been oversold. VCs want to get better terms, and it’s in VC’s interest to emphasize how bad things are. What do you say to that?

The valuation that we saw in 2021 and 2022 didn't make a lot of sense. We’re seeing a recalibration of the markets. We also say that to our portfolio companies: If you are being offered a down round, you probably should accept it because most likely, and obviously it's always on a case-by-case basis, but most likely, your last valuation was probably a little inflated, and the new valuation that you're getting is probably closer to reality. And so yes, it looks like you're down round. But maybe the way you should look at it is your previous round was an out of the ordinary round and this is the normal round. So it's not a down-round technically; it’s just a normal round.