UV Quarterly Update: Q1 2023

UV LPs,

Welcome to our first quarterly update of 2023. As a reminder, we at Unpopular Ventures focus on “the best companies, off the beaten path.” We invest in exceptional founders who are building high potential businesses, that are non-consensus in some way.

To help us find great opportunities around the world, we leverage a “Scout Program,” through which we share significant portions of our carried interest with anyone who helps us to identify, evaluate, and diligence companies that we invest in. If you would like to refer an opportunity, please check out our Scout Program Guidelines.

We were the first to do this publicly and systematically on AngelList, starting in 2019, and it has contributed significantly to our success. Thank you to everyone in our community who has helped us build UV into what it is today.

In the rest of this update you will find:

1. PORTFOLIO UPDATE

• News and Highlights
• Statistics

2. GENERAL THOUGHTS

• Portfolio Analysis: 2019 Vintage
• Will 2022 and 2023 Be Good Vintages?

Thank you all for your continued partnership!

Sincerely,

The Unpopular Ventures Team

Reminder: you can invest in our Rolling Fund for broad access to our portfolio, which co-invests in every new company we invest in, and invests in more companies than you see in the syndicate. Rolling Fund LPs also receive preferential access to limited-allocation deals.

1. PORTFOLIO UPDATE

SUMMARY

As we’ve shared in a couple of our updates over the last year, we think our portfolio value will likely follow one of two paths over the course of the bear market:

If we are fortunate, we’ll get the blue line — where the value flattens out for a while, with some investments getting marked up while others get marked down or written off — more or less balancing each other out until the uptrend resumes. If we are less fortunate, there’s a chance we will see more significant markdowns for a period before the uptrend in portfolio values eventually resumes — in which case we would get the red line.

This has been the first quarter in UV’s history in which we’ve seen our portfolio value decline, with more mark downs than mark ups. It was not a significant dip — less than 1% — and we are still up vs. 6 months ago (and significantly up vs. a year ago) — so we are still on the blue line. But it has certainly been a challenging time in the market. It has been hard to see some of our companies struggle or shut down. We feel terrible for the founders and teams who devoted years of their lives to their ventures, and will now have to move on to something new.

Our aggregate portfolio value across all UV investments is now $153.8M, from $54.5M of principal invested. This compares against $153.6M last quarter, and $53.3M of principal at that time. So although the top line stayed ~flat, we also added $1.2M of principal — and effectively lost $1M of appreciated portfolio value. You can see the numbers in more detail further below.

PORTFOLIO HIGHLIGHTS

It’s been a slow news period for us compared to some of our past quarters. But here’s some public news about a few of our portfolio companies from the last 90 days:

Jeeves: released a great 10 minute documentary about their journey.

Foundation Devices: raised a $7M seed round led by Polychain. We invested in their pre-seed in 2021, and followed on in this round. Thanks to Ryan Li for the original introduction and for co-leading our syndicates.

Supercede: recently announced that $24B of insurance premiums were registered on their platform.

AltScore: announced their $3.5M seed round that we participated in. Thanks to Ivan Montoya for the introduction.

Flagship: announced their pre-seed round that we participated in. Thanks to Nikolaus Volk for the introduction.

And here are some more portfolio companies of ours that have had something exceptional happen in the last 90 days — in most cases either an investment value markup, or an exciting development in their traction. In all of these cases, the news is not public, so we are treading cautiously to ensure we don’t share information before the companies are ready for us to: Startchy, Vaultree, Fitnescity, Stepful, Kiwibot, Community Phone, Swan Bitcoin, Exosonic, Remedial Health, DRUO, Zoko, Moni, Propertymate, TLPRT, and Homli.

STATISTICS

First: please read the disclaimers and our valuation methodology in the last Annual Report. The same applies here. Second: in last quarter’s update we updated how we report our numbers. In case you missed it and the explanation, you can find it there.

Here are the numbers for the UV Syndicate:

Here are the annualized numbers for the UV Rolling Fund:

And here are the numbers combined:

Here are statistics about our investing activity:

And here’s the Quarterly Breakdown for the Rolling Fund:

Note that although we had $2.1M of capital available to invest in our Q4 fund, we saw fewer opportunities in the quarter that we felt strong conviction in. So we only invested $939k in the quarter, and rolled over $1.1M of capital into Q1. Combined with $1.5M of fresh capital raised in Q1, we currently have well over $2M of dry powder available to invest. As we discuss further down, we may continue to roll significant portions of our fund over until we feel higher confidence in the quality and quantity of investment opportunities we see.

As always, if you are a major LP of Unpopular Ventures (invested >$250k to date), and are willing to sign an NDA, we will share with you the complete portfolio data that is behind these numbers. Please submit a request via this form: link

For everyone else, you can access the de-identified data here: link

2. GENERAL THOUGHTS (from Peter)

PORTFOLIO ANALYSIS: 2019 VINTAGE

One thing that’s a bit tricky about angel/VC investing is that it takes a long time to know the results of our investment decisions. We make all these bets, and even 2–3 years later, it’s still not 100% clear which ones are going to be great outcomes, or not.

But we are now 3 years past our first vintage, 2019, which feels like it’s starting to come into focus. Given that it’s our most mature cohort, and there is some clear divergence in the investment outcomes — I thought it might be interesting to write about it, and share what we can learn from it.

In 2019 we made 24 investments in 22 companies. To help you visualize, here are the marks we currently have for the set of 24 investments:

What you see here is 4 shutdowns (red), 4 down rounds/recaps (yellow), 1 flat (grey), 9 small markups (dark green), 3 moderate markups (light green), and 3 big markups (blue). Note that these multiples all include dilution; the valuation deltas for the 3 biggest multiples here are 36x, 31x, and 24x.

Without going into detail (which could be damaging to the companies), I’ll share that in my humble opinion: most of the returns from that year are going to be driven by 3 investments — which happen to be the 3 blue ones (although they wouldn’t necessarily be, it just happens to be so in this case). I won’t name them publicly here, out of respect for the other companies, but those of you who invested actively with us in 2019 likely know which they are.

The 3 blue investments have each increased in value by more than 10x. Which is great, but what is additionally promising about them is:

1. Their traction is commensurate with their valuations (if anything, the valuations feel too low).
2. They have all raised recent rounds during the bear market, re-affirming that their valuations feel “real.”
3. They remain on fast growth trajectories.

Because of the current state of these 3 companies, I believe that all 3 could easily go another 10x+ from here. One of these was a bigger investment for us, and as a result is now worth 1x the “vintage” (all the money we invested in 2019). The other two were smaller initial checks, so are now each worth 30–35% the vintage. So if any one of these 3 increases in value by another 10x, each alone will return that vintage 3–10x.

We have lots of other investments that have been marked up, but with most of them there is one of two things going on:

• The traction is comparatively low or not growing quickly — which makes me question if the valuation is “real,” and/or likely to keep increasing.
• The business is healthy and doing fine, but has not yet grown in value dramatically. Many of these are solid businesses with revenue, and will likely end up making their founders personally wealthy. But they have a long way to go to catch up with our top 3, and/or don’t seem to have the same forward potential at this time.

I think we’ll have some decent exits from the rest of the portfolio, but I’d estimate that all together, the rest of the investments from that year will end up returning a total of ~1–2x the vintage. Of course, I’d love to be proven wrong.

It’s a good reminder of the power law in startup investing outcomes. The founders we invest in can build solid businesses and make many millions of dollars personally, yet not make a dent in our overall returns. Because the outliers are so extreme, the merely good outcomes don’t make a difference for us. All that matters (financially) is the top 1–3 investments we make. As I shared in our last LP office hours, it’s not that 90% of startups fail (in our experience, the actual failure rate is closer to 30–40%); it’s that only about 10% of venture investments end up mattering financially for us investors.

Worth noting also: the power law phenomenon is a fractal. If you zoom in or out, you still end up with a small number of investments that drive most of the returns. If you zoom out to include 2019 and 2020 for us, the 2019 portion is relatively insignificant, because 2020 had Jeeves. Our 3 top positions from 2019 are currently valued at $8.3M combined, whereas our pair of 2020 Jeeves investments are currently valued at $49M.

So what can we learn? Here are a few attributes that these top 3 investments have in common:

1. In all 3, we were either the first outside investor in the company, or part of the company’s first round of financing.
2. There were no brand name VCs when we first invested in any of them.
3. The founders in all 3 looked very good “on paper.” They either had impressive backgrounds, and/or extremely relevant experience to the businesses they were starting.
4. 2 of them had compelling traction when we invested, relative to their valuations. The third had an attractive valuation for the absence of traction they had at the time.

Worth noting: all 4 of these points apply to our best investment of 2020 too (Jeeves).

Based on these observations, going forward we will be aiming to make more investments that match these attributes. It’s a small data set — so we won’t be taking these as absolutes — but we have been gravitating in these directions.

In the case of #1, we are increasingly trying to invest as early as possible. Not always, but more than we did before.

#2 is something we spend a lot of time thinking about. Because as an AngelList syndicate, it is very hard to turn down deals that have brand name VCs. Whenever we syndicate a deal with a brand name VC, regardless of the underlying attributes of the opportunity — we raise a lot of money. Many of the AngelList LPs, including the AngelList Access Fund, select deals almost purely based on the co-investors. The Access Fund only invested in one of our top 3 2019 investments (and passed on Jeeves too), and 2 of the 2019 investments raised a below-average amount of money for us (both $150k or less). So the choice of ignoring VCs equates to usually raising less money — and not having the participation of the AL Access Fund.

#3 and #4 indicate that our best outcomes tend to happen when we bet on great founders, and/or compelling traction — “on paper.”

So putting this all together — you have likely noticed that recently, fewer of our syndicated investments have had noteworthy VCs in them. The reason for this is that we are trusting our data, which is telling us to trust our judgment — not the judgment of other VCs — and focus on the founders and/or the traction. Because our focus is on returns, not capital raised, and the data supports this in our case — we will not be focusing much on co-investors (although we won’t necessarily dismiss great investments that happen to have them). We accept that this usually means raising less money via AngelList syndicates.

As I told Meb Faber: my best investments were the ones I had a hard time convincing others to do — and that’s okay with us. We are “Unpopular Ventures” after all. We will continue to move less money than some of the other AngelList syndicates, but I’m optimistic that we will continue to beat their returns : )

WILL 2022 and 2023 BE GOOD VINTAGES?

I think of myself as a “student of the game” in venture investing. Beyond doing it as a job, I also just find it fascinating — I love to study the ins and outs of this industry. One thing I’ve been giving a lot of thought to recently is whether or not 2022 and 2023 will be great vintages, and I thought you all might be interested in my thinking around this.

VC is an extremely cyclical industry. Some time periods produce incredible returns across the entire industry, while the returns of other periods are lackluster. In fact, the #1 thing that most of the best performing venture funds (individual funds, not firms) have in common is their vintages. The correlation in performance between fund vintages is stronger than the correlation between funds of a specific firm. One illustrative example here is Benchmark fund 1 vs fund 2: fund 1 (mid ’90s) returned ~100x, but fund 2 (1999) returned ~1.5x — which was still considered top quartile for that later vintage (please note that I heard these numbers by word of mouth — so they may be slightly off, but are directionally correct).

The reason I’ve been thinking about this is that the current narrative is: “we are in a bear market, which is the best time to invest.” That originally sounded right to me, and I’ve probably even said it myself in some of my past writing. So I was expecting that investing right now would feel easy: lots of great opportunities at low valuations, just sitting around for us to sweep them up.

But what has been weird is that the game I’m seeing on the ground right now is actually the hardest it’s ever been for me. I’ve been working harder than at any point in the past 4 years, and meeting with more startups than ever before. Valuations haven’t come down that much, there are not tons and tons of companies that I’m super excited about, and the very best companies seem to be more competitive than I’ve ever seen them. There is indeed a record amount of VC dry powder out there, and although 90% of companies are having a hard time raising, VCs are competing aggressively for the top 10%.

To be clear: we have been able to find companies that we are excited about, and we believe we are making excellent investments that will produce outstanding returns. But it has been far from easy. I thought it would be easy, but it hasn’t been.

So I was curious to look back at the historical returns of the VC industry. Here’s a page I have from a slightly old Cambridge Analytics report, showing TVPI by vintage for the VC industry:

What I was intrigued to find is that the industry-wide VC returns from the depths of the last two bear markets were quite weak. I would have expected the 2001 and 2002 vintages to be good, but they were terrible (1.21x and 0.96x pooled return). 2002 in particular was just as bad as 1999. Vintages for 2003 onward were better. Similarly, 2008/2009 were weaker vintages (1.77x and 2.1x pooled return) despite being the heart of that bear market; 2010 onward were stronger.

So history seems to confirm what I’m seeing on the ground. What I think is happening is:

1. Most of the great founders/opportunities already raised plenty of money in 2021, and have simply chosen to stay out of the market right now.
2. The few very top founders/companies that are trying to raise, are inundated with competing VC interest.

This will take some time to reset: more founders and fresh companies to emerge, and the VC dry powder to clear out. So with that in mind, 2022 and 2023 may be weak vintages for the overall industry, with 2024 or 2025 onwards much better.

You have likely noticed that our investing pace has slowed down recently. We have been leading fewer syndicates, and we have been rolling significant portions of our fund over to subsequent quarters. Despite having $2.1M of dry powder in our Q4 fund, we opted to only invest $939k, rolling over the rest.

It wasn’t intentional; we didn’t know at the beginning that we were going to invest less. It has just been harder to find investments in which we have strong conviction. We take our responsibility as stewards of LP capital extremely seriously, and the last thing we want to do is deploy that money into sub par investments that we don’t believe in.

So we are working hard, being patient, and investing slowly, to make sure we produce returns that defy the industry averages. I do now think the overall industry returns right now are going to be weak. But please remember: we are not the industry. The investments we have made, and are continuing to make, we believe are going to produce exceptional returns. Our past investing performance has been within the top decile of the industry, and we have every intention of maintaining that above-market performance now.

But during this period of time where our job feels harder, we have been exercising extra caution. These dynamics highlight one of the challenges with a rolling fund — where we call capital every quarter, and are generally expected to deploy that capital within the quarter. If we had a normal venture fund, we would deploy the raised capital over a longer time period of 3–4 years, and it would be no big deal if we deployed less of it over a 1–2 year period.

Which is how we are behaving: investing less during a period of time in which we see fewer good investments, preserving the capital for when we expect there to be more/better ones. Our intent is to be the best possible stewards of our LPs’ capital.

The last thing I’ll say is that it’s extremely hard to know when the market will improve. History seems to suggest it takes about 2 years post peak. But of course, our returns will be driven by a very small number of the investments we make. If we happen to land a “Jeeves” this year — our returns will defy the industry averages by a wide margin. It was the same for investors in Uber and Airbnb in 2009 — which were evidently anomalies for that vintage too.