UV Quarterly Update: Q1 2024
UV LPs,
Welcome to our first LP update of 2024. As a reminder, at Unpopular Ventures we 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.
Our annual LP updates are longer and more detailed, and we try to keep these quarterly updates shorter. If you’d like to read more, you can find our last annual update from August here.
Below you will find an update on our portfolio, and a few miscellaneous thoughts on the market and our mindset.
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 many more companies than you see in the syndicate. Rolling Fund LPs also receive preferential access to limited-allocation deals.
PORTFOLIO
SUMMARY: $67M of capital invested to date has grown into $179M of portfolio value. This compares to $65M of invested capital at this time last quarter, and $174M of aggregate portfolio value — reflecting $3M of appreciation. As usual, these high level numbers contain a lot of movement under the surface; some positions increased in value, while some moved down. But on net, we are grateful to have had another up quarter despite the challenging VC market.
There are two big things worth mentioning. First, the new unicorn we mentioned last quarter still has its round underway — and now appears to be happening at an even higher price. Because the round hasn’t closed yet, we are still not able to share the name publicly. Those who are invested in the company know which it is.
Second, a company that Thibault invested us in from our fund in both Q4’22 and Q4’23, called Farcana, is a really interesting game that involves crypto rewards. They recently listed their crypto token publicly, and the fully diluted market cap briefly exceeded $1B before settling at ~$500M. Our investments are already marked up ~33x and ~25x (originally $50k each). The position is not liquid yet; it will be released in tranches after a 6 month lockup period. Knowing how volatile the crypto markets can be — we are viewing this cautiously, and there is a chance the price will decline from here. Having said that, the market is giving us a price — so we have marked the investment up to the current market price — which is why our Q4’22 fund is already marked over 2x net, and Q4’23 is already 1.62x net.
STATISTICS
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:
We rolled over $233k of uninvested capital from the Q4 rolling fund, and raised another $1.4M of fund capital in Q1 2024.
As always, if you would like to review the de-identified portfolio data behind these numbers, you can find it here.
For LPs who have invested >$250k with us and are willing to sign an NDA, we can share the complete portfolio data with you. Please submit a request via this form: link
MISCELLANEOUS THOUGHTS
(written by Peter, hence the switch to first person)
Unpopular Ventures Is 5 Years Old
We started Unpopular Ventures in 2019, which means we are now 5 years old! Thank you to everyone who has been a part of our journey. We’ve come a long way, but you might be surprised to know: the beginning was actually pretty rocky.
I initially started UV on my own, as just a syndicate on AngelList (there was no fund yet). The first deal I tried to syndicate, I successfully raised $250k, and then the founder changed his mind and canceled our allocation. The second investment I syndicated, I successfully closed the deal — but the company shut down less than 12 months later. Ouch. It took time to figure it out, but over time we hit our stride — in no small part thanks to my Partner, Thibault Reichelt — who joined me later that first year when he sent me a really compelling company and offered to partner on it. We did it, and remarkably — that investment is now the most valuable investment we did in 2019, currently worth ~2x all the money we invested in that first year (and still growing like crazy).
Thanks to all of you who have joined us over the last 5 years and stuck with us through the ups and downs. Startup investing is far from easy! No matter how much experience we gain, it never stops being messy. We’ve received plenty more black eyes since those first two. But we’ve been fortunate that every now and then, we get it very right.
Our Name
A fun topic for me for a long time has been our name. As you might expect, it was quite polarizing when I first chose it — and it still is. I originally chose it because it was a reflection of my prior angel investing experience, where I found that my best investments were the ones I couldn’t get anyone else to do. I also liked that there was an element of the idea that successful startup founders tend to have been the misfits in school — the “unpopular” kids — who were more interested in building things than in fitting in and trying to be cool. And I liked that the name was memorable — people notice it — which helped us to stand out amidst a sea of thousands VCs.
When I was first starting out, I got lots of negative feedback about the name. Some told me that no founder would take money from a firm with such a name. Others were worried that it would be a negative signal, a black mark — i.e. having “Unpopular” on a company’s cap table could scare VCs away from investing after us. Knowing the herd mentality of VC, where most VCs are more focused on chasing the hot deals, than thinking for themselves — that was a legitimate concern. Fortunately, it hasn’t happened that way in practice, and on net the name has been great.
The most interesting thing I’ve noticed in the years after choosing the name, is that the name functions as a surprisingly effective “dog whistle.” It has meaning that only some can hear.
As some worried at the beginning: it *does* lead some founders to not approach us. But it’s the ones we wouldn’t want to invest in: the status seekers, the ones who are more concerned about fitting in and being popular. In contrast, the founders who are serious about building a compelling, differentiated product and business — they love our name. The truly great founders know they are trying to do something unique, perhaps even unpopular — and they know that success lies in pursuing opportunities where others are not.
As Naval famously said: “seek wealth, not status.” Similarly, we want to invest in founders who are in it for the wealth, not the status. But it’s difficult to figure out a founder’s motivation just from talking to them a couple times. Having gotten to know many of our portfolio founders over a longer period of time since investing, I have observed that we do seem to be invested in very few status seekers relative to what I see more broadly in the startup ecosystem.
And in case you’re skeptical, yes: surprisingly many people become founders for the status. Sure, they would like to make money too, but for many their primary motivation is to impress other people — and with that they care more about looking good than being good (in the words of Elon Musk, albeit different context). I feel like I can personally speak to this because *I* was once that type of founder a long time ago. I foolishly cared more about how I appeared, and whether people around me approved of what I was doing — than I did about making the right decisions to build the best possible business. As you can probably predict, that mindset was disastrous for my startup, and the company failed. Navalism #2: “if you want to make the wrong decision, ask everyone.” Boy, that was me.
I’ve since learned that to build a wildly successful business, you not only have to venture off the beaten path, but you also have to be comfortable being unpopular. Making decisions that you know are correct, even when they look wrong to others around you. The founders who understand that, are drawn to our name. Often, founders don’t figure that out until their second or third startup — which I think is why we end up seeing (and investing in) a lot of repeat founders. It takes some experience to figure out that being unpopular is a good thing.
So far I’ve only talked about the name’s effect on founder filtering. But another interesting element here is that I think there’s a similar effect on the LP side too. A lot of novice investors really care that others approve of their investment decisions. Before making an investment they consult their spouse, their friends, their colleagues at work, etc. This is why so many people hire a financial advisor and pay them 1% per year; they want someone to tell them they are doing the right thing.
It’s only after they have some experience, or they become a real student of the investing game — that they realize that’s a terrible approach. As Howard Marks famously identified: the only way to make big money in investing is to be “non-consensus and right.” To make money, you literally have to make investments that most people think are terrible in the beginning.
Those beginner investors who are always seeking approval, looking for someone to hold their hand and reassure them that they are doing the right thing — are a pain in the neck to work with. Interestingly, we don’t seem to have many of those among our 4600+ LPs in Unpopular Ventures — and I wonder if again, our name turns away those types of investors. Most of our LPs are really quite sophisticated. So it seems that our name is serving as an effective filter on the LP side too. It turns away the amateurs, while attracting the smart, serious pros — the authentic students of startup investing.
So we’ll be sticking with this name. We are very satisfied with the people it has attracted to us — both founders and LPs — and the people it has kept away. We are proud to be Unpopular.
Market Observations
I’ll share a few things I’m observing in the overall startup market. This is the first bear market we’ve had in VC in 15 years, and it’s the first one I’ve experienced as a startup investor — so I’m finding it interesting to observe how things are different right now.
The first thing I think is interesting is that the effects of a bull market vs. bear market seem to impact different portions of our portfolio. I previously assumed the prices of everything would move up and down together, similar to what happens in the public stock markets. I.e. in the bull market most prices go up, and in the bear market most go down. But I’m observing that it’s different for private startups: in the bull market the strong startups go up, and in the bear market the weak startups go down.
To elaborate: during the bull market, our portfolio value was rapidly lifted — primarily by the strongest companies. Those got marked up quickly, whereas the weaker companies mostly stayed alive but the value didn’t change much. So the top portion of the portfolio moved, and the bottom part stayed fixed. So we were (perhaps unfairly) measured by what was happening in the top part of the portfolio, and we weren’t impacted by the bottom.
Now what I’m finding interesting is that in the bear market, the opposite seems to be happening. Most (but not all) of the strongest companies don’t really raise money — because they don’t have to and/or they don’t like the prices being offered by the market. Or if they do raise, it’s generally small amounts from insiders at a similar price as the last round. So the strong part of the portfolio is relatively fixed in price. But the weaker companies are no longer static — they are shutting down or doing heavy down rounds. So it’s the bottom part of our portfolio that is moving now, down — and that’s what moves our overall portfolio value. In contrast to the bull market, when it felt like we were being perhaps unfairly rewarded by the best companies, I now feel the opposite happening — where we are getting minimal measurable credit for the good companies, and we are primarily being pulled down by the weaker companies.
In short: in a bull market the strong companies lift the portfolio up, and in a bear market the weak companies pull the portfolio down. Neither time period provides a truly accurate picture of the portfolio, and I think this is part of why startup investing is perceived as particularly volatile. The bull market emphasizes the good investments, and the bear market emphasizes the bad ones — at least in the way we measure these companies’ value.
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Another thing worth talking about is the return of the J curve. Seasoned VCs have long talked about this idea — that the value of a startup portfolio usually dips for a few years, before it eventually turns up in the later years — forming the shape of a slanted letter J. They also describe this as “your lemons ripen before your oranges” — because the bad investments typically fail quickly, but it takes the good investments longer to grow into their potential.
During the bull market, the J curve disappeared. Each year we built a portfolio of investments, and then somehow the portfolio would quickly become worth 2–3x, 1–2 years later. The good companies would get marked up quickly, and relatively few would shut down. There was never any dip.
Sorry to report: something resembling the J curve has returned. Our best portfolio companies aren’t getting marked up as quickly as they used to, and the weaker ones are failing at a faster rate than they used to.
We are individually fortunate that we haven’t been seeing that much of a dip — our 2021 and 2022 portfolios are actually already in the green — so not really a true J. I think it’s probably because we invest so early and at pretty low valuations. But the takeoff is slower than it used to be. Instead of 2–3x in 1–2 years (which we were lucky to see for 2019 and 2020), both 2021 and 2022 are still under a 2x so far.
I wish our more recent portfolios would appreciate rapidly, like our old ones used to. But the reality is that this is probably more healthy. The appreciation is supposed to take a while. If we regularly get a 2–3x in year 1–2, and a 3–5x final overall outcome is supposed to be good — that doesn’t make sense. I.e. if you hope you’ll get a 5x portfolio return after 8–10 years of holding, and you assume relatively constant year over year growth in value — this is how the numbers should look over time:
What this shows is that if you’re expecting a 5x after 10 years, and you expect the growth rate to be the same every year, you won’t surpass a 2x until year 4 or 5. So a 2–3x in year 1–2 — that’s not rational to expect.
The point is: although I miss the good old days of quick early appreciation in our portfolio, I believe we are still well on track to produce excellent returns over the long period of time we hold our investments for.
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One last thing I’ll share is something I’ve discussed with some of our founders. Remember the hurricane in the movie Forrest Gump. In the movie, Forrest bought a shrimp boat with Bubba, they went out to fish for shrimp, and initially couldn’t catch anything. There was too much competition. Then a hurricane came, and it was terrible, but somehow they survived — while all the competing shrimp boats got wrecked. Then with all the competition gone, Forrest and Bubba hauled in loads of shrimp and they went on to be wildly successful.
It’s the same for startups right now. We are in the hurricane. The hurricane is not the time to try to haul in the shrimp. The hurricane is the time to make sure you survive, and build your position for success later. Most startups right now will be wrecked by the hurricane. But those that survive, will haul in the shrimp and grow like crazy after the storm clears.
That’s what we are seeing in our portfolio. Before the bear market, times were good — and our best companies were hauling in shrimp (i.e. raising tons of money, selling customers, and expanding market share). They got marked up quickly and our portfolio returns looked amazing. Now that the hurricane is here, that’s happening less; because the startups are focused on surviving.
I have confidence that those who approach this period of time intelligently, making sure they survive, are going to reward us with a lot of shrimp in the future. It’s just going to take some time. No hurricane lasts forever, just as you can’t expect it to be sunny all the time either.
