UV Quarterly Update: Q2 2023

UV LPs,

Welcome to our Q2 2023 update. 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. 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.

We recently read this excerpt from Jeff Bezos’ 2015 shareholder letter that resonated with us: “Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

This thinking aligns exactly with our approach here at UV, and with that in mind, you should think of us as a particularly “high beta” fund and syndicate. We are probably going to be wrong more often than other leads you will find on AngelList. But because we are taking such non-consensus swings, we will also hit particularly big home runs. This is already showing up in our returns. Despite being only a little over 4 years old, we already have one investment up over 100x and several more up over 10x (net of dilution). We aim to hold our best investments for 10 years, so we expect these (and other investments) to grow much further too.

In the rest of this update you will find:

1. GENERAL THOUGHTS

• Investing Outlook: big shift from Q4 to Q1. Q4 was a near-record low for us in # of investments, Q1 was a record high. Great startups are finally coming back to market.
• Green Shoots?: The market has been icy for the last year, but maybe starting to look up.
• New Carry Structure for UV Syndicates: 0% carry under a 10x return, 30% after.

2. PORTFOLIO UPDATE

• Statistics
• New AngelList Metrics

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.

1. GENERAL THOUGHTS

(written by Peter — hence the switch to first person)

INVESTING OUTLOOK

In our last update, I wrote about how challenging it was to find promising investments — particularly in Q4 2022. You can see that reflected in our investing activity: we only made 18 new investments in Q4, plus 5 follow ons. The last time we made so few new investments was in Q1 2021 (the first quarter of our rolling fund). In terms of dollars too, we only invested $939k despite having $2.1M of dry powder available. The vast majority of the opportunities we saw were bridge rounds for struggling companies, and we were working harder than ever to find promising new companies on healthy trajectories that we could build conviction in.

All the founders must have received a secret memo to not fundraise in 2022, and wait for 2023 — because in Q1 2023, the opportunities came roaring back. We made a record number of investments in Q1: 47 in total (42 new, 5 follow ons), and deployed nearly all of the dry powder we had saved up — investing more than $2.1M in the quarter. We are investing very actively into Q2 as well, with 14 investments so far.

The environment feels completely different. Whereas late last year it felt easy to invest less, like we weren’t really missing out on anything — now it feels like there is an abundance of exceptional founders building extremely compelling businesses — and I’m feeling quite a bit of FOMO. I am seeing a lot of companies where I feel that if I don’t invest, there’s a legitimate chance I’ll miss the “next Uber.” It has now become harder to pace ourselves, to ensure we deploy our available capital at a responsible rate without running out of money within the quarter.

I feel a great deal of confidence that some of the investments we have made so far in 2023 are going to produce extreme outlier returns.

GREEN SHOOTS?

No one can predict the future — myself included. But we can attempt to see the present clearly, which was the basis of my Is Winter Coming? post in January 2022. At that time we were already witnessing a severe downturn in the “venture-like” public companies, and it was a reasonable guess that this would pass down to the private VC market — given that the VC market tends to lag the public markets by 6–12 months.

I now wonder if we can make a similar observation about the public market today — which again is likely to pass down to the VC market over the subsequent 6–12 months.

Here’s what has happened with the Nasdaq over the last 12 months:

The Nasdaq made its lowest low so far in this cycle 4 months ago. But it has been coming close to that low as far back as 6/16, when it was only 4% higher than it was on 12/28. So the worst of the crash seems to have finished 11 months ago, with the action since then more or less flat, and then turning up over the last 4 months.

Worth noting also, the S&P 500 (less tech-centric, but still relevant) reached its lowest point almost 7 months ago:

Certainly, if the public market turns down and makes fresh lows, I will revise my thinking. But based on what it is actually doing so far: it appears that the market has been having a hard time making much lower lows over the last 11 months, and has been drifting steadily upward for the last 4–7. Both the Nasdaq and S&P 500 are (surprisingly) almost flat vs. 12 months ago.

Looking at this from another angle, there’s the famous saying: “buy when there is blood in the streets.” In my humble opinion, the streets have been pretty darn bloody, with:

• The second and third largest bank failures in US history (SVB and First Republic)
• One of the biggest corporate frauds in history (FTX)
• Plenty more wreckage, including other banks (Credit Suisse, Signature, Silvergate).
• High profile startups going to zero or having significant downrounds (Stripe, etc.).

Truly disastrous events have happened, which I can imagine looking back on similarly to how we look back on what happened in 2008 or 2001. Of course, it can always get worse, but it has already been pretty bad. Maybe bad enough to mark a bottom.

Most noteworthy of all: the market has been drifting higher *while* the worst news has been happening. SVB and FRC collapsing should be cataclysmic disasters for the tech industry — but they didn’t take the Nasdaq to new lows. The market always looks ahead. And so far in 2023, it seems to be marching to the beat of a different drummer, shrugging off disasters, looking ahead to something that it views as positive in the future.

As a wise mentor used to tell me: “don’t read the news; read the market’s reaction to the news.” The public market’s behavior lately has been remarkably positive, especially compared to the black bearish news that has been taking place. I am inclined to believe the market has already discounted the worst that is going to happen.

The last angle I’ll share is what we are seeing in our little corner of the world. The institutional VC market remains ice cold, with the slowest rate of Series A/B/C rounds I’ve ever seen across our portfolio. But what has been interesting is that we have actually been starting to receive secondary buyout offers for some of our stronger companies at quite attractive prices — at either par to the last priced round, or at higher prices. We haven’t seriously considered the offers, given that we believe our best companies have a lot further to run. But it’s been gratifying to see that others see value in our portfolio and we could sell parts of it at decent prices if we wanted to. Some market players are starting to nibble.

I believe these signals reflect the underlying reality. Although there has been a dearth of upward re-pricing lately, many of our strongest companies are doing great, growing steadily, and increasing in underlying value — even if the market hasn’t properly priced that value in yet.

So again: no one can predict the future. But looking at the broader market’s behavior over the last several months, I’m cautiously optimistic that we may start to see green shoots in the VC market over the coming 6 months. We have lots of excellent companies in our portfolio, and I am confident that once the market thaws — maybe soon, judging by the public market action — we’ll see our portfolio value begin rising again with it.

NEW CARRY STRUCTURE FOR UV SYNDICATES

One last thing I wanted to include in this update, before we get into the portfolio: this quarter we released a new carry structure for UV syndicates. In UV syndicates, we now charge zero carry on returns under 10x, and 30% after. For clarity, it’s only 30% carry on the returns after 10x — i.e. in an 11x outcome, we would only earn 30% on the excess 1x.

The intent behind this is to better align incentives, and emphasize our investing philosophy. Our approach to venture investing is to swing for the fences, aiming for a 100x+ outcome on every investment, and being comfortable with the idea that 90% of our investment returns will be financially inconsequential. We are not here to make $100k here and there. A 5x outcome is not a lot more exciting to us than a zero. We are here, working hard, with the intent to make $10M+ from single investments. Those are the outcomes that make our efforts here worthwhile.

So with this in mind, we only want to make money on our home runs — when we make a lot of money for you. The home runs are what we are here for.

2. PORTFOLIO UPDATE

SUMMARY

Sorry to report: we took more mark downs this quarter, once again more than mark ups.

We now value our aggregate UV portfolio at $152.4M, against $58.1M of principal invested to date. This compares to a portfolio value of $153.8M one quarter ago and $54.5M of principal invested at that time. This indicates that we lost $5M of appreciated portfolio value.

As we discussed further above, we are cautiously optimistic that we are now in or near the worst of the storm for the VC market — given that the VC market lags the public markets by 6–12 months, and the public market saw its worst lows (so far) 4–11 months ago. One year ago when the public markets were plummeting, our portfolio value was still going up. Now we are finally feeling those effects.

Having said that, zooming out, I really can’t complain that much. AngelList now reports our aggregate IRR across all UV investments (syndicate and fund) since inception at 56.4%. I remember reading something like “the time to measure your net worth is not at the bull market peaks, but at the bear market bottoms.” I think it’s the same for your IRR. I’m not certain that we‘ve seen the bottom yet, but we are definitely in the dumps compared to 2021. I recall lots of VCs touting incredible IRR numbers in late 2021/early 2022 — often well above 100%. Ours at one point was well above 100% too. I don’t think I’ve seen a single other VC mention their IRR for at least a year now.

And being realistic: a 56.4% IRR is still unrealistically high over the long term. A 56.4% IRR for 10 years is 87x. I have zero expectation that we are going to consistently 87x our portfolio over every 10 year period. Might happen once, if we are extremely lucky. I will be *ecstatic* if we can simply sustain a 30% IRR — which is still almost unrealistically high, but a good target to aim for. 30% over 10 years is 14x. That would be pretty darn amazing.

One last interesting development is that AngelList recently released a new performance dashboard for leads, which finally gives us more detailed metrics about our fund, and enables us to break down our syndicate by vintage. Before, they only gave us one IRR number, and it was on the syndicate only, over the entire life of UV.

So we will first report the metrics that we track internally, and then will share snapshots of the metrics that AngelList has given us.

OUR STATISTICS

These are the metrics that we track ourselves. First: please read the disclaimers and our valuation methodology in the last Annual Report. The same applies here. Second: in the Q4’22 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:

We have raised another $1.4M of Rolling Fund capital in Q2, and are investing that now.

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 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

ANGELLIST PERFORMANCE DASHBOARDS

Here are some snapshots of the new dashboards that AngelList has given us.

Important to note: these numbers differ slightly from our own numbers above, for the following reasons:

• They don’t include syndicates we co-led, but were hosted in other syndicates.
• We mark to SAFE caps — both up and down. AngelList only marks to priced rounds.
• AngelList lags us by a month or two — it takes them time to process mark updates.
• They use a different dating system for the syndicate. We count a syndicate within a calendar year based on when we closed it to investors, but they appear to count from when they finished their back end paperwork (often several months after an investment closed). This is why, for example, they say we invested $4.18M in 2019, whereas we say we invested $4.9M.

Everything, including syndicates and rolling fund, over the life of UV since inception:

2019 and 2020 (syndicates only — because we had no fund then):

Clearly, 2020 was an exceptional year for us, driven significantly by Jeeves. But there were lots of other good investments in there too — like 99Minutos, CopyAI, Yassir/Kyte/Blissway follow-ons (some of our 2019 stars), and many others.

2021 syndicate:

2021 fund:

Couple thoughts here:

1. It’s interesting that the fund and syndicate performance are so similar, given that we invested in 75% more companies from the fund than we did from the syndicate in 2021.

• But important to note: the syndicate numbers include follow-on investments that were only offered to fund LPs, like the Jeeves and 99Minutos follow-ons. If you take those out, the fund outperformed the syndicate.
• Furthermore, over a longer timeline, we expect the increased diversification of the fund to produce superior (and smoother) returns vs. the syndicate. Particularly now, where we are currently investing in ~4x as many companies from the fund as we are from the syndicate.

2. We are a bit bummed that our 2021 IRR is tracking at “only” 21–22%, well under our average, but:

• Not enough time has passed for this to be meaningful. We are still less than 18 months since 2021 ended — and many companies take at least a couple years to get their first big markup.
• As time goes on, we expect the IRR here to rise closer to our long term average. We swung from extremely high market valuations in 2021, to extremely low market valuations today. That makes a big difference over that short period of time. But over the 10 years we expect to hold these investments, market swings like that will matter much less.
• And really: what else did you invest in in 2021 that has grown at a >20% IRR? We can’t be *that* disappointed here.

Thank you for reading. And thank you for your continued support of Unpopular Ventures!