UV Quarterly Update: Q2 2024
UV LPs,
Welcome to our Q2 2024 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.
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 that are top of mind.
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: $69M of capital invested to date has grown into $184M of portfolio value. This compares to $67M of invested capital at this time last quarter, and $179M of aggregate portfolio value — reflecting ~$3M of appreciation. As usual, these high level numbers contain a lot of movement under the surface; we had our fair share of mark downs this last quarter, but we’ve also been fortunate to receive big mark ups in some of our stronger companies too — and on net, our portfolio value increased again.
CONFIDENTIALITY
One thing that’s been challenging for us is that our strongest companies — the ones that are really driving our returns and are most interesting to talk about — have also become the most secretive. The founders of most of our best companies have barred us from sharing anything with the syndicate. Some have gone so far as to ask that we not even name them as “a company that is doing well.”
It makes sense. “Loose lips sink ships,” as the saying goes. We have literally heard from some portfolio founders that people send them the decks of their competitors, pulled straight from other AngelList syndicates. We never do that ourselves; and we think it’s terrible that anyone does it. But it has made us well aware that there are spies all over AngelList — and we need to be exceedingly cautious about what we share here.
We know this can be frustrating, especially for LPs in many of our syndicate investments. For those of you who want to keep up with the companies and what they are doing, we’d recommend following the founders on Linkedin and Twitter. Many of them are quite vocal there — and those are mediums where they can share exactly what they feel comfortable posting publicly.
If we want to be able to keep bringing great investment opportunities to all of you, it’s important that we build a reputation that founders can trust. If founders think we are going to blab about them to hundreds/thousands of LPs that they don’t know, and don’t know anything about — we aren’t going to see the best companies. We prefer to make our LPs happy with great *returns,* rather than make them happy with information.
So we are sorry that we can’t share specifics about a lot of our portfolio companies at the moment — especially the most interesting ones — in these widely-distributed updates. But we will say that we are grateful to have *a lot* of companies that are doing very well.
Of course — investors in our fund can see the companies we have invested in through the private AngelList portal. And as always, large LPs (>$250k) are welcome to review the detailed portfolio data (with names and marks) if they sign an NDA. Just let us know here.
PORTFOLIO STATISTICS
Here are our aggregate numbers, across every investment in UV’s life:
Here are the numbers for only the UV Syndicate:
Here are the annualized numbers for only the UV Rolling Fund:
Here are statistics about our investing activity:
And here’s the Quarterly Breakdown for the Rolling Fund:
We rolled over $423k of uninvested capital from Q1, and raised another $1.4M in Q2.
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)
INVESTING OUT OF BOUNDS
I saw this tweet recently:
It’s such an interesting topic. You heard me touch on this two updates ago in the section “Buckets Theory of VC Investing.” Rod is exactly right: most of the outliers in VC portfolios are outside their theses. But I’d take it a step further: the biggest outliers are outside *everybody’s* theses.
It’s a funny phenomenon. For whatever reason, everyone in the VC market feels the need to come up with very specific theses, and the LPs in turn want to hear clear theses from the GPs that they consider investing in. But these theses are so often junk, or late, or the same as everybody else’s. They are tuned to sound good, over being good. So we get these hype cycles in VC — where all the money gets thrown at a finite number of themes, be it AI, or crypto, or US-based enterprise software — to name a few. Those themes that are in vogue get over-funded, the valuations go crazy, and we get a dozen well-funded competitors for each idea.
It’s far better, in our opinion, to toss those theses out the window and instead invest in the very best companies outside of them. Beyond the boundaries of where everyone else is investing. When you do that, you can usually invest at great prices, and when those companies succeed, they end up being the only ones and they win big.
One thing that’s been interesting to learn about in the last quarter is that in many cases, it’s not really up to the VCs where and how they invest. The boundaries of VC — at least for those of any meaningful size — are heavily dictated by the LPs.
We learned about this because we had the opportunity to talk to some institutional LPs over the last few months — just to see if there might be interest in joining us — and boy, are we unpopular. Here is some of what we heard from big institutional LPs:
- One of the biggest university endowments, famous for being an LP in many of the biggest VCs, flat out said they would never invest in us because they believe that VC is a highly personal business; the VCs must be based in a tech hub like SF or NYC, and primarily invest in companies in that location.
- The firm that invests in VCs on behalf of one of California’s biggest pension funds, said they are barred by this pension fund from investing in VCs who invest meaningfully in companies outside the US.
- Several funds of funds said they would not invest in us because we either don’t focus enough on % ownership in the companies, and/or because we invest in too many companies. This isn’t new — we’ve heard it before. The business model of funds of funds is to invest a little bit of their fund into the VCs, and then when the VCs run out of money, the FoF takes over the pro rata in their best investments — investing much more money in those companies, directly, without fees. This only works if the % ownership in the companies is high, to give them a meaty pro rata, and when there aren’t too many for them to keep track of. They care more about implementing this strategy, than they do about the returns of the VCs they invest in.
- Others prefer to invest in “specialists” — GPs who have special expertise in a focused area, and primarily invest there. This is similar to what I shared above, where LPs often want to hear a clear and focused thesis. They want to put you inside a box.
We heard several more, but you get the idea. There were literally zero questions about our performance; they all acknowledged that our performance is excellent — well within the top decile for the years that we have existed. But nearly every big pool of capital said they can’t invest in us for one idiosyncratic reason or another.
It really surprised me. I would have thought that with all the capital out there, wouldn’t a lot of it simply want to invest in the managers that produce the best returns? That’s how I would invest if I were a big LP. Surprisingly, most of the large pools of money only care that the managers produce “good enough” returns, and they care far more that the managers practice Venture Capital within a framework that they have decided is “the right way to do VC.”
Our biggest insight from all of this, is the realization that this is our moat. We are consistently producing exceptional returns by being open minded, venturing off the beaten path, and taking higher risk that is counterbalanced by an unusually diversified portfolio. Normally, when you consistently produce above average returns, the market will copy your strategy and the returns get competed away. But that’s not happening here, and here’s why: it’s not that the other VCs don’t want to pursue a similar strategy, it’s that the big LPs won’t let them. Our competitors are literally not allowed to invest in this way that we believe produces the best returns.
I don’t know how long this will last. With the returns of the overall VC market being as atrocious as they are, I’d have thought that the biggest LPs would have already considered that their allocation strategies might not be working very well for them:
But for now at least, we have a strategy that no other VC of meaningful size can replicate, simply because the big LPs won’t invest in it.
It presents an interesting choice for emerging managers like us. We can choose to either adapt our strategy to please the big LPs, fit in their box, raise more money, but end up with returns like the above — where a 3x fund is considered rare. Or we can stick with what we’ve been doing, stay “out of bounds,” be content with the smaller amount of money we are able to raise and invest — and produce exceptional returns.
We think it’s a lot more fun to do the latter.
EXIT STRATEGY
One other topic that is top of mind for many LPs these days, is exits. The time to liquidity for venture-backed startups is getting longer and longer, and many LPs have seen quite a bit of carnage in their venture portfolios in recent years — so it makes sense that some are pushing their managers for exits. After a lot of pain and patience, many just want their money back.
UV is too early in its life to be expected to have meaningful exits. We are barely over 5 years old, and the majority of our investments are less than 3 years old. Most venture funds begin to have real DPI (distributions to paid in capital) around years 7–8, and then the really big returns usually happen around years 9–12.
Even so, some voices in the market have pretty extreme opinions about this. We’ve even heard one person go so far as to say “if you don’t have DPI, you shouldn’t even be talking to LPs.” We disagree, but they are entitled to their opinion.
I think the fundamental question behind this whole topic is: why do you invest in Venture Capital? I think for some, they simply see it as one component of a diversified portfolio. Just another thing they allocate to, a box to check, and they want their managers to produce predictable returns that are marginally better than their other asset classes. That’s one approach, while others invest in VC to earn extraordinary returns. We think of ourselves in that latter category: we invest in VC, with our own money and time, to make life changing money for ourselves and our investors.
In fact, we were recently confronted with a big decision on this point. We received buyout offers for our shares in one of our 2019 portfolio companies, where if we were to sell — we would return ~1.5x all the money we raised in 2019. That would be legendary DPI for such a young vintage. Compared to that chart above, where you see that 70–80% of VC funds produce less than 2x DPI after 10 years — producing 1.5x in 5 years is unusually good.
We thought really hard about accepting one of the offers. Perhaps if we sold, it would please our LPs, and also help attract new ones — especially those that are clamoring for exits right now. We shared with our LPs that we were considering selling, and remarkably — the majority who chimed in told us they *did not* want us to sell.
So we went back to that fundamental question: why are we here? We spent more time analyzing the company and researching the market, and concluded that the company is both currently undervalued, and also has a lot further to run. The valuation in their latest priced round is less than 3x annualized revenue, revenue is more than doubling year over year, and of course the share price in a sale would be at a discount to the primary share price. One market comp (whose market is actually smaller) recently IPO’d at a valuation that is more than 15x higher than this company’s valuation. So the choice we have is to either bank a 1.5x DPI now, or if we are a little patient — potentially produce a 20x+ fund return from just this one investment. 1.5x is a nice win, but insignificant. A 20x+ fund (esp. from a single investment) is life changing. To us, the answer is clear.
The last thing we did related to this company was that we offered to help buy out any LPs who wanted to exit. Some LPs even offered to buy shares from any interested sellers at a 25% discount to the primary share price (in line with the broader market). We had 2 LPs say they wanted to sell, but when we presented them with the offers at a 25% discount, both backed out. So in the end, not only have we personally decided not to sell, but also 100% of our LPs have chosen not to sell too.
Zooming out, I thought I’d share more about our broader exit strategy. We are seeking a balance between capturing the power of compound interest over a long period of time, while also understanding that our LPs need liquidity at some point.
To the first part of that, we are big believers in the power of compound interest. Or technically, compound *growth* in this case. If we can simply find an investment that consistently doubles in value year over year — that means in year 5 you have a 32x return. Big win! A lot of people would sell at that point; 32x is a home run.
But here’s the thing: if you hang on to that investment and it keeps doubling, at year 10 you have a 1024x return. By selling at year 5 instead of year 10, you left 97% of the returns on the table. Compound growth is powerful, especially in the later years.
The other side of this, however, is that none of us have unlimited money. We need our cash back at some point if we want to be able to keep investing. So with that in mind — we *do* seek to return cash to our LPs, when we can do it in a way that is both meaningful, and also does not overly dampen the long term returns.
We believe the right way to do that is when we can sell a sliver of an investment — 25% or less — and return an entire fund (or “vintage” in our case — since we don’t have a conventional VC fund — so we think of our portfolio in yearly vintages) — then we do it. All your money back 1x is a big deal, and holding ¾ of a long term winner is still pretty good. No one will cry about making only $7.5M, instead of $10M.
So that’s the approach we will take with both the company mentioned above, as well as some of the other winners in our portfolio. When we can sell 25% or less and return the fund, then we’ll do it.
We think that’s possible with that company in its next round. So although liquidity isn’t quite here yet for us, we can see it on the horizon.
Thank you for reading!
