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Jason Calacanis: State of the Venture Industry

Jasons shares his thoughts on early stage investing, the market and Sequoia’s new fund structure

Watch Jason Calacanis, legendary angel investor and VC explore the ‘State of the Venture Industry’ and read the key takeaways from this interview below .

On Early Stage Investing

You can talk yourself out of investing in any company in Series A and below

In the early stage, there are more reasons to not invest in a company than to invest

The most innovative companies look the worst in Series A and before. Companies like Uber and Airbnb looked so bad that most VCs did not invest in them early on.

Since 80-90% of startups fail, the best strategy for new investors is to invest in companies with traction. When starting out, focus on companies that are generating revenue and have at least 5 real paying customers that you can talk to, who were not sourced from the founders’ inner circle.

Part of the job is being an investigator. Make sure that you and the founder are aligned on simple definitions such as customer and user. In some cases, founders define a customer as someone who has logged in once. Find out if the metrics and definitions match your expectations and verify all the data.

The sweet spot is $10k-$20k MRR. In the beginning, focus on these companies to gain some experience in investing. With time you will develop an understanding of the market and startups like myself and Adeo. Lastly, try to focus on a few geographies, for example, I’m currently active in only around 2 to 3.

On the Market

In the short run, the market is a voting machine but in the long run, it is a weighing machine

Benjamin Graham

New entrants coming to the market such as Tiger Global and other public market investors are marking up valuations. Their strategy is getting in on as many quality deals as possible with small regard for price. Averaging a deal every 48 hours comes at the cost of due diligence. In contrast, we do more careful diligence than ever.

So we are seeing a very frothy market and reality may soon come if the bubble bursts. We will then get back to valuing companies based on their earnings. Right now people are voting on the potential of technologies but eventually, they will weigh their earnings. Companies like Apple, Microsoft and Tesla are being judged this way now. Many others like Uber and Lyft are starting to show profits, but they’re the outliers

On Strategy

The problem now is, people have stopped looking at the process and are concentrating on the outliers.

Focus on the process and the outcomes will take care of themselves

Outcomes are a function of the process so, we still focus on that and the fundamentals of a company. To not get caught up in the mania, I try to stay humble and not look at the previous victories and I look at each company with a fresh set of eyes. I focus on what I can control and not worry about the rest. 

In this market, I will at times sell 10%-20% secondary shares when the right opportunity arises. I want to lock in wins for my LPs and investors as we don’t know when the liquidity will emerge. I believe in slowly pairing your position and think that this is a wise philosophy in the current climate, though some people believe that you should let your winner ride

On Sequoias New Fund Structure

Sequoia is in a unique position in that they are the greatest venture capital fund of all time

They have decades of relationships with long-term LPs such as endowments and foundations. These LPs are not sensitive to time so they are aligned with Sequoias ‘patient capital’ thesis.  If Sequoia held their positions in companies such as Google, Apple and many others, they could be somewhere from a $500 billion fund to all the way to a trillion.  So for LPs in Sequoia, it makes sense to hold on to these assets for the long term and not take the tax hit.

This way Sequoia can also be on the boards of these companies and have a much larger influence. For example, Roelof Botha, a friend of mine who made me the first ‘Sequoia Scout’ sits on the board of Square, which went public at $15 – $20 per share and is now at $250. As a board member, he knew the company was on a tear, so was able to make the decision to not liquidate their position, knowing that there was a possibility of getting 20X more returns after the IPO. So with companies like that, you would want to hold them for the long-term, but only the top-5 venture firms can probably do that and this fund structure allows them to do so.

More on Sequoia’s New Fund Structure

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch 83 venture capital firms around the world.

Click here for Part 2 where Jason talks about: the next generation, syndicates, fundraising in the future and his advice to new investors.

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