It’s been almost five years since this editor sat down with longtime VC Harry Nelis and three other investors from Accel’s London office to talk about the trends rippling through the venture industry. At the time, our talk largely centered on Brexit and SoftBank’s feverish pace of investment, which was beginning to drive other late-stage funds into earlier-stage companies.
Of course, much has changed in the intervening years. Brexit came to pass in January 2020. COVID-19 took hold around the world soon after. A global downturn has also reshaped how investors and founders are thinking about their respective roles — and pushed SoftBank into the background.
To learn how some of these shifts have impacted Accel (thanks to bets like Slack and UiPath, it raised some enormous funds just as things were cooling off), we chatted with Nelis again yesterday. Excerpts from that catch-up have been edited lightly below for length and clarity.
TC: Your seventh fund closed almost exactly two years ago with $650 million as part of $3 billion in capital commitments that Accel announced in June 2021. This included funds in the U.S. and a global growth stage fund. How much of that fund have you committed?
HN: I think we’re roughly halfway through the fund. Subsequent to that whole fundraising, we raised another “Leaders Fund,” a pre-IPO fund, with $4 billion in commitments in June of ’22. But . . .we’re now in a period where things have slowed down quite dramatically.
We have early-stage franchises in Palo Alto, London and Bangalore, India; we have two global funds — a global growth fund and a global pre-IPO fund. Especially the growth fund and pre-IPO fund, the business for them has been very slow because companies raised so much money over the last few years that they really don’t need any more. And they know that if they were to raise more money, it probably wouldn’t be at a higher valuation. So a lot of them are kind of trying to get as far as they can on the money that they’ve raised. Even the early-stage market was slow for a moment . . . but that has readjusted itself now, and the early-stage market is really back again.
Accel downsized one of its funds back in 2001 after the big dot-com bust. The firm couldn’t put the money to work that it had raised, and LPs were meanwhile in a bind because of the downturn. Here we are again. Has Accel talked about downsizing the size of these massive pre-IPO and growth-stage global funds?
In general, I don’t think we have seen that. So I haven’t read anything in the news where people have been cutting back the stage funds or fund commitments. I also think that we’re very close to the market adjusting again. We’ve done analysis of, okay, when did most of the big funding rounds happen, how long ago was that, what are reasonable assumptions for burn rates, what does that mean for companies having to fundraise again. And by most of our estimates, it feels like toward the end of the year and definitely in the beginning of next year, we should see the market normalizing again, so I think any kind of talk about smaller funds, etc., would be premature.
Sometimes it feels like a domino effect. Somebody does it, then everyone else says that was the right thing to do; we should do that as well. It’s good that you think the markets are going to bounce back. At the same time, the numbers are not looking so great. I talk to secondary shops here in the U.S. from time to time and they’ve all said that it’s like trying to catch a falling knife here. Nobody really wants to sell their shares because they’re down so much. At the same time, buyers don’t want to buy yet because they think the shares will fall even further. And then yesterday, I saw that institutional LPs are selling some of their holdings at a 40% to 60% discount. Are your portfolio companies talking more actively with secondary platforms? Is Accel selling any of its holdings?
No. We’ve been here before, right? So in 1999–2000, there was a massive funding cycle, and then of course, after 2001, that became very, very quiet again. So booms and busts are part of capitalism and hence also part of venture capitalism, so our approach is to really keep focusing on building large and valuable businesses, and over time, those large and valuable businesses will end up in windows where there is liquidity and then good stuff will happen.
During the last few years, we had lots of growth, but it was also sometimes inefficient growth. We’re working on making them efficient and really building these companies into large and valuable businesses, and then that creates great outcomes for entrepreneurs, and it’ll also create great venture firms.
Where are you looking in particular to make new bets? I know fintech is an area of interest for you, and that sector has been hammered obviously over the last year or so.
What are we looking at? Generative AI, of course, is a very fertile area for us to fund and look around. Security is always something of a gift that kind of keeps giving, as attackers and defenders come up with evermore powerful weapons to battle each other. We’ve particularly focused on security for big market companies but small businesses have not had the benefit of a lot of defense and a lot of security, so there’s a whole bunch of companies that are being formed now that help SMEs protect themselves from cybercrime. We also continue to do a lot in payments. And we’re funding a number of repeat entrepreneurs who have built large businesses before and are still quite young and want to do it again and want to possibly do it bigger.
How has your pacing changed since we last talked? How long does it take Accel to write an initial check right now?
It’s very different from the boom times. In the real boom [in 2020 and 2021], we had typically three or four days to decide on a deal. And that’s not good for the investors, but it’s also not good for the entrepreneurs because you end up working together for at least five to 10 years, and when you make a commitment like that, it’s good to get to know each other. Now the time we have to really familiarize ourselves with an investment opportunity and an entrepreneur is two or three weeks or so, which is much more normative, and it gives us an opportunity to get to know the entrepreneur but equally importantly, it gives the entrepreneur an opportunity to get to know us.
Before the boom, a typical deployment period for a fund would be three years and it would be deployed in three years and [would feature] roughly 30 to 35 companies per fund. During the boom, that deployment period definitely went to two years and for many firms, sometimes a year and a half — even faster. And you don’t get enough time diversification into a fund like that, which makes venture funds more vulnerable. So now we’re back to what I would expect to be a three-year deployment cycle, with a [more traditional] period to really properly diligence an opportunity.
So many bets were made during that period, and the fatality rate in the startup world is always high. How do you know that it is time to pull the plug?
We are of the opinion that it’s always best for portfolio companies to raise fresh money from the outside, in good times and bad, because that kind of gives an outside market reality check as to the market as a whole. So the first litmus test is, is a company able to raise money from the outside? It doesn’t matter at what valuation. If they’re not able to raise money, that’s kind of a signal from the market.
Are you more inclined to fund a founder who has returned capital to investors before running out of gas completely?
If an entrepreneur says, “Listen, I don’t quite believe in it anymore because circumstances have changed, it’s a different market, I prefer to wind things up and give money back to investors and move on,” on a case-by-case basis, we’d be okay with that. It’s okay to admit that circumstances have changed and that the opportunity that you jointly thought was attractive is no longer. It happens. But it’s not something that we actively ask for. Typically, with entrepreneurs, we kind of we realize they’re in the driver’s seat, so we support them when they when they go public; we support them when they decide they want to sell. We also support them if they decide that circumstances have changed and it no longer makes sense to really go after their dream.
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