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 plaguing the venture industry at the time. At the time, our conversation focused largely on the investment frantic pace of Brexit and SoftBank, which at that time was just beginning to push other late-stage funds into early-stage companies.
Of course, a lot has changed in the intervening years. Brexit came to pass in January 2020. The coronavirus spread around the world soon after. The global downturn has also reshaped the way investors and founders think about their respective roles — and pushed SoftBank to the background.
To find out how some of these shifts have affected Accel — thanks to big bets like Slack and UiPath, it’s made some pretty big money just as things were cooling down — we chatted with Nelis yesterday in a quick recap that’s been edited slightly below for length and clarity.
TC: Your seventh fund closed exactly two years ago with $650m as part of the $3bn capital commitments Accel announced in June 2021. This included funds in the US and a global growth stage fund. How much of this fund have you committed to?
HN: I think we’re about halfway through the box. After this all fundraising, we raised another Leaders Fund, a pre-IPO fund, with $4 billion in commitments in June of ’22. But . . . We are now in a period where things have slowed down 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 the pre-IPO fund, business for them has been very slow because companies have raised so much money over the last few years that they don’t really need it anymore. And they know that if they were going 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 much as they can out of the money that they’ve made. Even the early stage market was sluggish for a moment. . . But this has now readjusted itself, and the early stage market has really bounced back.
Accel downsized one of its funds in 2001 after the dot-com crash. The company could not put the money it raised to work, and the limited stock holders were on the hook due to the economic downturn. Here we are again. Did Accel talk about downsizing these huge global funds before the IPO and growth phase?
Overall, I don’t think we’ve seen that. So I didn’t read anything on the news where people were cutting funds or financial commitments. I also think we’re very close to getting the market adjusted again. We’ve analyzed, well, when do most of the big funding rounds happen, how long ago that was, what are reasonable assumptions for burn rates, and what that means for companies that have to raise money again. And by most of our estimates, it looks like towards the end of the year and certainly early next year, we should see the market normalize again, so I think any kind of talk about smaller funds, et cetera, would be premature.
Sometimes it feels like a domino effect. Someone does it, and then others say it’s the right thing to do; We should do that too. It’s nice to think that the markets will recover; At the same time, the numbers do not look very large. I talk to secondary stores here in the US from time to time and they all say it’s like trying to catch a dropped knife here. No one really wants to sell their shares because they have fallen so much. At the same time. Buyers do not want to buy yet because they think the stock will fall further. And then, yesterday, I saw Institutional LP Partners selling some of their properties at 40% to 60% off. Are your portfolio companies talking more actively to secondary platforms? Does Accel sell any of its properties?
No, we’ve been here before, right? So in 1999, 2000, there was a huge funding cycle, and then of course, after 2001, it’s very quiet again. So booms and busts are part of capitalism, so it’s also part of venture capital, so our approach is to stay really focused on building great business and value and over time those big business and value will end up in the windows where there’s liquidity and then things will happen good.
Over the past few years, we’ve had a lot of growth, but it’s also been inefficient growth at times. We’re working on making it efficient and really building these companies into great, valuable companies, and then that’s going to create great results for entrepreneurs, and it’s going to create great investment companies.
Where are you particularly looking to make new bets? I know fintech is an area of interest to you, and this sector has clearly developed over the past year or so.
What are we looking at? Generative AI is, of course, a very fertile field for us to fund and look around. Security is always something of a gift that keeps on being given, as attackers and defenders come with extremely powerful weapons to battle each other. We’ve focused particularly on security for large market companies but small businesses haven’t had much defense and a lot of security, so there’s a whole bunch of companies that are forming now that help small and medium businesses protect themselves from cybercrime. We also continue to do a lot of payments. And we’re funding a number of repeat entrepreneurs who’ve built great businesses before and are still very young and want to do it again and want to do it even bigger.
How has your pace changed since we last spoke? How long does Accel take to write an initial check now?
It’s very different from boom times. In a real boom (in 2020 and 2021), we usually had three or four days to decide on a deal. And that’s not good for investors, but it’s also not good for entrepreneurs because you end up working together for at least five to 10 years, and when you make that commitment, it’s nice to get to know each other. Now it’s time for us to really get to know the investment opportunity and the entrepreneur is two or three weeks or so, which is much more standard, and it gives us a chance to get to know the entrepreneur but more importantly, it gives the entrepreneur a chance to get to know us.
Prior to the boom, the typical deployment period for a fund was three years and it would be deployed in three years and (advantage) approximately 30 to 35 companies per fund. During the boom, that publishing period certainly went to two years and for many companies, sometimes a year and a half – even faster. And you don’t get enough diversification time in a fund like this, which makes venture funds even more vulnerable. So now we’re back to what I anticipate will be a three-year publishing cycle, with a (more traditional) period of opportunity to spare properly.
Many bets were made during that time, and the death rate in the startup world is high. Everyone is now dealing with portfolio companies that are struggling to survive during this period and no one knows how long it will last. How do you know it’s time to pull the plug?
We are of the opinion that it is always better for portfolio companies to raise new funds from outside, in good times and bad, because that kind of would give an external market reality check in relation to the market as a whole. So the first test is, is the company able to raise money from abroad? It does not matter in any evaluation. If they can’t raise money, that’s a signal from the market.
Would you be more inclined to fund a founder who returned capital to investors before all the gas ran out?
If the entrepreneur says, “Listen, I don’t believe in it anymore because circumstances have changed, it’s a different market, I’d rather end things and return the money to the investors and move on,” on a case-by-case basis, we’d be fine with that. It’s okay to acknowledge that circumstances have changed and that the opportunity that you jointly thought was attractive is no longer. that happens. But it’s not something we actively ask for. Usually, with entrepreneurs, we kind of realize they’re in the driver’s seat, so we support them 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 truly pursue their dream.