It’s been almost five years since this publisher sat down with longtime VC Harry Nelis and three other investors from Accel’s London office to talk about trends impacting the venture capital industry. At the time, our discussion was largely focused on Brexit and the frenetic investment pace of SoftBank, which was beginning to attract other late-stage funds to early-stage companies.
Of course, a lot has changed in the years since. Brexit happened in January 2020. COVID-19 took hold around the world soon after. A global downturn has also reshaped how investors and founders view their respective roles — and pushed SoftBank to the background.
To find out how some of these changes have impacted Accel (thanks to successful bets like Slack and UiPath, it raised massive funds just when things were getting colder), we chatted with Nelis yesterday in a quick catch-up which has been slightly edited below for length and clarity.
TC: Your seventh fund closed almost exactly two years ago with $650 million as part of the $3 billion in capital commitments announced by Accel in June 2021. This included funds in the United States and a global growth phase fund. How much of this fund have you committed?
HN: I think we’re about halfway through the fund. As a result of all this fundraising, we raised another “leaders fund,” a pre-IPO fund, with $4 billion in commitments on June 22. But . . .we are 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 the pre-IPO fund, business for them has been very slow because companies have raised so much money over the past few years that they really don’t need it anymore. And they know that if they were to raise more money, it probably wouldn’t be at a higher valuation. So many of them are trying to go as far as they can with the money they have raised. Even the startup market slowed for a while. . . but it’s readjusted now, and the start-up market is really back.
Accel downsized one of its funds in 2001 after the big dot-com meltdown. The company was unable to put the money it had raised to work, and the LPs were in a bind in the meantime due to the recession. Here we go again. Has Accel talked about reducing the size of these massive pre-IPO and growth-stage global funds?
In general, I don’t think we’ve seen that. So I haven’t read anything in the news where people have reduced stage funds or fund commitments. I also think we are very close to another market adjustment. We’ve analyzed, okay, when most major funding rounds were, how long ago, what are reasonable assumptions for burnout rates, what does that mean for companies who need to raise funds 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 funds more small, etc., would be premature .
Sometimes it looks like a domino effect. Someone does it, then everyone says it was the right thing to do; we should too. It’s good that you think the markets will rebound. At the same time, the numbers are not so good. I talk to side stores here in the US every once in a while and they’ve all said it’s like trying to catch a falling knife here. No one really wants to sell their stocks because they are so down. At the same time, buyers don’t want to buy yet because they believe stocks will fall further. And then yesterday I saw that institutional LPs were selling some of their holdings at a 40% to 60% discount. Do your portfolio companies engage more actively with secondary platforms? Is Accel selling any of its holdings?
No. We’ve been here before, haven’t we? So in 1999-2000 there was a massive funding cycle, and then of course after 2001 it was very, very quiet again. So booms and busts are part of capitalism and therefore also part of venture capitalism. So our approach is to continue to focus on building big, valuable businesses, and over time, those big, valuable businesses will end up in windows where there is liquidity and then good things will happen.
Over the past few years, we’ve had a lot of growth, but it’s also been growth that’s been inefficient at times. We strive to make them effective and make these businesses great and valuable businesses which will create great results for entrepreneurs and also create great venture capital businesses.
Where in particular are you looking to make new bets? I know fintech is something you’re interested in, and that sector has obviously been hammered 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 explore. Security is always kind of a gift that keeps on giving, as attackers and defenders come up with more and more powerful weapons to clash with. We’ve been particularly focused on big business security, but small businesses haven’t had a lot of defense and a lot of security, so there’s a whole bunch of companies forming now that are helping SMBs to protect against cybercrime. We also continue to do a lot in payments. And we are funding a number of regular entrepreneurs who have already built great businesses and are still quite young and want to start over and eventually make it bigger.
How has your rhythm changed since our last conversation? How long does Accel take to write an initial check right now?
It’s very different from boom times. In the real boom [in 2020 and 2021], we usually had three or four days to decide on a deal. And it’s not good for investors, but it’s not good for entrepreneurs either because you end up working together for at least five to 10 years, and when you commit like that, that’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 about two or three weeks, which is much more prescriptive, and it gives us the opportunity to get to know the entrepreneur but, just as important, it gives the entrepreneur the opportunity to get to know us.
Before the boom, a typical deployment period for a fund was three years and it would be deployed in three years and [would feature] about 30 to 35 companies per fund. During the boom, this deployment period definitely increased to two years and for many companies, sometimes to a year and a half, or even faster. And you don’t get enough diversification time in a fund like that, which makes venture capital 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 for really well diligently an opportunity.
So many bets have been made during this time, and the death rate in the startup world is high. Right now, everyone is dealing with portfolio companies struggling to get through this period and no one knows how long this will last. How do you know it’s time to pull the plug?
We believe that it is always better for portfolio companies to raise fresh money from outside, in good times and bad, as it gives insight into the reality of the external market as to the market as a whole. So the first litmus test is, is a company able to raise funds from outside? It doesn’t matter at what valuation. If they’re not able to raise funds, that’s sort of a market signal.
Are you more inclined to fund a founder who returned capital to investors before completely running out of gas?
If an entrepreneur says, “Look, I don’t really believe in it anymore because circumstances have changed, it’s a different market, I’d rather wrap things up and give money back to investors and move on,” at case by case. on a case-by-case basis, we would be fine with that. There is nothing wrong with admitting that circumstances have changed and that the opportunity you jointly considered attractive is no longer so. It happens. But it’s not something we’re actively asking for. Typically, with entrepreneurs, we kind of realize they’re in the driver’s seat, so we support them when they go public; we accompany them when they decide to sell. We also support them if they decide that circumstances have changed and it no longer makes sense to really pursue their dream.
