UV LPs,
Welcome to our last LP update of 2023. 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.
In what follows, you will find an update on our portfolio, and a few miscellaneous thoughts on the market and our strategy.
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: One of our biggest and most valuable investments just received a term sheet from a tier 1 VC at a unicorn valuation. Assuming that deal closes — it will be our third unicorn here at UV (after Jeeves and Zepto). All three of these we invested in at seed or pre-seed. Not bad for less than 5 years in : )
Because the deal is underway we have to keep the name confidential, but the impact will be big: adding another ~0.75x to our 2019 portfolio value alone. It’s crazy to see markups starting to happen that are worth almost an entire “fund.”
Counting that pending deal, this quarter has seen another uptick in value. $65M of capital invested over the last 5 years has grown into $174M of aggregate portfolio value. This compares to $61M invested to date last quarter, when we had a portfolio value of $160M. Which means: we had $10M of appreciation (~6%) in the quarter.
PORTFOLIO STATISTICS
Here are the numbers for the UV Syndicate:
Here are the annualized numbers for the UV Rolling Fund:
And here are the numbers combined:
Here are statistics about our investing activity:
And here’s the Quarterly Breakdown for the Rolling Fund:
We rolled over ~$82k of uninvested capital from Q3, and raised another $1.45M in Q4 — which we are investing now.
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)
Market
We continue to feel very fortunate — both that we have enough investments that are doing really well, and also that our LPs continue to believe in us. In these challenging times, many (most?) investors can’t claim either of those things, and we are exceptionally grateful that we can. Thank you to our LPs for your steadfast belief, and thank you to our portfolio founders who are out there working wonders.
On the capital side, we raised $1.45M in our rolling fund this quarter, which I think is very good relative to our peak of $1.7M during the bull market. I.e. our fund size is only down 15%. Countless VC firms right now are quietly closing because they can’t raise new funds, and many of those that can are raising funds that are a fraction the size of their past ones. Insight as one prominent example raised a $2B fund, after their last one was $20B — a drop of 90%. You can also see in publicly available information on AngelList that most of the other rolling funds have shrunk 70–90% from where they were at peak. LP capital has definitely dried up out there — which makes me feel exceptionally grateful to have LPs that have chosen to stick with us. Thank you.
On the portfolio side, I’ll put up my favorite diagram again — my expectation for how our portfolio value will trend over the course of the bear market:
Thus far, we have followed something between these two lines. We first saw our portfolio appreciate quickly through early 2022, and then it was ~flat to slightly down for over a year, until a few months ago. The last two quarters are the first in a while that we’ve seen meaningful appreciation in the value of our portfolio again. I wonder if it’s indicative of the market finally turning up — exiting the flat/down area and resuming the uptrend.
I’ll say that I’m hopeful, but cautious. The public markets have not actually made a new high yet, and seem to potentially be turning down again. If they continue down from here, they will continue to hold the venture market down too.
And of course, the movement in our portfolio is driven by a small number of companies that are getting really valuable. Last quarter we had a big markup in one company that drove most of our gains, and it’s the same (but a different company) this quarter. We’ve had other markups in other portfolio companies, but some also got marked down — and they all more or less balanced each other out. As you know — VC returns follow the “power law” — where a small number of investments are responsible for most of the returns. As time goes by, we are experiencing that more and more. A small number of companies are having a big impact on our overall numbers.
Having said that, we do feel very fortunate to be invested in enough great companies that we *are* getting these big markups, even during the bear market. And because of that, our overall portfolio performance looks excellent.
Buckets Theory Of VC Investing
I thought I’d share a perspective I have on the overall VC industry, and how it drives our strategy and thinking.
Most people in VC (and beyond) really fixate on ideas. They care much more about what the startup’s idea is, than just about anything else about it.
I see this when people ask what we invest in at UV. I always respond: “we invest in exceptional people, building high potential businesses, that are preferably off the beaten path or non-consensus in some way.” 90% of the time, they reply with “ok, but WHAT are you investing in?” And they follow up with something like, “are you investing in AI? Or crypto? Or SaaS?” Everyone wants to know what ideas or trends we like.
The thing that’s tricky is that I literally don’t think like that. I used to. I used to fixate on the startups’ ideas too, trying to judge if the ideas were good or not. But after years of that, I discovered that idea-centric investing is not a good strategy. Whenever I invested based on an idea or a hot trend, I ended up with a terrible investment. When I instead invested in a great founder with interesting insights or a unique focus — those investments have tended to do well. The great founders always pivot if the initial idea isn’t working. In fact, several of my best investments were in startups that pivoted after I invested.
Sure: we do invest in some AI, some crypto, some SaaS, some FinTech, some marketplaces, and just about everything else. But we don’t go in with a plan to invest in certain trends or ideas. If we see a great founder building a high potential business (preferably unpopular), we’ll invest regardless of what the idea or trend is.
Taking this further, I believe there is actually a pattern of behavior in the VC industry that creates a market inefficiency — which we have used (and continue to use) to our advantage here at Unpopular Ventures.
Here’s the behavior: VCs all go to raise funds, and they know all the LPs will ask this question: “what are you going to invest in?” So they come up with some ideas or focus areas that sound good, such as crypto, or AI, or digital health, or SaaS, or FinTech, etc. and they go tell the LPs they are going to invest in X, Y, and Z areas. The LPs in turn say “great, we’d like more exposure to X, Y, and Z, those sound like good ideas,” and they invest with each of the VCs. The VCs are then locked in to investing in those “buckets,” and deploy capital there for the next few years.
Here’s the thing: there are a finite number of these buckets, particularly ones that sound good to the LPs, so all the LP money gets funneled into a defined set of categories that the VCs are then locked into investing in. The startups in those buckets that have money allocated to them get stuffed with money at high valuations. In contrast, the startups that don’t fit into a bucket with money allocated to it, end up starved for capital — regardless of how exceptional the founders or opportunities are. The VCs simply respond to the outside-bucket ideas with, “sorry, this isn’t a focus area for us.”
Those startups with great founders and high potential businesses, that don’t fit a bucket — are often the very best investments. We get to invest at a great valuation, we don’t have to compete to invest, and when they succeed they don’t have to compete with a dozen well-funded competitors.
Many of the best investments through history didn’t fit a bucket when they were good investments. When Facebook started, “social media” was not an investment category. When Bitcoin was a good investment, it wasn’t “crypto.” When Google was getting going, “search engines” were well past seeming like a good category to invest in, considering there were already 20 of them. “Sharing economy” or “marketplaces” were not established investment theses when Airbnb and Uber did their early rounds. I could go on — but you get the point. All these great investments were not part of any defined trend that people were talking about at the time.
In fact, I believe that the existence of a “label” for a startup makes it likely to be a weak investment. Once a label has been created for a category (particularly one that sounds good to LPs), money flows in, tons of competitors emerge, and it’s no longer a good place to invest. Even worse, these labels attract the weakest founders who change what they are doing to fit the VCs’ focus areas, so they can raise money. The best founders don’t think in terms of “I want to build something in AI,” or crypto, or whatever. They think about customers and their problems, and how to serve those customers in the most effective way — regardless of what the latest hot trend is.
I’ll share examples among our own best portfolio companies:
- Yassir, a super app for Francophone Africa, never fit any bucket or trend. This one was particularly extreme considering they are headquartered in Algeria, which most investors perceived to be a crazy place to invest. In fact, it was the first startup in Algeria to ever raise funding from investors outside Algeria.
- Blissway, which makes tolling infrastructure, again never fit any sort of bucket that aligned with a trend or focus area that sounded good.
- Kyte, which enables you to rent a car like you order an Uber, specifically pursued a bucket after the bucket seemed like a terrible place to invest and all the money had left: “Uber for X.” Investors who have been around for a while probably remember a wave of startups in the early 20-teens that were all building various Uber for X ideas, and nearly all of them died. When Kyte said they were building “Uber for renting a car” most investors balked. When I tried to refer them to other VCs, everyone thought it was a terrible idea.
- Jeeves is FinTech which was a hot area at the time, but it was focused outside the US — which was extremely off-thesis for nearly all VCs at the time. In 2020 (when we first invested) most VCs were still of the belief that all the startups that matter were in the US, and especially Silicon Valley, and it wasn’t worth investing outside.
- Zepto, which does instant grocery delivery in India — had two issues: 1) most people thought grocery delivery was a terrible business (which has proven true in most cases), and 2) it was based in India.
The point is: not one of our best investments was in a category or trend that was hot at the time we invested.
So with all this in mind: we will keep being unpopular. When people ask what we invest in, we won’t list off some labels that sound good. We are literally looking to invest in exceptional people, building high potential businesses, that are doing something so unique and interesting that it doesn’t even fit a label or a bucket that is easy to talk about.
Challenge to Other AngelList Leads: Show Your Numbers
In the last LP update, I challenged the other AngelList leads to show their performance numbers. I’ve been surprised that since then, only one has: Ali Jamal with First Check Ventures. Hat tip to you, Ali — and congrats on the nice results so far.
But I am really quite shocked that everyone else has chosen to keep their performance a secret.
I was also curious to see if the AngelList Access Fund, which invests across the AngelList platform, has updated their numbers recently. They present numbers about their past performance on their home page, but I haven’t seen the numbers change in quite a while. So I read the fine print carefully, and was surprised to see this near the bottom: “The above table presents the net realized and unrealized returns of past AngelList Access Funds, as of February 19, 2021.” Evidently, they have chosen not to update their public numbers in over 2.5 years. Why not?
All this reticence to share anything publicly about investing performance, leads me to only one conclusion: most AngelList leads’ results are bad. With this in mind, I have chosen to stop investing as an LP in other AngelList syndicates, and will only be investing in our UV fund and syndicate going forward. I’ve been a very active investor across AngelList in the past — with over 550 investments going all the way back to 2014. And on paper, the results appear to be pretty good. But of course, most of the leads that I’ve invested with in the past have moved on, and I do have questions about many of the leads who are active on the platform today.
Until I start to see more accountability from AngelList leads (via transparent performance reporting), I am going to sit on the sidelines and will primarily invest only in our own fund and syndicate.
Thank you for reading!
