Interview, Fireside Chat
Mark Suster: Why Private Equity Will Replace IPOs and M&A as the Exit Path | E1147
- A market correction initiated two years ago is projected to require another five years to fully resolve, with valuations in 2021 described as significantly more severe than those of the 1998, 1999, and 2000 cycles.
- Of the 1,200 private companies marked at valuations of $1 billion or more, an estimated 1,000 will never achieve an exit value exceeding $1 billion.
- Despite current hype, a correction in venture capital valuations is predicted, with seed-stage generative AI valuations in 2023 and 2024 carrying a 44% premium and B-round valuations a 200% premium over enterprise software.
- Making money as an investor in generative AI during 2023, 2024, or 2025 is expected to be difficult due to a lack of arbitrage opportunities, with the speaker characterizing current AI pricing as "astoundingly ridiculous" and noting that 2021 saw companies paying 60x to 80x pre-revenue valuations.
- Primary exits for large private companies are expected to face hurdles as public market buyers struggle to acquire the largest firms, potentially forcing exits via IPO or private equity consolidation, whereas exits at the $250 million to $1 billion level are predicted to be easier.
- Private equity firms are expected to increasingly acquire assets from venture capital funds via direct purchases or secondary markets, with the speaker's fund deploying almost $50 million into secondaries at deep discounts in 2023.
- Hardware companies combining hardware and software are predicted to provide differentiated returns, exemplified by over 100 SpaceX spinouts raising more than $10 billion, with 30% focused on space and the remainder moving into energy, clean tech, or infrastructure.
- The speaker's fund anticipates a return north of 5x capital cash-on-cash for the 2012 fund, citing a portfolio of six companies that received reserve funding and returned $1.4 billion, while avoiding SoftBank or Tiger deals.
- The cost of launching startups has dropped from $5 million to $500,000 since 2005, and the cost per kilogram to launch into space has decreased by more than 90% due to reusable rockets, creating a lower barrier to entry but increasing competition.
- Market dynamics are shifting with the speaker's fund reserving 58% of fund size for follow-on investments, resulting in an average of six years to raise a growth round, whereas the speaker sold $1.2 billion in positions between 2018 and 2021, including $600 million in 2021.
- Valuation multiples have diverged sharply, with the public software trading multiple reaching 24.6x in November 2021 while private market multiples ranged from 50x to 100x Net Trailing Revenue in 2021.
- Historical data indicates that 60% of 1,200 unicorn markings were driven by four specific firms (SoftBank, Tiger, Koichu, and Insight), whereas the current environment sees a market correction involving significant mark-downs that many managers have not yet taken.
- The speaker's median check size ranges between $3.2 million and $3.5 million with ownership of 18% to 21%, and the fund typically sells 33% to 40% of a position during market run-ups while retaining a long position.
- The speaker believes the 2021 market created 1,200 unicorns in a single year, a dramatic increase from 12 in 2012 and 749 created in 2021, while noting there are currently only 343 public software and internet companies in the U.S. worth $1 billion or more.
- Institutional stress is expected to increase, with predictions that the majority of VCs and LPs will quit during hard times, though 70% of LPs were previously gracious regarding portfolio mark-downs.
- The speaker maintains a policy of not targeting specific demographic groups in university policies, predicting that donor and parent bases will force universities to stop targeting Jewish people.
- Investment strategy focuses on five or six distinct themes rather than concentration, with the fund avoiding SoftBank and Tiger deals and expecting to have fewer positions to decline than those who subscribed to 2021 hype.