It’s been nearly five years since this editor sat down with longtime VC Harry Nelis and three other investors from Accel’s London office to discuss trends sweeping the venture industry. Our chat then focused heavily on Brexit and SoftBank’s feverish pace of investment, which at the time was beginning to push other late-stage funds into earlier-stage companies.
Of course, a lot has changed over the years. Brexit happened in January 2020. COVID took hold worldwide soon after. A global recession has also reshaped the way investors and founders think about their respective roles, pushing SoftBank into the background.
To find out how some of these changes have affected Accel (thanks to big bets like Slack and UiPath, it raised huge funding just as things were cooling down), we chatted with Nelis yesterday in a quick catch-up that slightly edited below. for length and clarity.
TC: Your seventh fund closed nearly two years ago with $650 million as part of the $3 billion in capital commitments that Accel announced in June 2021. This included funds in the US and a stage fund of global growth. How much of that fund have you pledged?
HN: I think we’re about halfway through the bottom. After all that fundraising, we raised another “Leaders Fund,” a pre-IPO fund, with $4 billion in commitments on June 22. But . . .Now we’re 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 raised so much money over the last few years that they really don’t need more. And they know that if they raised more money, they probably wouldn’t have a higher valuation. So many of them are trying to go as far as possible with the money they’ve raised. Even the early stage market was slow for a while. . . but that has now readjusted, and the early stage market is really back.
Accel downsized one of its funds in 2001 after the great dot-com bust. The company was unable to put the money it had raised to work, and meanwhile the LPs were struggling due to the recession. Here we are again. Has Accel talked about downsizing these massive pre-IPO and growth stage global funds?
Overall, I don’t think we’ve seen that. So I haven’t read anything in the news where people have been cutting stage funding or funding commitments. I also think we are very close to the market adjusting again. We’ve looked at, OK, when did most of the big funding rounds happen, how long ago, what are the reasonable assumptions for consumption rates, what does that mean for companies that have to raise again background And by most of our estimates, it looks like by the end of the year and definitely early next year, we should get the market back to normal, so I think any kind of talk about smaller funds , etc., would be premature.
Sometimes it feels like a domino effect. Someone does it, then everyone says it was the right thing to do; so should we. It’s good that you think the markets will recover; at the same time, the numbers don’t seem that big. I talk to thrift stores here in the US from time to time and they all tell me 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 still don’t want to buy because they believe the stock will fall further. And I saw yesterday 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? Does Accel sell 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 part of venture capitalism, so our focus is to continue to really focus on building great, valuable companies, and over time, those great and valuable companies 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 sometimes it’s also been inefficient growth. We’re working to make them efficient and really turn these companies into big, valuable companies, and that creates big results for entrepreneurs and it’s going to create great ventures as well.
Where in particular are you looking to make new bets? I know fintech is an area of interest to you, and that sector has obviously been affected over the last year.
what are we looking at Generative AI is of course a very fertile area to fund and look around. Security is always a gift that keeps on giving as attackers and defenders come up with ever more powerful weapons to fight each other. We’ve been particularly focused on security for large enterprises in the market, but small businesses haven’t had the benefit of a lot of defense and a lot of security, so now a bunch of companies are forming that help SMBs protect -se of cybercrime. We also continue to do a lot in payments. And we’re funding a number of repeat entrepreneurs who have built big companies before and are still fairly young and want to do it again and possibly want to do it bigger.
How has your beat changed since we last spoke? How long does it take for 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 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 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 the opportunity to get to know the entrepreneur but, which is also important, it gives the entrepreneur. an opportunity to get to know each other.
Before the boom, a typical rollout period for a fund would be three years and would roll out over three years and [feature] approximately 30 to 35 companies per fund. During the boom, this deployment period was definitely two years and for many companies, sometimes a year and a half, even faster. And you don’t get enough time diversification in a fund like this, which makes hedge 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 properly pursue an opportunity.
So many bets were made during this period and the death rate in the startup world is high. Everyone is dealing with portfolio companies that are struggling to get through this period and no one knows how long it 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 money from outside, both good and bad, because it provides a reality check on the foreign market as a whole. So is the first litmus test a company capable of raising money from outside? It doesn’t matter at what rating. If they’re not able to raise money, that’s kind of a market signal.
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 believe in it anymore because the 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 would be fine. It’s okay to admit that circumstances have changed and that the opportunity you thought was attractive together is no longer so. It happens. But it’s not something we actively ask for. Usually with entrepreneurs, we 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 pursue their dream.
Ikaroa is closely watching the developments in Europe, where Accel, a leading banking institution, is banking on a turnaround over the next six to nine months. This announcement follows the recent financial difficulties experienced by the sector, and strengthens the position of investors and banks with a presence on the continent.
In response to this news, Ikaroa’s CEO, Tom Miller, said “This is a positive step forward for Europe, and a sign of economic recovery post-Covid-19. We have been closely monitoring the situation in Europe and offering our support to all our clients. We are committed to helping Accel succeed in its endeavours to turn around their business over the next six to nine months, and offering our advice and expertise as needed.”
Ikaroa recognises that the success of Accel is integral to the future of the European financial system, and is dedicated to forging a stronger relationship with the bank in the coming months. Ikaroa is committed to the responsible and innovative use of technology to drive the success of those operating in the financial services sector, and Accel’s turnaround is a testament to the potential it has to make a real difference.
Ikaroa’s aim is to offer the best possible service, both in terms of technology and customer service, while maintaining the highest standards of security and privacy. As a fullstack technology company, we believe we can help support Accel in achieving their goals of turning around the business in the next six to nine months and creating a new legitimacy for banking institutions in Europe.