Taking a pioneering approach to higher returns
Taking a pioneering approach to higher returns
Secondary funds have grown from a cottage industry in the 1990s to big business today. They’re a fixture in private equity, and there’s scope for growth in private debt and infrastructure. But venture capital (VC) secondaries are still relatively new.
Aman Verjee launched Palo Alto-based Practical Venture Capital with partners in 2019. He spoke with Shaun Beaney, Editor of Preqin First Close, about setting up one of Silicon Valley’s few VC secondaries managers and raising a $100mn third fund.
Your CV includes PayPal, eBay, Sonos, McKinsey, Lehman Brothers, Harvard Law School, and Stanford. What inspired you to set up Practical VC?
I was at PayPal in 2001, when it was very much a start-up. PayPal went public in 2002 and was acquired by eBay, and I stayed on for another eight years. After I left PayPal in 2010, I became CFO for Sonos (NASDAQ: SONO) and then in 2017, I joined 500 Startups. I became their COO and managing partner, so I got my feet wet in venture. Now we run our own secondaries firm here in the Valley.
What prompted you to move into VC secondaries?
In the early 2000s, the typical cycle from founding to an IPO was about four to five years. That’s no longer the case. The most recent big IPOs like Airbnb took 12 years, Palantir took 17 years, and Uber about 10 years. SpaceX has been a private company for almost 20 years. So, as an investor, you’re along for the ride. It’s great, because the companies are valuable and doing well, but they’re not liquid.
We think there’s a real opportunity in providing liquidity to early investors via secondary-market transactions. For those early investors, money now is better than money later – they don’t want to wait indefinitely for an IPO. But we’re more patient capital, so we ride out that second half of a fund’s or a company’s lifecycle.
We’re definitely early in the VC secondaries game. It’s still in its infancy.
You’re mid-way through deals for your $56mn second fund. Are you already planning a third vehicle?
We’re starting to. Fund 1 did great. We got into companies like GitLab, Canva, and Talkdesk. We closed our second fund at $56mn at the end of 2021 and we’ve been very slowly and carefully deploying. Until recently, valuations hadn’t found the bottom and we didn’t feel comfortable investing during 2022. But now, I think we’re back to a normal valuation cycle, so we’ll be fully deployed by early next year. We’re targeting $100mn for Fund 3 and kicking that fundraising off pretty soon.
What kinds of deals are you typically doing?
The types of transactions we’ve done during the first two funds have been companies that we can underwrite in a high-growth phase – typically in SaaS, fintech, or e-commerce. Companies at series C and beyond are what we really want to go after. They have a shorter timeline to getting liquid and more certain business prospects.
We’re targeting an allocation that’s between 60–70% VC portfolios. We think we can get discounts of 30–50% to fair value by buying out LPs who need liquidity. The other third of our allocation is in companies. Say a company’s doing well, it’s series C or beyond, there may be five to seven years to go before IPO, but it has early employees who need to exercise options and liquidate those shares.
How do you generate deal flow? Do you knock on doors?
Most of it’s actually through our network of investors and GPs. My background is all fintech and e-commerce, so a lot of our sourcing comes from that network. A lot of our investors also come from that network. Every transaction we do is with a friendly GP. We never want to be taking a position in a company or a fund where it’s going to be adversarial. That’s not how we roll. It’s GPs coming to us, saying: ‘Hey! I’ve got investors who need liquidity. Can you help them out?’
Who are your investors?
Most of Fund 1 was early PayPal friends and family. Fund 2 is a little more family office, multi-family office – a bit more institutional. I think Fund 3 will have a few more institutions. We’re talking to some endowments, universities, and professional money managers.
Where are the biggest discounts?
The discount is a little tricky. Just because something’s discounted, that doesn’t mean it’s a good deal. For example, 70% of fair value in a very expensive company may not be the best deal, but a discount may only be 10–20% on a previous round and still be a good deal. In general, if you can invest in a growth category at below-average multiples, you’ll get above-average returns.
SaaS is one of those categories where companies are performing well, delivering strong year-to-year growth and excellent retention economics. If that category normalizes back to 8x or 9x multiples, then you’re getting a little bit of alpha. Fintech has a lot of the same dynamics.
Would a robust recovery in the VC market reduce new opportunities for you, because LPs would then get liquidity?
I think what will happen in the next 12–18 months is there’ll be a little bit of sunshine, but it won’t feel like we’re back in 2020–2021. It’ll be a slow process. We expect there will be a window where some of the big companies with very strong brands will be able to IPO. A good sign. Maybe that will trickle down over time, but there’s also going to be lots of secondary opportunities. We’re seeing no shortage of great deals and deal flow.
Shaun Beaney is Editor of Preqin First Close, the essential daily newsletter for the global alternatives assets industry. It’s quick, easy, and free to subscribe here.
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