1Mby1M Virtual Accelerator Investor Forum: With Andrew Romans of Rubicon Venture Capital (Part 5)

Sramana Mitra: How do you process unicorn mania?

Andrew Romans: If you look at how many companies achieve a billion-dollar valuation and how many venture financers there are in this region, it’s mathematically not probable that the VC will get into a unicorn.

I think it’s important to develop a financial model and a portfolio construction that gives a large degree of expectation that you will be very profitable without even needing to get to a unicorn valuation. We like to see that any investment a fund makes can achieve a 10x return even with dilution of future rounds if we’re not investing all the way to exit. If you see a company with a $100 million pre-money valuation, you might get a 2x or a 4x. We’ll do an SPV for that, but we wouldn’t put money in from the fund. We really don’t do SPVs unless the fund is already in the deal.

Sramana Mitra: Is your expectation that you’re going to be selling out before exit?

Andrew Romans: In some cases, yes. In ancient times, VCs hated secondaries. It was a negative signal if anyone is selling. In modern times, there’s a lot of reason not to IPO. Rubicon, like many VCs, has got a 10 to 12 year time horizon. When you see companies get to a really high valuation, it starts to make sense to divest a bit. I think that if we can return our capital and only sell 20% of our position in a startup that we’ve invested in, that makes sense.

In some cases, we can even offer that secondary to our own LPs first, and we can have those LPs investing that in a sidecar SPV at an $8 million valuation. When the company is raising at a $800 million valuation, that might make a lot of sense for an individual guy with twins that just got into Stanford that’s going to cost him a lot of tuition.

Selling shares in a secondary market can make sense. It’s pragmatic to start at some point selling 20% of your position each time the company does the financing. If you’re in a company like Palantir that’s essentially publicly-traded and it’s going up in value so quickly, you might say, “I’m going to sell 20% of my position now and every six months, I’ll consider selling another 20% of the remaining I own.”

Sramana Mitra: I agree. This segment is very flushed with capital. There are a lot of small funds even smaller than your fund. That segment makes a lot of sense to start selling some of their holdings or all of their holdings if they get enough returns.

Andrew Romans: Rubicon fund one has a 31% IRR which is in the top 5% of all Vintage 2014 US Tech Fund. Rubicon fund two has 105% unrealized IRR on capital that we’ve already deployed into seven startups. We’re actively investing right now, but we’re continuing to raise capital from angel investors, family offices, large corporations, and institutional LPs by being able to show that we invested in this company at an $8 million valuation and invest it again at a $25 million valuation with a big Sand Hill VC or we invest it at a $30 million valuation, and invest it again at a $140 million valuation. There were opportunities to sell. These were all oversubscribed rounds where VCs have sharp elbows and are being very rude. We tend to be good at sharing. Maybe that’s easy when you’re small. It’s hard when you don’t know how to move your billion-dollar fund.

Sramana Mitra: Those are also perfect opportunities to sell out.

Andrew Romans: That’s it. That’s not a big enough return for us to sell out at. We know these companies can get to billion-dollar exits. We think they’re going to get the billion-dollar exits. Those are real numbers from companies we’ve invested in out of fund two. Of the $47 million, $35 million was secondary. Our position was, we definitely don’t want to sell out. This gives a huge uptick in the valuation. We can say to a family office in Singapore, “If you want to invest in that company, they just closed money at a $140 million valuation. You cannot get into that deal at $140 million. It’s already done. We invested in that thing also at $30 million. You could never get into that at $30 million but you can buy ownership units in our fund which gets you into that company at $30 million and at $140 million.”

NEA, being the biggest fund, were raising fund 21 on a Monday. By Friday, they’ve closed $3.2 billion with all their existing investors into the next found. I’m a startup founder like your community. I founded Rubicon and have to get up the mountain myself. It takes time and it’s a process.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Andrew Romans of Rubicon Venture Capital
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