As you would expect, Tim Bliamptis, a co-founder and managing director at fund of funds Weathergage Capital, is no stranger to venture capital.
He was early to the micro VC phenomenon of recent years and is convinced this year may see an uptick in venture liquidity through acquisitions.
He also has an open mind to emerging managers.
VCJ recently had the opportunity to speak with Bliamptis about the venture business. An edited transcript of the conversation follows:
Q: How were distributions in 2016?
A: As a rule, I’m not going to comment on Weathergage activity. But the industry data, I believe, says 2016 was an OK, but not great, distribution year…Solid.
Q: Do you have thoughts on what 2017 will look like?
A: I think there are a couple of things going on. The venture market is going through a slow motion reset in terms of valuations and valuation expectations. The reset sort of started with the public market shock of about a year ago.
Then it sort of rippled through, like a wave, from the H round to the G round to F, E and eventually it gets to resetting A valuations and seed valuations. That ripple, if you will, takes time to roll through the system, and it now has been rolling through the system for about a year.
It has a somewhat different impact in different stages, but one thing that’s happened is when VCs talk to their entrepreneurs, the previous mantra was, ‘there is plenty more where that came from.’
The new mantra is ‘you’ve got to make that last.’ We believe that makes it more likely we will see some acquisition activity.
First of all, acquirers know there is a valuation reset coming through, which makes them more interested in valuations. The entrepreneurs know that it won’t be as easy to raise on favorable terms as it was. And the VCs have also sort of pulled in their horns.
I wouldn’t say they are risk-off. But they are risk-down.
They are at half sail rather than full sail.
All of those factors contribute to a higher willingness to be acquired than we have seen in recent years. So we expect to see more acquisitions this year relative to previous years.
Q: What about with IPOs?
A: On the IPO side, we don’t know. No one knows.
It seems to be picking up. It certainly isn’t going gangbusters, but it seems to be picking up.
From a venture liquidity perspective, it’s April and (if) you haven’t gone public, you are unlikely to be out by the end of the year because a 180-day lockup means a company that goes public today isn’t coming off lockup until October. Hard to see there will be a giant amount of IPO-driven liquidity in 2017 and what there will be will be in the back half just cause there hasn’t been a lot of volume.
There have been a couple biggies, but it is not going to be a giant year for IPO driven liquidity.
With luck, 2018 will.
Q: How do you view opportunities in the micro-VC space?
A: Let me start by defining what we mean by micro VC because I think the term is used differently in different circles. If you want to roll the clock back 10 years, we started taking meetings with people who were working as EIRs or venture partners at well-established venture capital firms.
They were very excited about an opportunity that wasn’t exactly venture capital. The reason was, as one of our managers put it, $500,000 is the new $5 million. The cost to develop software companies had declined thanks to changes in way the open source software stack had developed. You could start a software-based company on very small amounts of money. Those amounts of money were so small they were below the economic order quantity of the major venture players.
But just because the company didn’t need a lot of money to get started, didn’t mean it didn’t have good potential. What we were hearing was, ‘I don’t want to be the next general partner at Fund IX in this well-established firm. I want to raise $25 million or $30 million and I want to invest in these seed rounds of capital-efficient companies.’
It was an interesting time because our analysis was, ‘this guy makes sense and if he’s right the opportunities to make seed investments in capital-efficient companies is a really a big potential opportunity for us. And if this set of opportunities proves to be as big as it looks like it could be, we want to participate.’
Q: So you were early to the space?
A: At the time we started, the category hadn’t even been named yet. These were just crazy guys, but crazy right. There is nothing more powerful than crazy right.
Ten years later, the numbers show they were exceedingly right. So right, in fact, there are hundreds and hundreds of imitators, new entrants, some of them profoundly differentiated, some of them wannabes. And the space has become crowded.
And so the excess returns that were present in the early days have been arbitraged away. There are still good returns to be made as a micro VC, but it’s now a super competitive category, just as competitive, if not more so, than doing Series A rounds and B rounds and the more traditional venture world.
Q: Are you still active in micro VC?
A: We remain active, but this is definitely not the time to start a new practice. We’re sort of steady as she goes.
We think it still has attractive risk-return characteristics, but it’s not jumping off the page attractive they way it was. And it’s way more competitive.
Q: What is your strategy toward new and emerging managers?
A: Emerging manager and new manager is kind of a loaded term. The implication is there is a lack of experience.
Someone who has never made investments before is certainly a new and emerging manager, but the category also includes a lot of people, or teams, who are spinning out that have a lot of experience. They may carry a Fund I Roman numeral, but they could have had brilliant careers somewhere else.
It is our experience, and the data would back it up, if you back the right fund ones, typically comprised of people who have made their mark somewhere else, a portfolio of those can do very very well.
We don’t make a practice of backing rookies, but we’ve done very well backing Roman number I and Roman numeral II funds.
Q: What do you look for as you weigh new and emerging opportunities?
A: Some of it is situational. But obviously you want a deep expertise and a proven nose for investments.
There are some people who are fabulous consultants or fabulous operating executives, but don’t necessarily have a good nose for investments, which is its own thing.
Then, depending on the sector, some kind of unique competitive advantage is always a good thing.
We’re kind of agnostic about what the unique competitive advantage is.