The Ledger
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Somerville: Mark down VCs with under two years of runway, not long-runway growers
“I would look at the companies that are shorter on runway that are going to need to raise within the next 18 to 24 months, and if those companies have hit a growth phase and a price that's too high, then I would take a discretionary markdown on it. If instead i…”
Somerville: VC Managers Lacking DPI After Four Funds Face Organizational Risk
“I think if you wait around and have four or five funds and have returned no capital, you're actually introducing organizational risk from an LP standpoint.”
Somerville: VC Funds with 3x-4x TVPI Can Accept 50% Secondary Discounts
“Now, if a fund is at a three to a four X and you're asking them to take a 50% discount, they're still going back to their board with a two X return and the ability from an opportunity cost standpoint to then deploy it. Into what we all expect to be very good v…”
Somerville: Emerging VC managers should avoid selling management company GP stakes
“I don't think they should take it unless that's the only option. And if it's that hard to fundraise, and they don't have, like, a natural group of family offices or high net worths to support them maybe they should wait and find a different way to generate a t…”
Somerville: Structured equity downside protections often evaporate prior to exit
“Structure doesn't necessarily stay when a company exits. It gets negotiated out by management or the rest of the board, and so you can think that you've protected yourself with structure, and it ends up absolutely evaporating.”
Somerville: Micro VCs should sell majority stakes into mega growth rounds
“Yeah, I mean, I think definitely on the micro side, it's something that people should be actively doing, and I would even consider selling majority positions, not full positions, into these mega growth rounds. I think it makes sense as a seed investor, you're …”
Somerville: Venture capital firms retain non-performing partners for too long
“I think people keep non-performing partners for too long, and there's not as much of a focus on transitioning those folks out or giving them the ability to fix a portfolio rather than continue to deploy at the same clip.”
Somerville: Buying secondaries off current TVPI risks paying for overinflated valuations
“You could argue in some scenarios, if you're buying off of current TVPI, it's already overinflated, and in order to actually get to that TVPI at the end of the day, it might not make sense from a duration standpoint to even consider that.”
Somerville: LPs Face Rampant Adverse Selection in SPV Direct Investments
“That they get rampant adverse selection and oftentimes pushed into fee bearing SPVs that even further dilute their end of day return.”
Somerville: Lateral partner hires can disrupt firm chemistry and create organizational risk
“I think on the fun side, just underestimating the human element with people that join on a lateral basis that have great pedigrees that you think will be additive, it's not always that way. You can have someone join and it completely messes up the chemistry of…”
Somerville: LPs target 3x net returns, which becomes mathematically harder at scale
“Because at the end of the day, an LP that's deciding whether to invest in venture wants outsized multiple performance, I think generally above a three X net, and the math is just harder in order to get there, particularly as fund size increases.”
Somerville: LP Patience Depends on Management Fees Being Charged on Invested Capital
“If it truly is on invested capital for some of these growth funds, then I think LPs are fine being patient and respecting the discipline of the manager. If it's on committed, that becomes a more problematic scenario”
Somerville: Missing deep-pocketed investors increases venture down round risk
“Deep pocketed investors that actually know how to do reserve management that will be there to support the companies in the future. If you don't have that, you're going to be more susceptible to down rounds or complete wipeouts.”
Somerville: Sell Secondary Stakes in 1.5-2x Assets, Hold 3-5x Growth Assets
“For me, I would look at the portfolio If there are assets that you really like, but you feel like are higher priced and offer maybe you know, one and a half to two X kind of arbitrage off of whatever last round prices, I would think about pruning some level of…”
Somerville: Carry performance kickers in venture funds require at least 3x net returns
“I don't like when it's less than three X and people start doing, like, kickers at two X or two and a half. I mean, that's just not high enough for a venture fund. I think it really needs, at a minimum, to be a kicker of three X net, net or above”
Somerville: GP commitments should be judged on net worth percentage, not dollars
“I like to see a decent level of GP commit, but there's no reason to, like, push it to an extreme kind of percentage level, and I do think that the net worth percentage is much more important than whatever the absolute dollar value is”
Somerville: Picking category winners in weak sectors yields poor growth-stage returns
“You can pick a winner in a bad category, and you can still really not do well if you're entering in at a growth phase. I think we've picked some companies that have proven to be the category leader, but if it's in an area like InsureTech, or areas of PropTech,…”
Somerville: First-time micro VC fund raising barriers are relatively low
“It's not that hard to raise a micro fund being that typically a first time fund would be looking to raise 25 to fifty million in size and that really requires that you have an aligned set of high net worths that believe in you that you've worked with for a whi…”
Somerville: Senior VC spin-out funds raise under the radar and are highly competitive
“I think if you have someone that's been a partner or a senior member at an established brand who decides to leave and start something smaller, more focused on their own, those are generally highly competitive to get into. There's a big access premium. Most peo…”
Somerville: Junior VC spin-outs struggle to raise due to unclear deal attribution
“If it is more of a variety of spin out where it's someone who's junior or mid-level at a firm that Maybe has mixed attribution or has been responsible for sourcing, but not monitoring or carrying something through end to end. That can be a more challenging fun…”
Somerville: Evaluating VC Funds Requires 5-7 Year Forward Performance Projections
“What you need to build a view on is what projected performance can look like five to seven years from the point of assessment, and that requires having an understanding of the underlying companies, understanding what's showing traction, what that could mean, w…”
Somerville: Healthy VC firms plan generational transition 10 years ahead
“Generational transition is something that is very difficult for any firm to navigate, and so it being done gradually with a good plan in place where people are thinking about it even 10 years before it's going to happen is the mark of a good firm with a health…”
Somerville: High-Ownership Unrealized Winners Outweigh Early Liquidity for LPs
“For us, it's great unrealized positions with high ownership behind it that will ultimately matter at an aggregate level at the end of the day. So it doesn't matter necessarily if it's realized or unrealized.”
Somerville: Denominator effect forces LPs into secondaries to rebalance portfolios
“The denominator effect is effectively when you have both a public and a private book, the public side has gone down more significantly. The private side has come down, but not at the degree or the speed that you've seen the public side go down. And what you're…”