Preparing for the Downturn: A Playbook for Emerging Fund Managers

  • Tier One: If the company is growing greater than 100% a year, with solid unit economics, they have hundreds of millions in the bank, and a great management team, they will do just fine. Don’t worry about them.
  • Tier Two: These are companies that look like they might have a business, but it’s not proven out yet. There are still significant risks and questions. And you have a big ownership stake that represents a large portion of your unrealized NAV. You need to ensure that they can raise money in the next 2–3 years.
  • Tier Three: These are companies that have not hit their plans, have incomplete management teams, and still haven’t figured out their business model. They will need to raise capital in the next two years and will also absorb an inordinate amount of energy and attention that you can’t afford, especially if your ownership stake is small.
  1. Get involved: Treat your Tier Two companies’ fundraising like it’s your own. When faced with a terrible term sheet, it’s up to you to create a better option for your portfolio company. You can form an access fund with your LPs to participate in down rounds and pay-to-plays. Don’t charge fees and carry. As an industry, we have created thousands of SPVs to increase our exposure to our best companies. We have all played offense with SPVs. Now it is time to play defense.
  2. Get a mentor: There are experienced venture capitalists out there who lived through 2000–2002 and 2008–2010. You need one now to be your friend. They have been through these events before and can coach you through tough situations.
  • Independent board members: They are required to represent all the shareholders who are not the major VCs.
  • Corporate governance law: The Board has a fiduciary responsibility to all shareholders, not just the big VCs.
  • Reputation: VCs hate to look bad publicly. That is a source of power for small shareholders. Call out bad behavior. Use the press if you absolutely have to.
  • Blocking rights: If enough small shareholders band together to control a share class that has to approve new rounds, they may be able to block dilutive financings, if they have the votes. If a big investor wants to try to sell a company, even common shareholders can block it if more than 50% of common shareholders vote against a deal. We have seen this happen! Refuse to approve new share issuances to stop transactions or extract concessions.
  • Time: This downturn will be rough for the next 2–3 years. Focus on helping all your companies get through this time without getting your positions crushed.

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Magnify Ventures

Magnify Ventures

Magnify Ventures is an early-stage venture capital fund investing in founders with bold ideas to reimagine life, work, and care for families.