Chris Douvos runs a fund of funds called Ahoy Capital that manages assets on behalf of numerous nonprofit institutions, endowments and foundations throughout the U.S.
Outfits that want exposure to startups — but aren’t large enough to contemplate funding them directly — count on Ahoy and funds like it to invest in venture firms on their behalf.
Douvos has been at it for nearly 20 years, having joined Princeton University’s endowment in 2001 out of business school and investing on behalf of several organizations since, always focusing on venture. Given his background, we suspected he might have some thoughts about what a pullback in funding from big institutions might mean for the venture industry, so we called him up last week.
You can catch a longer version of our chat in podcast form, but you’ll find the most valuable highlights below, edited for length.
TechCrunch: You’ve talked and blogged in the distant past about passing on investing in the Accel fund that ultimately invested in Facebook. What happened?
Chris Douvos: I said no to probably one of the better funds of that decade not once but twice . . . [If you] rewind to 2004, you know, we’re there at Princeton, we’re existing investors. And Accel is coming back [for more capital commitments]. And we were really kind of rethinking our portfolio a little bit because most long-established names had stumbled [after the dot-com crash] . . . and there was a lot of tumult in the portfolio . . . and venture returns [had] just been so grim.
In an endowment where you’ve got a panoply of assets, why are you going to buy this long-dated, way-out-of-the money option? Like, it’s really got to be worth it to compensate you for the risk and illiquidity, [yet] here comes Accel and . . . returns haven’t been good, they’ve had team turnover . . . we [thought we] could do better, and so we said no. There are a bunch of other folks that that said no; everybody threw up their hands [deciding that the] numbers just don’t justify this [new fund the firm was targeting]. . . .
It’s decision-making under uncertainty . . . A mentor of mine, a top-10 Midas List kind of guy [told me I’d] made exactly the right decision . . . that had a bad outcome and sometimes that happens in investing. We don’t live in a Newtonian universe where force equals mass times acceleration.
It’s relevant now because the market is terrible. LPs are going to have a lot of hard decisions to make. Turning away a new fund is one of those possibilities but also, will LPs cut back on already committed capital?
The market is already down to levels before Trump was elected, so that’s three years-plus of performance that we’ve given away, and so yes, there’s a lot of consternation and a lot of wringing of hands and everybody is really freaked out about liquidity.
Part of the challenge is that — even going into [this seeming recession] — we were so heavily levered to venture because . . . [across the last] seven, eight years, we’ve been on like a two-year cadence [with venture capital managers hitting up LPs for more money] every two years. So you’re three, four funds deep before you really know you know if [a fund’s performance is going to be decent]. So you’re putting out a lot of money [and a lot of assets are rising in value but these are largely unrealized gains as companies remain private longer].
Now, all of a sudden, by the beginning of this year, people were way out over their allocations. Their target allocation [to venture as an asset class] might have been 10%, but their value was actually like 14%. [Add to the mix this downturn and] if your equity portfolio is halved — which we haven’t gotten to half yet — now venture [makes up] 28% of your portfolio against a target of 10%, and you’re like, oh my God, what happened?
And by the way, you’ve now got all these capital calls — undrawn commitments — where like you’re going to start getting calls and [VCs] are gonna be like, “we’re finding all these great deals, and so we need 5% of your commitment sent in.” And you’re like, Where does the money come from? It’s like, I’ve got to sell stock that’s in the tank . . . And so the first thing you do is you start saying like, “I can’t really make a lot of new commitments . . .”
That’s new relationships, [but] at some point, that starts to creep back into your existing portfolio, and you start doing portfolio triage, and you’re like, Wait, I have 24 venture managers . . . I’ve got a cut somewhere. Do I do make smaller commitments to each of them? Do I start saying sayonara to the bottom third? What if the bottom third includes the next Accel fund?
One thing you and I have talked about before is once you say goodbye, you can’t go home again. It’s not like I’m putting a circle on the calendar for Accel’s holiday. The Accel guys would have no interest in talking to me.
So you start telling VCs, “don’t ask me for money.”
It’s a very real thing that happens . . . Meanwhile, the venture people here believe, oh my gosh, entrepreneurs are suddenly willing to accept term sheets at 10% less, there’s so much value here. What they don’t realize is there’s so much more value out in the rest of the world. When I hear VCs saying, there’s value here, I’m like, no, you don’t understand. If you’re talking public markets, there’s value everywhere; there’s wreckage in the street. Every company is on sale 50% off. . . It’s Warren Buffet buying 60-cent dollars, all day long . . .
Are VCs telling you that this is the worst environment they’ve ever seen? Are they scared?
People are really nervous. I’m calling a bunch of my GPs, and we also do direct investments — we’ve got about, you know, 50 investments directly in the companies — so I’m talking to a lot of the founders and management teams.
People don’t know what’s gonna happen. We’re in the early innings of this. We’ve got kind of twists and turns on tap that we may not even understand . . . but I have an email in my inbox that came in 20 minutes ago from a health system, and the guy there — it’s an investment officer — says, “CEOs concerned that the infection rate in the U.S. will look like that of Italy over time . . . With a caveat of the fluidness of the situation and everything that is everything is subject to change, we would appreciate any color you can provide on capital calls and distributions in the near term. Are there any opportunities to generate liquidity in any underlying funds or investments?”
I mean that’s kind of a wild email to get. I will tell you I’ve got a 2012 fund that’s an awesome fund; we’ve had a bunch of great companies . . . and I was expecting this year to be like a nice liquidity year [but now] in my letter to my investors, I’ve had to say, expect no liquidity out of that fund this year. I think we’re all going to rue 2020 as the year where all these companies missed their window.
Sometimes, when something like this happens, money comes from elsewhere to fill the vacuum. Do you see a white knight out there?
So it’s really interesting. After the [dot-com] crash, you had these situations like the ones I’ve described where, you know, a lot of institutional investors needed out. And what was amazing about that time is that all of a sudden, out of nowhere, you had the Singaporeans show up, so like Temasek and GIC, and they started dropping the dollars. And not too long after that the Australian superannuation funds came in and they really supported the venture industry and it was really important during that time.
And if you look back to like 2009, that’s when we saw the first big waves of capital from the Gulf and Russia and some of these other places. And that kind of stabilized the market until everybody got their sea legs.
And now . . . I don’t know where you know where the next pools come . . . I don’t want to get like alarmist about it, but I think the venture industry as a whole is going to get, you know, kind of resized over the coming years. The problem is that the capital is so persistent that the committed capital is on the books forever.
I remember Doug Leone from Sequoia said to me in 2004, “if this venture downturn had lasted one year longer, we finally would have shaken the deadwood out.”
There are a lot of marginal investors in the business today and you know, maybe it’ll take a few years for them to shake out. But boy, if I’m somebody who just spun out [of a big] company and I’ve got a $25 million fund that I scratched up for my friends and family and I’m looking for the hot deal coming out of Twitter and doing these momentum, overpriced deals, I’m thinking this is gonna be a slog and . . . if this downturn persists, how long can I credibly do this before I go start another company?
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