Most active global venture capital firm on deal terms, mortality rates and downsides of lines of credit • TechCrunch

Yesterday, we had the chance to meet Fabrice Grinda, a serial entrepreneur who co-founded the free classifieds site OLX – now owned by Prosus – and who has set up his venture capital company, FJ Labs, in recent years. . He often compares the holding to a “large scale” angel investor, saying that like many angel investors, “we don’t lead, we don’t set prices, we don’t sit on the board.” We decide after two one-hour meetings spread over a week whether we invest or not.

The outfit, which Grinda co-founded with entrepreneur Jose Marin, has certainly been busy. Although its first fund was relatively small — it raised $50 million from a single sponsor in 2016 — Grinda says FJ Labs is now backed by a wide range of investors and has invested in 900 companies across the world. world by writing them checks for between $250,000 and $500,000 for a stake of typically 1% to 3% in each.

In fact, data provider PitchBook recently ranked FJ Labs as the world’s most active venture capital firm, just ahead of international firm SOSV. (You can see the Pitchbook rankings at the bottom of the page.)

Yesterday, Grinda suggested the company could get even busier in 2023, now that the market has cooled and the founders are more interested in FJ Lab’s biggest promise to them – getting them funding. of follow-up against winds and tides thanks to the connections of Grinda and its partners. Indeed, while that promise was probably less compelling in a world awash with capital, it has likely become more compelling as investors pull back and founders find themselves faced with fewer options. Excerpts from our extensive conversation with Grinda follow, slightly edited for length.

TC: You make so many bets for a very small stake. In the meantime, you’ve bet on companies like Flexport that have raised a lot of money. You are not cleansed of these transactions while they increase round after round with other investors?

FC: It’s true that you sometimes go from 2% to 1% to 0.5%. But as long as a company comes out at 100 times that value, say we put in $250,000 and it becomes $20 million, that’s fine. I don’t mind if we dilute on the way up.

When you make as many bets as FJ Labs does, conflicts of interest seem inevitable. What is your policy regarding the financing of companies likely to compete with each other?

We avoid investing in competitors. Sometimes we bet on the good or the bad horse and that’s fine. We made our bet. The only time this happens is if we invest in two companies that are not competitive and do different things, but one pivots in the market of the other. But otherwise, we have a very Chinese wall policy. We do not share any data from one company to another, even abstract.

We will be invest in the same idea in different geographies, but we’ll clear it up by the founder first because according to you, there are many companies that appeal to the same markets. In fact, we cannot answer a call when a company is in the pre-seed or seed stage or even in the A stage if there are seven companies doing the same thing. We’re like, ‘You know what? We are not comfortable making the bet now, because if we make a bet now, it’s our horse in the running forever.

You mentioned not having or not wanting seats on the board of directors. Given what we see at FTX and other startups that don’t seem to have enough experienced VCs involved, why is this your policy?

First of all, I think most people are well-meaning and trustworthy, so I don’t focus on protecting against downside. The downside is that a business reaches zero and the upside is that it reaches 100 or 1000 and will pay the losses. Are there cases where there has been fraud by doubling the numbers? Yes, but would I have identified him if I had sat on the board? I think the answer is no, because VCs rely on numbers given to them by the founder and what if someone gives you wrong numbers? It’s not like the board members of these companies identify him.

My choice not to be part of the councils is in fact also a reflection of my personal history. When I ran board meetings as a founder, I thought it was a useful reporting feature, but I didn’t think it was the most interesting strategic conversations. Most of the most interesting conversations were with other VCs or founders who had nothing to do with my business. So our approach is that if you as a founder want advice or feedback, we’re here for you, even if you need to contact us. I find it leads to more interesting and honest conversations than when you’re in a formal board meeting, which feels muffled.

The market has changed, a lot of late-stage investment has dried up. How active do you think some of these same investors are in early-stage deals?

They write a few checks, but not many. Either way, it’s not competitive with [FJ Labs] because these guys write a Series A check for $7 million or $10 million. The middle seed [round] we see is $3 million at a pre-money valuation of $9 million and $12 million after [money valuation] , and we’re writing checks for $250,000 as part of that. When you have a fund of 1 or 2 billion dollars, you are not going to play in this pool. That’s too many trades you would need to make to deploy that capital.

Are you finally seeing an impact on seed stage size and valuations due to the general slowdown? This obviously hit more advanced companies much faster.

We see a lot of companies that would have liked to raise a later round – that have the traction that would have easily justified a new outer round a year, two or three years ago – instead having to raise a flat inner round as an extension of their last lap. We have just invested in a company’s A3 cycle, so three extensions at the same price. Sometimes we give these companies a 10%, 15% or 20% markup to reflect the fact that they have grown. But these startups are up 3x, 4x, 5x since their last round and they’re still going flat, so there’s been a massive compression in the multiples.

What about death rates? So many companies raised funds at too high valuations last year and the year before. What do you see in your own wallet?

Historically, we have made money on about 50% of the trades we have invested in, which equates to 300 exits and we have made money because we have been price sensitive. But the mortality is increasing. We are seeing a lot of “acquisitions” and companies may be selling for less money than what was raised. But many companies still have money until next year, so I suspect the real wave of deaths will come in the middle of next year. The activity we’re seeing right now is consolidation, and it’s the weaker players in our portfolio that are being acquired. I saw one this morning where we got around 88% back, another that delivered 68%, and another where we got between 1 and 1.5 times our money back. So this wave is coming, but it’s in six to nine months.

What do you think of the debt? I sometimes worry that founders are getting in over their heads thinking this is relatively safe money.

Typically, startups [secure] debt up to their A and B rounds, so the problem is usually not venture capital debt. The problem is more the lines of credit, which depending on the company you are in, you totally have to use. If you’re a lender, for example, and you do factoring, you’re not going to lend on the balance sheet. It’s not scalable. As you grow your loan portfolio, you would need infinite equity, which would take you to zero. What usually happens if you’re a lending business is you first lend on the balance sheet, then you get family offices, hedge funds, and eventually a bank line of credit, and it gets less and less cheaper and evolves.

The problem is in an environment of rising rates, and an environment where perhaps the underlying credit ratings — the models you’re using — aren’t as high and not performing as well as you think. These lines are drawn and your business may be in danger [as a result] . So I think many fintech companies that rely on these lines of credit may face existential risk. It’s not because they’ve taken on more debt; this is because the lines of credit they used could be revoked.

Meanwhile, inventory-based businesses [could also be in trouble] . With a direct-to-consumer business, again, you don’t want to use equity to buy inventory, so you’re using credit, and that makes sense. As long as you have a viable business model, people will lend you debt to fund your inventory. But again, the cost of that debt is going up because interest rates are going up. And because underwriters are becoming more cautious, they may decrease your line. They may call it, in which case your ability to grow fundamentally diminishes. Thus, companies that depend on it to grow quickly will be extremely constrained and will struggle to move forward.