Capital Chronicles #3

Hello there! Welcome to Capital Chronicles, saving you hours every week with ~2-3 minute summarised insights from the best venture builders, investors and capital allocators out there. This week: understanding equity vs. SAFEs with Quentin, TDM Growth Partners’ perspective on investment valuations, and distilling 25 years of Bill Gurley’s knowledge on VC and marketplaces.

As subscriber #TBD, each web link below takes you to:

• A link to the original article (read time: varies)

• Summary / insights / implications per article (read time: 2-3 minutes)

Now, read on for the latest…

🛠️ On venture building…

The Founder's Dilemma: Priced Equity Rounds vs SAFEs, by Quentin Wallace. A thoughtful piece providing a detailed examination of priced equity rounds and SAFEs, highlighting the respective advantages and disadvantages between funding mechanisms.

• Why you should read it: it’s an article I often come back to as Quentin does an awesome job at laying out the foundational elements between the two funding options. While priced equity rounds offer certainty in valuation and ownership, they also involve extensive negotiations, due diligence, and legal costs. Conversely, SAFEs provide a faster and more flexible funding option, but introduce uncertainty around future valuations and potential dilution.

🧭 On venture investing…

“Through-the-cycle” exit multiples, by TDM Growth Partners. An analysis of 123 listed software companies over the past decade to determine "through-the-cycle" exit multiples at varying growth rates.

• Why you should read it: a structured and logical set of insights that quantitatively prove the benefits of thinking long-term when investing in technology businesses. Despite the prevailing narrative that high-growth software companies should command premium valuations, TDM Growth Partners' analysis suggests that a conservative "through-the-cycle" multiple of less than 8x revenue is more realistic and prudent.

📖 Learning resource…

A summary of Bill Gurley's blog posts from his blog Above The Crowd, collated by Alex Barrow. Distilling 25 years of Bill Gurley’s knowledge into one, easy-to-read document.

• Why you should read it: as a successful venture capitalist, Gurley has an incredible track record investing in marketplace businesses like Uber, GrubHub, Nextdoor, OpenTable and Zillow. Gurley provides amazing ‘first principles’ advice for VCs while his perspectives on technology companies with marketplace business models act as a foundational set of concepts for building and/or investing in the category.

📊 Market insight…

Kauffman Fellows Sentiment Survey 2024. Based on responses from 262 venture capital fund managers, the survey reveals a cautiously optimistic outlook for the venture capital industry.

• Why you should read it: the Kauffman Fellows Program is often likened to an ‘MBA’ for venture capital, with an exceptionally strong alumni network throughout the industry. This translates to a high signal-to-noise ratio in their market research, providing a clearer perspective on the current state of the industry and its trajectory for 2024.

🎲Lucky dip essential reads…

• What makes a successful founder?

• Adopting a "three-musketeers" attitude for your go-to-market

• The Best Way to Do Cap Table Math (In My Opinion…)

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Have a great week!

Josh