{"id":19420,"date":"2022-12-17T23:02:23","date_gmt":"2022-12-17T23:02:23","guid":{"rendered":"https:\/\/fabricegrinda.com\/?p=19420"},"modified":"2022-12-19T14:59:49","modified_gmt":"2022-12-19T14:59:49","slug":"deal-terms-fatality-rates-and-the-drawbacks-of-credit-lines-a-view-from-todays-most-active-vc-firm","status":"publish","type":"post","link":"https:\/\/grinda.org\/fa\/deal-terms-fatality-rates-and-the-drawbacks-of-credit-lines-a-view-from-todays-most-active-vc-firm\/","title":{"rendered":"TechCrunch Interview: Deal terms, fatality rates and the drawbacks of credit lines; a view from today\u2019s most active VC firm"},"content":{"rendered":"\n

By Connie Loizos<\/a>, reproduced from TechCrunch<\/a><\/em><\/p>\n\n\n\n

Yesterday, we had the chance to catch up with Fabrice Grinda, a French, New York-based serial entrepreneur who co-founded the free classifieds site OLX \u2014 now owned by Prosus \u2014 and who has in recent years been building up his venture firm, FJ Labs<\/a>. He often likens the outfit to an angel investor \u201cat scale,\u201d saying that like a lot of angel investors, \u201cWe don\u2019t lead, we don\u2019t price, we don\u2019t take board seats. We decide after two one-hour meetings over the course of a week whether we invest or not.\u201d<\/p>\n\n\n\n

The outfit, which Grinda co-founded with entrepreneur Jose Marin, has certainly been busy. Though its debut fund was relatively small \u2014 it raised $50 million from a single limited partner<\/a> in 2016 \u2014 Grinda says that FJ Labs is now backed by a wide array of investors and has invested in 900 companies around the world by writing them checks of between $250,000 and $500,000 for a stake of typically 1% to 3% in each.<\/p>\n\n\n\n

In fact, the data provider PitchBook recently ranked FJ Labs the most active venture outfit<\/a> globally, just ahead of the international outfit SOSV. (You can see Pitchbook\u2019s rankings at page bottom.)<\/p>\n\n\n\n

Yesterday, Grinda suggested that the firm could become even more active in 2023, now that the market has cooled and founders are more interested in FJ Lab\u2019s biggest promise to them \u2014 that it will get them follow-on funding come hell or high water through its worldwide connections. Excerpts from our wide-ranging chat with Grinda follow, edited lightly for length.<\/p>\n\n\n\n

TC: You\u2019re making so many bets for very small stakes. Meanwhile you\u2019ve bet on companies like Flexport that have raised a lot of money. You\u2019re not getting washed out of these deals as they raise round after round from other investors?<\/strong><\/p>\n\n\n\n

FC: It\u2019s true that you sometimes go from 2% to 1% to 0.5%. But as long as a company exits at 100 times that value, say we put in $250,000 and it becomes $20 million, that\u2019s totally fine. It doesn\u2019t bother me if we get diluted on the way up.<\/p>\n\n\n\n

When making as many bets as FJ Labs does, conflicts of interest seem inevitable. What\u2019s your policy on funding companies that might compete with one another?<\/strong><\/p>\n\n\n\n

We avoid investing in competitors. Sometimes we bet on the right or the wrong horse and it\u2019s okay. We made our bet. The only case where it does happen is if we invest in two companies that are not competitive that are doing different things, but one of them pivots into the market of the other. But otherwise we have a very Chinese Wall policy. We don\u2019t share any data from one company to the others, not even abstracted.<\/p>\n\n\n\n

We will<\/em> invest in the same idea in different geographies, but we will clear it by the founder first because, to your point, there are many companies that attract the same markets. In fact, we may not take a call when a company is in the pre-seed or seed-stage or even A stage if there are seven companies doing the same thing. We\u2019re like, \u2018You know what? We\u2019re not comfortable making the bet now, because if we make a bet now, it\u2019s our horse in the race forever.\u2019<\/p>\n\n\n\n

You mentioned not having or wanting board seats. Given what we\u2019re seen at FTX and other startups that don\u2019t appear to have enough experienced VCs involved, why is this your policy?<\/strong><\/p>\n\n\n\n

First of all, I think most people are good-intentioned and trustworthy so I don\u2019t focus on protecting the downside. The downside is that a company goes to zero and the upside is that it goes to 100 or 1,000 and will pay for the losses. Are there cases where there has been fraud in lining the numbers? Yes, but would I have identified it if I sat on the board? I think the answer is no, because VCs do rely on numbers given to them by the founder and what if someone\u2019s giving you numbers that are wrong? It\u2019s not as though the board members of these companies would identify it.<\/p>\n\n\n\n

My choice not to be on boards is actually also a reflection of my personal history. When I was running board meetings as a founder, I did feel they were a useful reporting function, but I didn\u2019t feel they were the most interesting strategic conversations. Many of the most interesting conversations happened with other VCs or founders who had nothing to do with my company. So our approach is that if you as a founder want advice or feedback, we are there for you, though you need to reach out. I find that leads to more interesting and honest conversations than when you\u2019re in a formal board meeting, which feels stifled.<\/p>\n\n\n\n

The market has changed, a lot of late-stage investment has dried up. How active would you say some of these same investors are in earlier-stage deals?<\/strong><\/p>\n\n\n\n

They\u2019re writing some checks, but not very many checks. Either way, it\u2019s not competitive with [FJ Labs] because these guys are writing a $7 million or a $10 million Series A check. The median seed [round] we see is $3 million at a pre-money valuation of $9 million and $12 million post [money valuation], and we\u2019re writing $250,000 checks as part of that. When you have a $1 billion or $2 billion fund, you aren\u2019t going to be playing in that pool. It\u2019s too many deals you\u2019d need to do to deploy that capital.<\/p>\n\n\n\n

Are you finally seeing an impact on seed-stage sizes and valuations owing to the broader downturn? It obviously hit the later-stage companies much faster.<\/strong><\/p>\n\n\n\n

We\u2019re seeing a lot of companies that would have liked to raise a subsequent round \u2014 that have the traction that would have easily justified a new outside round a year or two or three years ago \u2014 having to instead raise a flat, internal round as an extension to their last round. We just invested in a company\u2019s A3 round \u2014 so three extensions at the same price. Sometimes we give these companies a 10% or 15% or 20% bump to reflect the fact that they\u2019ve grown. But these startups have grown 3x, 4x, 5x since their last round and they are still raising flat, so there has been massive multiples compression.<\/p>\n\n\n\n

What about fatality rates? So many companies raised money at overly rich valuations last year and the year before. What are you seeing in your own portfolio?<\/strong><\/p>\n\n\n\n

Historically, we\u2019ve made money on about 50% of the deals we\u2019ve invested in, which amounts to 300 exits and we\u2019ve made money because we\u2019ve been price sensitive. But fatality is increasing. We\u2019re seeing a lot of \u2018acqui-hires,\u2019 and companies maybe selling for less money than was raised. But many of the companies still have cash until next year, and so I suspect that the real wave of fatalities will arrive in the middle of next year. The activity we\u2019re seeing right now is consolidation, and it\u2019s the weaker players in our portfolio that are being acquired. I saw one this morning where we got like 88% back, another that delivered 68%, and another where we got between 1 and 1.5x of our money back. So that wave is coming, but it\u2019s six to nine months away.<\/p>\n\n\n\n

How do you feel about debt? I sometimes worry about founders getting in over their heads, thinking it\u2019s comparatively safe money.<\/strong><\/p>\n\n\n\n

Typically startups don\u2019t [secure] debt until their A and B rounds, so the issue is usually not the venture debt. The issue is more the credit lines, which, depending on the business you\u2019re in, you should totally use. If you\u2019re a lender for instance and you do factoring, you\u2019re not going to be lending off the balance sheet. That\u2019s not scalable. As you grow your loan book, you would need infinite equity capital, which would dilute you to zero. What usually happens if you\u2019re a lending business is you initially lend off the balance sheet, then you get some family offices, some hedge funds, and eventually a bank line of credit, and it gets cheaper and cheaper and scales.<\/p>\n\n\n\n

The issue is in a rising-rate environment, and an environment where perhaps the underlying credit scores \u2014 the models that you use \u2014 are not as high and not as successful as you\u2019d think. Those lines get pulled, and your business can be at risk [as a result]. So I think a lot of the fintech companies that are dependent on these credit lines may be facing an existential risk as a result. It\u2019s not because they took on more debt; it\u2019s because the credit lines they used might be revoked.<\/p>\n\n\n\n

Meanwhile, inventory-based businesses [could also be in trouble]. With a direct-to-consumer business, again, you don\u2019t want to be using equity to buy inventory, so you use credit, and that makes sense. As long as you have a viable business model, people will give you debt to finance your inventory. But again, the cost of that debt is going up because the interest rates are going up. And because the underwriters are becoming more careful, they may decrease your line, in which case your ability to grow is basically shrinking. So companies that depend on that to grow quickly are going to see themselves extremely constrained and are going to have a hard time on a go-forward basis.<\/p>\n\n\n

\n
\"\"<\/figure>\n<\/div>\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By Connie Loizos, reproduced from TechCrunch Yesterday, we had the chance to catch up with Fabrice Grinda, a French, New York-based serial entrepreneur who co-founded the free classifieds site OLX … Continue reading “”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":19431,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[39],"tags":[],"class_list":["post-19420","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-interviews-fireside-chats"],"acf":[],"contentUpdated":"TechCrunch Interview: Deal terms, fatality rates and the drawbacks of credit lines; a view from today\u2019s most active VC firm. Categories - Interviews & Fireside Chats. Date-Posted - 2022-12-17T23:02:23 . \n By Connie Loizos, reproduced from TechCrunch\n Yesterday, we had the chance to catch up with Fabrice Grinda, a French, New York-based serial entrepreneur who co-founded the free classifieds site OLX \u2014 now owned by Prosus \u2014 and who has in recent years been building up his venture firm, FJ Labs. He often likens the outfit to an angel investor \u201cat scale,\u201d saying that like a lot of angel investors, \u201cWe don\u2019t lead, we don\u2019t price, we don\u2019t take board seats. We decide after two one-hour meetings over the course of a week whether we invest or not.\u201d\n The outfit, which Grinda co-founded with entrepreneur Jose Marin, has certainly been busy. Though its debut fund was relatively small \u2014 it raised $50 million from a single limited partner in 2016 \u2014 Grinda says that FJ Labs is now backed by a wide array of investors and has invested in 900 companies around the world by writing them checks of between $250,000 and $500,000 for a stake of typically 1% to 3% in each.\n In fact, the data provider PitchBook recently ranked FJ Labs the most active venture outfit globally, just ahead of the international outfit SOSV. (You can see Pitchbook\u2019s rankings at page bottom.)\n Yesterday, Grinda suggested that the firm could become even more active in 2023, now that the market has cooled and founders are more interested in FJ Lab\u2019s biggest promise to them \u2014 that it will get them follow-on funding come hell or high water through its worldwide connections. Excerpts from our wide-ranging chat with Grinda follow, edited lightly for length.\n TC: You\u2019re making so many bets for very small stakes. Meanwhile you\u2019ve bet on companies like Flexport that have raised a lot of money. You\u2019re not getting washed out of these deals as they raise round after round from other investors?\n FC: It\u2019s true that you sometimes go from 2% to 1% to 0.5%. But as long as a company exits at 100 times that value, say we put in $250,000 and it becomes $20 million, that\u2019s totally fine. It doesn\u2019t bother me if we get diluted on the way up.\n When making as many bets as FJ Labs does, conflicts of interest seem inevitable. What\u2019s your policy on funding companies that might compete with one another?\n We avoid investing in competitors. Sometimes we bet on the right or the wrong horse and it\u2019s okay. We made our bet. The only case where it does happen is if we invest in two companies that are not competitive that are doing different things, but one of them pivots into the market of the other. But otherwise we have a very Chinese Wall policy. We don\u2019t share any data from one company to the others, not even abstracted.\n We will invest in the same idea in different geographies, but we will clear it by the founder first because, to your point, there are many companies that attract the same markets. In fact, we may not take a call when a company is in the pre-seed or seed-stage or even A stage if there are seven companies doing the same thing. We\u2019re like, \u2018You know what? We\u2019re not comfortable making the bet now, because if we make a bet now, it\u2019s our horse in the race forever.\u2019\n You mentioned not having or wanting board seats. Given what we\u2019re seen at FTX and other startups that don\u2019t appear to have enough experienced VCs involved, why is this your policy?\n First of all, I think most people are good-intentioned and trustworthy so I don\u2019t focus on protecting the downside. The downside is that a company goes to zero and the upside is that it goes to 100 or 1,000 and will pay for the losses. Are there cases where there has been fraud in lining the numbers? Yes, but would I have identified it if I sat on the board? I think the answer is no, because VCs do rely on numbers given to them by the founder and what if someone\u2019s giving you numbers that are wrong? It\u2019s not as though the board members of these companies would identify it.\n My choice not to be on boards is actually also a reflection of my personal history. When I was running board meetings as a founder, I did feel they were a useful reporting function, but I didn\u2019t feel they were the most interesting strategic conversations. Many of the most interesting conversations happened with other VCs or founders who had nothing to do with my company. So our approach is that if you as a founder want advice or feedback, we are there for you, though you need to reach out. I find that leads to more interesting and honest conversations than when you\u2019re in a formal board meeting, which feels stifled.\n The market has changed, a lot of late-stage investment has dried up. How active would you say some of these same investors are in earlier-stage deals?\n They\u2019re writing some checks, but not very many checks. Either way, it\u2019s not competitive with [FJ Labs] because these guys are writing a $7 million or a $10 million Series A check. The median seed [round] we see is $3 million at a pre-money valuation of $9 million and $12 million post [money valuation], and we\u2019re writing $250,000 checks as part of that. When you have a $1 billion or $2 billion fund, you aren\u2019t going to be playing in that pool. It\u2019s too many deals you\u2019d need to do to deploy that capital.\n Are you finally seeing an impact on seed-stage sizes and valuations owing to the broader downturn? It obviously hit the later-stage companies much faster.\n We\u2019re seeing a lot of companies that would have liked to raise a subsequent round \u2014 that have the traction that would have easily justified a new outside round a year or two or three years ago \u2014 having to instead raise a flat, internal round as an extension to their last round. We just invested in a company\u2019s A3 round \u2014 so three extensions at the same price. Sometimes we give these companies a 10% or 15% or 20% bump to reflect the fact that they\u2019ve grown. But these startups have grown 3x, 4x, 5x since their last round and they are still raising flat, so there has been massive multiples compression.\n What about fatality rates? So many companies raised money at overly rich valuations last year and the year before. What are you seeing in your own portfolio?\n Historically, we\u2019ve made money on about 50% of the deals we\u2019ve invested in, which amounts to 300 exits and we\u2019ve made money because we\u2019ve been price sensitive. But fatality is increasing. We\u2019re seeing a lot of \u2018acqui-hires,\u2019 and companies maybe selling for less money than was raised. But many of the companies still have cash until next year, and so I suspect that the real wave of fatalities will arrive in the middle of next year. The activity we\u2019re seeing right now is consolidation, and it\u2019s the weaker players in our portfolio that are being acquired. I saw one this morning where we got like 88% back, another that delivered 68%, and another where we got between 1 and 1.5x of our money back. So that wave is coming, but it\u2019s six to nine months away.\n How do you feel about debt? I sometimes worry about founders getting in over their heads, thinking it\u2019s comparatively safe money.\n Typically startups don\u2019t [secure] debt until their A and B rounds, so the issue is usually not the venture debt. The issue is more the credit lines, which, depending on the business you\u2019re in, you should totally use. If you\u2019re a lender for instance and you do factoring, you\u2019re not going to be lending off the balance sheet. That\u2019s not scalable. As you grow your loan book, you would need infinite equity capital, which would dilute you to zero. What usually happens if you\u2019re a lending business is you initially lend off the balance sheet, then you get some family offices, some hedge funds, and eventually a bank line of credit, and it gets cheaper and cheaper and scales.\n The issue is in a rising-rate environment, and an environment where perhaps the underlying credit scores \u2014 the models that you use \u2014 are not as high and not as successful as you\u2019d think. Those lines get pulled, and your business can be at risk [as a result]. So I think a lot of the fintech companies that are dependent on these credit lines may be facing an existential risk as a result. It\u2019s not because they took on more debt; it\u2019s because the credit lines they used might be revoked.\n Meanwhile, inventory-based businesses [could also be in trouble]. With a direct-to-consumer business, again, you don\u2019t want to be using equity to buy inventory, so you use credit, and that makes sense. As long as you have a viable business model, people will give you debt to finance your inventory. But again, the cost of that debt is going up because the interest rates are going up. And because the underwriters are becoming more careful, they may decrease your line, in which case your ability to grow is basically shrinking. So companies that depend on that to grow quickly are going to see themselves extremely constrained and are going to have a hard time on a go-forward basis.\n ","Category":["Interviews & Fireside Chats"],"_links":{"self":[{"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/posts\/19420","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/comments?post=19420"}],"version-history":[{"count":9,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/posts\/19420\/revisions"}],"predecessor-version":[{"id":19436,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/posts\/19420\/revisions\/19436"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/media\/19431"}],"wp:attachment":[{"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/media?parent=19420"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/categories?post=19420"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/grinda.org\/fa\/wp-json\/wp\/v2\/tags?post=19420"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}