Paul Kedrosky just claimed there is a super seed bubble. As I can count about 12 super seed funds in New York, many of which are new, I agree there is more money flowing in to super seed funds than in 2006-2008. But to claim there is a bubble, you need to claim that the amount of money flowing in needs to be reduced.
There will be less super seed funds if it is not as rewarding as the investors hope. Super seed funds make their returns on acquisitions and IPO’s of their investments. That is when the investors and partners get capital back. So, to assess the bubble, you have to see if the exits will be less than the investors are expecting. Will the money that can come out in M&A and IPOs be enough to provide returns to the capital going in?
Lets say there are 25 super seed funds with $20 million to invest.
Say they aim to own 7.5% of companies when they exit in 7 years.
Say they want an average annual return of 12% across their fund.
So, can their surviving companies exit for:
[ 25 funds X $20 million invested X ( (1 + 12% )^ 7 years ) ] / 7.5% ownership
Assuming the exits are over a 5 year period, that’s exits of $3B a year (i’m excluding the fact that some exits have liquidity challenges in the early years).
Given tech companies are sitting on lots of cash: Cisco has nearly $40 billion in cash reserves; Microsoft, $37 billion; and Apple, $23 billion. It seems possible these companies can get $3B from their coffers. Add in 2 IPOs, and you’re there.
I would say that only the seed investors who partake in the homeruns will make it. The $3B in annual exits will be driven by the YouTube, Google, AdMob, Zappos, and other large exits. So, seed investors need to be in lots of deals to increase their chances of being in the few big winners. But, overall, the super seed industry will survive!
I’ll be fixing the math/assumptions as I hear from y’all.