Investing Notes From The Upfront Summit (2017)

How many years now — three? I had to check my back catalog, and lo and behold, I just wrapped up my third Upfront Summit. Every year, it’s an absolute blast, and each year becomes more memorable than the last. After two full days on the ground in downtown LA, hours of fascinating content, a who’s who of lobby conversations, celebrity sightings and conversations, and much more, I will now try to follow up my 2015 recap and 2016 recap with a 2017 version. A brief disclaimer — this will be written from an investor’s perspective, so will not aim to capture the entire conference and content itself, which is huge.

1/ The Four T’s Permeated Nearly Every Discussion – Tech, Trump, Trade, and Travel: The Upfront Summit is a technology conference, put on by a VC firm (thank you everyone at Upfront!), and now with three visits under my belt, it has been amazing to see how this event has grown and morphed into a national event. Last night as the Summit closed and I was having drinks with Greg from Upfront, he asked, “so, what did you think?” What I told him is that this is likely the preeminent “gateway” conference for a high concentration of influential pistons from within the technology startup world — LPs, who supply the capital; VCs, who allocate it; founders, who use it to create value; and the Press, who cover all the ups and down — to be in the same place for 48-72 hours, debate ideas, share deal flow, and hang out more naturally, especially for those who escape the Bay Area’s growing echo chamber. The Summit feels like a gateway because it isn’t just about technology, and that was evident from the carefully-selected programming, ranging from issues around mental health, failure in business, and some of the uncomfortable truths which have dominated the news for the past few months.

So, we have tech. Most everyone would talk about the new Administration and our new President, too, naturally. Not every panel, but it felt like nearly half of every conversation touched on the new world we all live in. Tech and politics seeped into the entire event. So, too, did the subjects of trade, which certainly affect many investors and startups, as well as restrictions placed on travel, and the free flow of ideas and people. Tech, Trump, Trade, and Travel, it was on everyone’s mind and permeated nearly every inch of panel conversations (not all) and off-stage, as well. The conference programmers did an outstanding job making this event much more than just tech — it was about how the tech industry interacts with society, from mental health, to fake news, to online bullying, and so forth. I’m sure more folks will be writing about this over the next few days.

2/ What’s On LPs Minds? There are only a few events where a vibrant network of LPs and GPs mingle for days, and Upfront Summit is outstanding in this regard. I don’t have years of experience under my belt here, but I do observe some of the changes year to year since attending. First, most LPs don’t seem to care about the pomp or headlines around markups in their fund’s portfolios — they go right into wanting to know the underlying details of the companies in question. Second, most LPs generally feel reluctant to add a new manager because their plates are full, and in fact, some have cut their own portfolio, even where performance was solid, in order to concentrate their portfolio more. Third, many who rushed to back spinouts over the past 5-7 years, backing Funds I and II, are now coming up on a decision for Fund III — if notable exits take longer or continue to be one-offs, it could mean things open up a bit for new managers to slot in.

And fourth, the biggest item I heard discussed, both on stage but mostly off stage, deserves it’s own section in this post….

3/ Geographic and Inflationary Stress On The Traditional Venture Model:

This is a tale of two — or many — cities. Many Bay Area investors joke during the Summit they want to move to LA, but I think quite a few mean it. I feel it every time I go down there. Maybe this is for another post, as I need to digest it more, but the variety feels even more expansive than what can find living in New York City. Again, this is for another post….

In chatting with many LPs, this was the first year where tons of them were notably curious and poking around about “how to invest in L.A.” It wasn’t a question of “Should we?” but rather, “How should we?” The region is so large, and with more people moving to the state and area, it’s not far-fetched to think there will be an explosion of LA-focused micro-funds like the Bay Area. A small fund covering the Pasadena area can’t also cover Venice, and vice versa. On the heels of a potential Snap IPO, new liquidity, more media attention, and LA becoming a multi-industry town, the ingredients seem to be in place for the next generation of creatives to make cool things. From the LP POV, looking over a 10-20 year horizon, the region feels extremely ripe and vibrant compared to every other region, including for some, the Bay Area.

Let me break it down…

As you may have noticed on this blog, I wrote almost a year ago that venture is a hyperlocal game, and that when a large chunk of the VC business model is predicated on exits, and most exits are driven by local firms, and most firms here have a history of making large acquisitions, it can be easy to think of the Bay Area as the only game in town.

Of course, that is no longer the case in the same way. Sure, the Valley exceeds on the metrics many measure, but with so much money in the ecosystem, so many new companies, rising local inflation for labor, office space, and the cost of mobility, valuations have gone up while ownership for most funds (not all) has decreased — it all puts a tremendous strain on the traditional VC model. Now, no one needs to shed a tear about that, and it’s partly why new models like Y Combinator, First Round, and AngelList have been able to thrive as innovators.

But…the money behind the money, the LPs, they care about this. They want active managers for their capital in different verticals and different geographies, and they want them to eventually have some decent level of ownership in the companies they allocate capital to. That’s their job, right? In conversation this past week, many expressed real concern about the concentration of money tied up in the Bay Area. As valuations rise, and the cost of living (which managers may need for living expenses) rises in step, it puts a big strain on the traditional model.

There are other creative solutions. There are investors in the Bay Area who have stayed disciplined and grown their funds size carefully; many will now get on a plane to find a deal at a more attractive price “out of market”; and many are more than happy to push back on price and negotiate a deal rather than just have a one-sided marketplace. These tactics will help reward the folks who execute on these types of creative solutions successfully.

In aggregate, however, we may be on a path where a new model has to emerge to make it work. It could already exist with AngelList and their infrastructure to handle fund management; it could be micro-regional funds within the Bay Area itself, which is already starting to happen as I can name a few (and I’m sure more new ones on the way). Where this all sorts out, I do not know. But, on a macro level, it is on LPs’ minds, that’s for sure, and while they will continue to keep investing in the Bay Area (no question), there’s healthy skepticism regarding just how brutally concentrated the rewards (like AppDynamics getting snatched up by Cisco in an all-cash deal) could be over the next 5-10 years. The rest of the country is wide open, though — more and more LPs seem to be open to a regional “bet” here and there, are certainly open to vertical-specific funds which have GPs with the right industry contacts. The “spillover” from the Bay Area to the rest of the country will be fascinating to see unfold — and perhaps it is also part of the solution.