7GC II Portfolio Semi-Annual Update
Written by Christopher Walsh, Partner @ 7GC & COReview & Outlook
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Review & Outlook |
7GC fund II has delivered exciting results in the first half of the year, driven by strong momentum across all facets of sourcing, deal execution, and existing portfolio outperformance. We continue to be extremely enthusiastic about current pricing and the beginning of some major thematic trends that are driving a healthy deal flow funnel that we anticipate will only accelerate as we enter the second half of 2024. Just as COVID-19 and post-ZIRP eras led to outsized exits and investment opportunities, the current market certainty today has exacerbated entry and pricing capabilities for the team at 7GC.
While we seek to avoid "macro" forecasts, our current framework considers three important factors—two idiosyncratic and one systemic—to guide our current allocations and where we are looking for new opportunities.
Breakaway early-stage companies are winning with less:
As we actively monitor and meet with companies, historical time between fundraising rounds is being extended for early-stage companies as well – but for very different reasons than late-stage. The founder cohort post-2022 is running a different management strategy showing great founders doing more with less. Many of these companies are optimizing burn while growing more consciously. This has led us to move downstream and meet with many companies that have raised fewer rounds, while remaining consistent with our investment mandate.
FOMO cycle has cycled out of interesting verticals and themes:
For Fund I, we looked to find opportunistic entries in a market that increasingly had few undervalued verticals, leading to substantial weighting toward consumer and online marketplace businesses. Today, we see previously frothy verticals like Fintech and traditional enterprise SaaS being slighted by many market participants given historical baggage. We have carefully structured targeted names that we see as optimal entry point levels with solid management teams.
Generative AI hype is warranted and this wave will drive seismic winners:
We shared our views on AI's technology revolution in previous notes to our investors. It remains a key thesis element with new investments in Anthropic and Poolside this year. While this was a consensus bet in 2023, cold water has been poured on progress from Goldman Sachs and other major banks over the past three months. This skepticism is nothing new – illustrated by previous technological revolutions like the Cloud (AWS was mocked), Internet (Amazon lost 90% of its value), and Mobile (Apple was a consensus short in 2010). Non-consensus creates dispersion and winners and losers, which we prefer. When evaluating these investments, we remain mindful of hype vs. tangible value, focusing on clear-cut winners where we see strong visibility in market positioning and ARR ramp.
These thesis points reverberate across our Fund II current portfolio, which I categorize as falling into three buckets:
Early Fund Investments Cohort:
Investments include Because Market and Jackpocket and were made at historic multiple expansion highs. We view these as examples of durable compounders driving to exciting execution and Jackpocket being acquired by DraftKings for $800M in gross proceeds, representing a projected 1.3-1.5x with an investment duration of <2.5 years. Only 38 VC-backed companies had an exit over $500M in FY23, representing a stark win for a Series D investment for 7GC.
Opportunistic thematic:
These investments include Returnmates (now Sway) and Lucra Sports. We invested in these companies at a blended forward ARR multiple of under 3.0x, and gave us the capability to lead and garner board governance with more significant ownership thresholds.
Generative AI:
WE HAVE built a strong deal funnel of generative AI companies across the three disparate technology layers to gain expertise across the entire ecosystem. We continue to monitor the hardware (semiconductors, data center technology), infrastructure (LLMs), and the application layers. Through this process, we made two concentrated investments into Anthropic and Poolside. As noted, we are not in the business of daydreaming when selectively deploying capital. We have asked ourselves the question with these investments not will this application be adopted, but who will win, driving our investment thesis from gray areas to black-and-white outcomes.
We will continue to use these frameworks in our next wave of capital deployment in the second half of 2024, with an extremely high caliber of upcoming mandates turning on in September / October to assess.
New Fund Investments
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New Fund Investments |
Anthropic
Invested in February 2024During Q1, 7GC fund II made a substantial investment in Anthropic's Series D alongside Menlo Ventures. At the time of investment, there was a question of LLM's durability with increased competition from Meta's release of LLaMa and OpenAI, recently valued at $86 billion. Unlike some participants, the idea of commoditization excited us as long as the company's market positioning was best-in-class. Generative AI represented just 1% of cloud spend in FY23, implying that we were not even halfway through the first inning at the time of investment. Cloud services today are viewed as commoditized and hyper-cheap offerings, but the oligopolies of Amazon AWS, Microsoft Azure, and Google Cloud generates $229 billion in annual revenue.
We spent time reviewing Anthropic and OpenAI's positioning and other tertiary players, and our general view was that this will not be a "winner take all" market but likely an oligopoly that is not dissimilar to the cloud market today. This was supported by research that suggested that large enterprises use three models on average today. Further, we noticed Anthropic winning dramatically on features concerning safety, security, and customer support – all critical components for enterprise sales. Unlike OpenAI, which focuses on 25 things at once, we gained conviction in Anthropic's relentless focus on enterprise sales and frontier research.
Fast-forward to today, and Anthropic has fully caught up with OpenAI in terms of performance, with Claude arguably leading the race today. This product execution has translated to financial performance, with the company surpassing $100M in ARR in just 9 months since launch in FY23 and a more robust margin profile relative to OpenAI due to a larger weighting toward enterprise vs. consumer revenue. As market positioning continues to solidify, we view the ~4.5x valuation differential between Anthropic and OpenAI to shrink.
Fund II Highlights
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Fund II Highlights |
THE Because Market
Invested in November 2021One of our highest-confidence bets continues to grow based on masterful execution by the founding team at Because Market. When we think about durable growth, we see the company as a perfect example of a company that is not focused on absolute growth but on positioning that allows it to compound opportunistically over an extended period.
The company showcased EBITDA profitability for the first time in its history in Q1 2024 and has scaled gross margin leverage by ~60% since we invested. The company has also executed by bringing three new revenue segments to fruition since our investment, including Amazon, B2B, and Wholesale.
Jackpocket
Invested in December 2021The company announced that it was to be acquired by DraftKings in Q1 2024. The deal's synergies made sense—Draftkings would be given access to a customer database of over 6 million users, with 1.8 million active users and funded wallets. In FY23 alone, Jackpocket acquired ~660K new customers at an 80% lower CAC than Draftkings.
As a result, the incremental revenue and EBITDA are significant, with the proposed transaction expected to drive $260 million to $340 million of incremental revenue and $60 million to $100 million of incremental adj. EBITDA in FY2026. We invested in the company when it had trailing revenue of ~$40M, showcasing that revenue is expected to scale by 7.5 times from 2021-2026, representing a 50% 5-year CAGR.
For Series D rounds specifically, at the end of 2023, the median pre-money valuation fell 42% versus FY21, articulating that the price yesterday for similar businesses is incredibly different today. Despite this multiple compression, the company's ability to compound allowed for a positive fund outcome.
Fundraising Update
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Fundraising Update |
As we enter the second half of 2024, we are thrilled to announce that 7GC II is on track for a final closing at year-end. This milestone offers newcomers the advantage of joining with full visibility into a well-curated portfolio of 7 top-tier investments including two landmark investments in AI frontrunners, totalling $38 million. This visibility significantly reduces the risk typically associated with a blind pool. Looking ahead, we also anticipate three high-growth follow-on rounds in Q1 2025, which should drive a meaningful increase in the Fund's value.
In response to increasing demand from our investors, we have expanded our offerings to include co-investment opportunities, enabling new partners to participate in high-potential new deals (previously offered to existing LPs for follow-on’s). This year, we have successfully raised $15 million in co-investments across two vehicles focused on leading AI companies: Anthropic and Poolside.
Our team will be traveling in the coming months ahead of the close, offering one-on-one sessions for interested LPs to discuss each investment in detail, both in person and virtually. We’ll kick off our journey in Paris for the IPEM conference, followed by a visit to Milan, we’ll also be in New York for the GCM Consortium in October. Please reach out to us anytime, we would be happy to hear from you!
