This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

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Years ago I started publishing an annual list of technology predictions from global venture capitalists. By design, I deliberately prioritize VCs beyond the usual Silicon Valley household names, whose voices were not necessarily heard on the world stage.

For this season’s set of predictions, I am again pleased to be able to give the floor to an all-female cast of investors, who in my opinion are poised to make a disproportionately positive impact on the venture ecosystem this year.

May 2022 bring us further enlightenment. Happy new year !

–mark

Yumiko Murakami — MPower Partners, Japan

ESG investments, which showed record growth in 2021, will continue to gain momentum in 2022. At the same time, criticism of greenwashing will increase, and the quality of ESG investments will be questioned in 2022.

ESG has so far been focused on listed companies. This year, ESG will begin to be introduced to the private market in earnest.

Tonna Obaze — Harlem Capital, NYC, USA

I believe the world will continue its Web3 evolution with blockchain technology, cryptocurrency, & NFTs. However this year, the focus will not be awareness but more mass adoption. I’m excited to see new players emerge who make Web3 accessible for everyone — those who communicate concepts in plain language to help the “non expert” understand and those who build infrastructure to make onboarding seamless. Once upon a time, only few had access to computers and even fewer had them within their homes — Apple sought out to change that and make computers accessible to everyone. Time will tell who will step up and do the same for Web3.

Emiko Takeda — Monex Climate Impact, Japan

I personally expect a lot of interesting innovation in sustainable food. For instance, I see projects which transform empty sea urchins, traditionally a scourge of algae vital to sea life and a headache for fishermen, into highly-prized sea urchins for sushi based on an all-natural alimentation program. Another example is a project producing delicious plant-based cheese alternatives from sticky rice by employing koji malt often used in Japan for fermentation of miso and sake.

Abi Mohamed—Tech Nation, UK

2021 was a remarkable year for European startups, with a record $100B of capital invested, 100 new unicorns (Atomico Report 2021), but there was still a lack of investment in underrepresented founders, the biggest disparity was towards founders who self identifies as Black. We still saw incredible funding deals to UK Black founders, i.e. Marshmallow and AudioMob. My prediction for 2022 is that we will see more UK Black founders being funded by micro/solo funds, ex-founder turned angel investors or international institutional funds.

Mai Iida — D4V, Japan

2021 saw the rise in new content driven by individuals and communities (think NFTs, EdTech cohort programs, Japan’s “Oshikatsu” or fan activities in pop culture, etc). The diversification of opportunities has put creators in a strong position to pick and choose what is best for them. People are also revisiting their way of work and life, such as the “Great Resignation” in the US, choosing a career that suits their lifestyle best. In 2022 I look forward to seeing these two trends merging – we may see more people choosing novel ways of work, treating their hobbies just as seriously as their so-called “actual” jobs. This is an interesting and hot area for startups to contribute their innovative ideas.

This guest post is authored by Mark Bivens. Mark is a Silicon Valley native and former entrepreneur, having started three companies before “turning to the dark side of VC.”

He is a venture capitalist that travels between Paris and Tokyo (aka the RudeVC). He is the Managing Partner of Shizen Capital (formerly known as Tachi.ai Ventures) in Japan. You can read more on his blog at http://rude.vc or follow him @markbivens. The Japanese translation of this article is available here.

There’s an old dig that venture capitalists like to make about private equity professionals: private equity folks boast about the size of their ego in AUM, whereas VCs know that what really matters is their IRR.

Now let’s define these three-letter words. First, I’m using the word ego as a euphemism here to be gender agnostic (albeit in reality it’s usually only men who tend to make this brag). AUM means assets under management (i.e. the total amount of money in the funds managed by the general partner team). IRR means internal rate of return (i.e. the cash returns distributed to a fund’s investors, annualized).

Asset managers care about AUM because it directly translates into guaranteed revenue. Closed-end investment funds typically follow a “2 and 20 model,” meaning annual management fees of 2% and a share of 20% of the capital gains generated by the fund (aka carried interest). The annual management fees are a direct function of AUM, i.e. 2% of total AUM each year. They are contractually established for the life of the fund, usually 10 years. The carried interest is a direct function of fund performance, i.e. 20% of the capital gains generated by the fund.

Accordingly, a large AUM directly translates into a significant guaranteed revenue stream for the entire life of the fund. A fund manager with $1 billion in AUM is probably receiving around $20 million per year in recurring revenue. A micro VC fund of say $10 million is receiving only $200k per year in recurring revenue via its management fees. 

Risk of misalignment

Since management fees are meant to cover the operations of the fund, excessively high management fees can translate into high salaries for the managing partners, luxurious offices, and lavish parties. Even if the fund’s financial performance is lackluster, a guaranteed annual revenue stream in the double-digit millions for several years makes for a fairly comfortable lifestyle. Do you see where a potential misalignment can emerge?

In contrast, a small VC fund can afford no such excesses. The managers of a small VC fund cannot become wealthy on management fees alone. They must perform. Only by generating significant capital gains on the funds they manage will they be able to generate wealth for themselves via the carried interest mechanism. IRR represents each fund’s financial performance.

For LP investors in private equity or VC funds who care about financial return, IRR is the metric that reflects their financial return, not AUM. So I submit that when a fund manager brags about their AUM, the appropriate rebuttal would be to ask their IRR.

Full disclosure: I too used to be guilty of the AUM flex. As a former GP in a fund that managed nearly $1 billion in AUM, I would often open my introduction at conferences by citing this figure. But over time, I learned that IRR represents my true KPI as a fund manager. IRR is the indicator of how well or how poorly I perform my job. It is not a mathematical anomaly that my best-performing funds have been those with smaller fund sizes, hence lower AUM.

In many ways actually, a propensity to chatter more about AUM than IRR is an indication of the stage of an ecosystem. When the venture market in a given region is still nascent, track records are limited, so the nearest metric people can look for is assets under management. However, once a fund manager has progressed beyond their first vintage, the more the relevant question to ask is, “So what is your IRR?”