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Key insights from Chris Ahn
On the significance of up rounds representing 65% of deals: “I think we’re still making our way through the impact of 2021 and early 2022, when there were low interest rates, high liquidity and, as a result, higher valuations.”
On his approach to risk management and mitigation strategies when investing: “Because each situation is unique, and there are no predetermined answers to these questions, it is paramount that founders and investors have a shared vision for the company to help guide them.”
On his perspective on the most effective monetization models for community-based ventures: “The tried-and-true method for monetizing open source has been to create a hosted version of the open-source project, build a sales team around this product and sell it as a subscription service.”
Series D and later rounds saw a significant increase in invested capital – from $451.7 million in Q4 2023 to $1.2 billion in Q1 2024. How might this influx of capital impact the valuation dynamics and exit strategies for companies in the modern enterprise technology space?
Investments in later rounds tend to track more closely to the movements in the public markets. As public tech company valuations began to rebound in Q1 2024, it gave private investors investing at later stages more confidence that there could be lucrative initial public offering (IPO) outcomes from their point of entry. This lies in stark contrast to most of 2023, when investors – both private and public – shied away from higher valuations due to the uncertain landscape for IPO exits.
In Q1 2024, up rounds represented 65% of deals, and the past three quarters represent the only instances in the history of Cooley’s Venture Financing Report when the percentage of up rounds was below 70%. How do you interpret the significance of this change in terms of market sentiment and investor behavior? What do you believe are the underlying factors contributing to this trend?
I think we’re still making our way through the impact of 2021 and early 2022, when there were low interest rates, high liquidity and, as a result, higher valuations. When these companies raised during those years, they usually did so with a plan for two to three years of runway. So fast-forward two to three years to today, and I think we’re starting to see those companies come back to market and adjust their valuations to the new market environment of higher rates and less liquidity.
Since Q2 2021, the percentage of deals with a pay-to-play provision has steadily increased, now standing at 8% of deals in Q1 2024. As this represents only the fourth time in the history of our report that the percentage of deals with a pay-to-play provision has exceeded 7%, how do you envision this impacting the negotiation dynamics between investors and companies, especially in terms of risk allocation and long-term partnerships? Do you see pay-to-play provisions continuing their upward trend?
Although investments with pay-to-play provisions have increased over the last two years, they are still rare at 8% of investments in Q1 2024. In times of market volatility like what we’ve experienced over the last two years, there is a natural flight to quality for investment opportunities. The top quartile of opportunities can usually continue to raise capital without additional provisions, while opportunities outside of that may need to get creative to incentivize investors to participate.
How do you approach risk management and mitigation strategies when investing? Are there challenges or pitfalls you prioritize addressing to ensure the success of your investments in this space?
As venture investors, we focus primarily on the potential upside of investment opportunities and ask ourselves the question of “what could go right?” However, it’s also important to understand that risks are inherent in any early-stage investment.
The most challenging risks are those that you can’t foresee. In the process of growing any early-stage company, many ambiguous questions arise where tradeoffs exist in every direction. We’re seeing some traction in an unexpected use case – should we change course and invest more here? There’s a special person we want to recruit, but that person needs to be remote – should we make an exception? Our competitors are slashing prices to gain market share – what should we do?
Because each situation is unique, and there are no predetermined answers to these questions, it is paramount that founders and investors have a shared vision for the company to help guide them. Although the execution path to get there may change, the end vision must remain clear and aligned on.
What factors led to open-source and community-based ventures being a significant focus for you?
When I was at Hellman & Friedman, we were evaluating investing in a multibillion-dollar software business, and the biggest risk we identified was a relatively new open-source project that we believed could potentially make this business obsolete. It struck me then that a motivated community could build meaningful projects that could compete with even the most robust of businesses.
When I dug into it further, it turned out that history has shown numerous examples of open-source community projects prevailing over centralized, tightly controlled ones. Wikipedia versus branded encyclopedias and the open protocols the internet is built on are just two famous examples. In fact, community-based, open-source projects have only accelerated in importance over the last 10 years, and I believe this will continue.
Many successful open-source projects have transitioned into commercially successful ventures through various monetization strategies. What are your perspectives on the most effective monetization models for community-based ventures, and how do you assess the scalability and sustainability of these models?
The tried and true method for monetizing open source has been to create a hosted version of the open-source project, build a sales team around this product and sell it as a subscription service.
The challenge with this model is that in order to monetize, the creators of the open-source project need to commit to building a full-scale enterprise software business. Unfortunately, many open-source projects start as hobbyist projects –and not necessarily with intentions to build a full-scale company with thousands of employees.
One emerging alternative has been crypto networks, which remain natively open source and can run with a handful of people. Because crypto projects live on blockchains, they don’t require building any additional infrastructure. The blockchain serves this purpose. In addition, tokens offer a native distribution and monetization mechanism. As a result, crypto networks have tended to achieve scale with significantly fewer people.
Are there any particular open-source projects or initiatives that you believe are crucial for advancing the crypto ecosystem?
Crypto has historically had three overarching challenges: facilitating cheap and fast transactions, onboarding users and onboarding funds. Over the last two years, the industry has made tremendous progress on all three.
Thanks to new scaling solutions, transaction fees have gone from tens of dollars to fractions of a cent. Smart wallets have made the user onboarding process as easy as logging in to an application using Google Authenticator. And, last but not least, companies like Coinbase are making it simple to move funds.
Most projects in crypto are open source. Keep an eye out for Layer 2s, smart wallets and new onramps!
Chris is a partner at Haun Ventures, a venture capital firm that supports teams building crypto. He started his career at Morgan Stanley before joining Hellman & Friedman, an investment firm with more than $80 billion in assets under management. It was there that Chris discovered open source, which led him in 2015 to join GitHub, where he was involved in numerous initiatives – including helping to start and lead the strategic finance and business operations teams, creating the company’s first operating plan, helping to scale the sales team, launching the marketplace product and leading the company’s acquisition by Microsoft.
After the GitHub acquisition, Chris became a partner at Index Ventures to invest in the next generation of community-led businesses. He helped sponsor Index’s investments in Notion and Figma, and he later spearheaded its crypto efforts.
Chris is originally from Korea. He majored in international economics at Georgetown University, where he earned a Bachelor of Science in Foreign Service (BSFS) degree.
Haun Ventures is a venture capital firm founded in 2022 by former Andressen Horowitz general partner Katie Haun. With two funds totalling $1.5 billion in assets under management, we invest at every stage in companies and projects that build on or incorporate decentralized technology. We believe crypto is a new architecture for the web that enables novel forms of ownership, economic behavior, and collaboration. Our nimble team supports founders and teams with deep product, operating, and regulatory expertise from their backgrounds holding leadership positions at companies including Coinbase, Google, Facebook, Anchorage, and GitHub as well as asset managers like Andreessen Horowitz, Index Ventures, and Hellman & Friedman.
Last reviewed: May 23, 2024
