Hitting Homeruns in the Post-Steroid Era

Hitting Home Runs in a Post-Steroid Era

Brady Anderson was a center fielder for the Baltimore Orioles from 1989 to 2003. Over his first 10 years in the majors, Anderson was never known as a prolific home run hitter, averaging just 12 home runs per season. However, in 1996, he hit an astonishing 50 home runs—the most by an American League player since Roger Maris hit 61 in 1961. To be fair, Anderson has never been directly linked to steroid use, but . . . . .

During the steroid era of baseball (late 1990s to early 2000s), home runs skyrocketed. While the overall number of home runs went up, the most striking statistic was the number of players hitting more than 40 home runs in a season

We are now coming out of the steroid era for investing. ZIRP (Zero Interest Rate Policy) was our steroids, and unicorns were our home runs. After all, we are in an industry that thrives on home runs. Venture funds don’t work without at least one “home run”—a company that returns most, if not all, of the fund, or more. Over the past 12 years, especially in 2020 and 2021, home runs were plentiful, but they have been steadily declining for the last three years.

What went wrong leading up to the crash? Everyone is indexing vs. investing like an active manager. The approach was simple: find something with momentum in any category that "could be big." As long as you were in the top 2 or 3 companies in that category, you stood to make decent money. In baseball terms, that's like making solid contact with the ball—swing less discriminately and just put the ball in play. In pre- and post-steroid eras, making solid contact usually led to a routine fly ball. In the steroid era, however, it often resulted in a home run. Just as home runs decreased when steroid testing ramped up, unicorns have dwindled when interest rates increased. Many ZIRP-fueled unicorns are now turning into routine fly balls; think of companies like Hopin, Convoy, Bird Scooters, and Olive AI.

As investors, we've been making solid contact, but ZIRP made these look like home runs. I realized this early on at Salesforce Ventures. We were deploying $1 billion a year, and our IRR was greater 35% per year, as were our realized cash returns. Over the last 3 years I was there, on average Salesforce Ventures generated 50% of Salesforce’s GAAP EPS. Fortunately, while I was there I avoided investing in many companies once they surpassed a $1 billion valuation because I felt the gravity of absolute valuations was too strong. At the time, there weren't many companies valued over $5 billion. Where I broke this rule was with Snowflake, where we invested $400 million—probably the fattest pitch I’ve ever seen.

Back to baseball. The beauty of hitting a home run in baseball is that it only takes a few seconds to clear the park. Hit 50 home runs in a season, sign a contract, and make millions. Unfortunately, VC investments don’t work that way—they can take a decade or more to exit. With rising interest rates, it's as though the wind picked up to 50 mph while the ball was at its apex, turning many of our supposed home runs into routine pop flies—or, at best, doubles.

This has left many VCs scrambling to figure out where to invest next; in other words, searching for the next "performance-enhancing drug." Crypto seemed like it might be that for a moment; now, it's AI. This is also why many VCs are exploring hard tech, climate tech, defense tech, and more. Many firms have also massively upsized their funds, requiring them to find new and interesting ways to deploy larger amounts of capital.

I’m still very optimistic on the venture category, but what worked for the prior 10-15 years likely won’t work for the next 10+ years. This will require many funds to shift strategy, stage and size.