E369: Midas List VC: Why Smart VCs Are Buying Secondaries

0:00Ryan, you've been a VC for over 25 years, prolific career, including being on the Midas list, the list of the top 100 VCs. A couple of years ago, you made a structural pivot to go from primary investing to secondary investing. Why did you do that? I mean, as I got older, I started to recognize more and more the time to liquidity for seed investing was just a stretch to 15, in some cases, even 20 years. And I felt it was a much more interesting place to play and a much more rapid payback. and I was starting to see some of the LPs start to question the asset class in the payback period. And I felt secondary was a more interesting way to tighten that loop.

0:37And is secondary an asset class? Is it a way to access opportunities? I felt the secondary market was ripe and I felt there was an opportunity to frankly create a new aspirational brand because there's some good secondary, pure secondary firms out there, but I felt I could bring a venture capital kind of mentality, service level approach to entrepreneurs and cap tables and access really good assets via the secondary market and to create, frankly, a new brand in the asset class. Give me a sense of what stage you're investing in when it comes to secondaries. What I try to do is quote unquote inflection point invest in advance of a P &L inflection point, a value inflection point, where I'm trying to buy shares a couple of months, a couple of quarters before that inflection point.

1:18So the key for me is not just access, but real detailed information and frankly leverage relationships so I can get that access and that information. I've had this thesis and maybe it's more of a thought experiment that some of the best opportunities via secondary is not buying some asset for 30, 40%. It's really actually buying quote unquote at par for an asset that's grown two, three times in value since the last round. 100%. why I wanted to get into the secondary market. I thought with a VC, I wasn't super focused on pencil pushing and FMV and discounts, so to speak. I'm just trying to access some of the best businesses that I know that are maybe misunderstood and frankly, less followed.

1:56And that's where you can frankly find the value, if you will. And it's interesting because you're competing against other secondary investors, not primary investors. So they don't have the same skillset or track record of fundamentally underwriting a business. That's why they have to go for these large discounts. You got it. So when I think about like my competition, of course, I run into secondary, pure secondary buyers. That's the business we're both in. But I view the real competitor as the incumbent cap table member. Like I think that's - Insiders. Insiders. Insiders is the real competition that, you know, when I talk to my LPs about who do I run into and who do I fear the most, it's the insiders.

2:33They've got governance, knowledge, relationship, all of the things that I kind of employed at a compiless when I was buying secondaries. I'm not saying like the other secondary groups aren't good. It's just I can differentiate from them, given my background. But insiders are a much more real competitor, if you will. And the flip side of that is insiders are not buying. That's also itself a signal. What I have found is you can play a role and co-invest alongside the insider because hygiene. An insider leading a secondary round on its own deal, it doesn't necessarily pass the mustard. So I've looked at a couple of transactions where I've played the role of pricer.

3:05And that just clears hygiene. And to your point, I love to see an insider doubling down. There's no better signal. And I've kind of used that signal as actually a filter for diligence. There used to be these firms that would come in and price rounds for the Sequoias, for the Greylocks, and then give most of the round back to those firms. But they needed that third party underwrite. This is kind of a secondary version of that. We'll add my fifth deal to coming up here in a couple of weeks here. And it's exactly like that. Introduced by the insider, splitting the insider, cutting the insider in.

3:34And then I had to negotiate for my slice and I paid a service of pricing and doing all the work. And they're coming in and doubling down actually even in an SPV out of the fund and within their LPs. And that's the best signal you can get. In that case, you're solving the problem, not just for the seller, but also for the buyer. And the entrepreneur, continuity of the cap table. Don't underestimate the continuity of a cap table when you're a founder. You just want to know the people you're dealing with and you want the people who've been with you for the last decade staying with you and concentrating more capital in your business.

4:02Is that just less problems, less headaches? What I learned in venture for two decades is like it takes 20 years and there's a lot of things and along comes a secondary buyer. You don't really know them at all. So in a perfect world, you would rather have your insiders concentrate more equity because it solves it. Entrepreneurs understand they need liquidity or their seed investor needs liquidity. but they don't necessarily want to entertain a new relationship. They want to be building their business, not building their cap table. Focus. Liquidity is not their problem. One of the novel things that you did, I've heard a lot of GPs talk about this, but you actually execute on this, is you had 30 GPs invest into your fund.

4:41Tell me about that strategy and how has that played out? Revenant was created off of a practice that I was running at Accomplice. Over the last 10 years, I did 35 secondaries all within the Accomplice portfolio. So I kind of knew the model, but as the GP and the person co-running the fund, I had all the relationships, all the information, and I understood where to create alpha. So when I left and wanted to create my new fund, I wanted to do it on quote, unquote, someone else's book. So I went out to 30 friends in the business, people I've either co-invested with, worked with, have done deals with.

5:12And one, I wanted them to endorse me in a certain way. And then two, I wanted deal flow. I wanted access to their portfolios. The thing that I can see here now, like what, eight months since I close those 30 GPs as LPs is I've got both of those things for sure. But the other thing, which I didn't appreciate was how much information flow you get from having 30 GPs and not only about their portfolio, but everyone has an opinion on another deal. So the information flow has been probably the thing that I most valued, but I didn't appreciate when I created it. Similarly to making a small investment in a startup, a lot of people don't realize the downstream consequences of investing in a fund and how tied in you get.

5:51very different by the way than having an equity stake or advisory stake but having that skin the game even if it's a small check this is why i don't write small checks into funds or things i don't want to be really active in it it becomes very problematic from that perspective so building the strategic lp base around gps is a very high leverage way for you to run a business i live in a world where i think founder-led businesses are worth more that's been proven in the last 15 years. And a lot of the GPs that are my LPs are seed funds because their relationship they have with the founder is on, once you put somebody in business, they look at you different.

6:26I don't care if you own 0.1 % or 5 % of the business, but if you're a first check kind of investor, the entrepreneur will always, always hold you in a certain high regard. And I've learned eventually when competing with quote unquote incumbent insiders, I'm going to have to go to the founder and ask for a favor. And there's no better currency I can find than a first investor. So I have used that in the past where I've gone to, you know, one of the GPs is an LP in my fund. And I'll say, hey, can you get so-and-so to help me waive some sort of governance? And in my world, for the most part, you would agree, founders usually carry a certain amount of cachet and they can steer governance your way.

7:02And that's another like tactical reason I brought that group in. At the end of the day, it doesn't necessarily matter why C investors have this sway or first investors have this sway around a founder. But how would you explain it if you had to? I would say for every founder, you're obsessed with something. And that first person, whether it's a customer or an investor, that says, yes, I believe in you. I believe in your vision. And I'm not only agreeing with you, I'm putting my skin in the game. I'm investing behind you and I want you to be successful in this mission. 20 years of seed investing, those relationships that get forged in the earliest stages of a business are the strongest.

7:43And they can go the other way when they go negative. But I have found that first investor relationship is very unique because they believed in you when no one else did. And I've used that as a calling card and drawn on that relationship with my old piece. What's the half-life on that? That's a great question. I would say it's 30 years because I used to think about what's the half-life of an entrepreneur relationship. Let's think about it. You probably get one, two, three deals out of the person. They probably introduce you to your best deals. Because when I think back about everything that we did really well at Accomplice, every great deal came from another entrepreneur.

8:20And so what's the value? Why do you think that is? I think talent recognizes talent at its core level, relationships are very, very valuable. If I'm going to step out and put my neck out there and say and endorse you to one of my investors or one of my friends, I don't do it a lot. And I'm really, really, and I think the bar is very high for that. VCs are obviously very smart. Oftentimes Ivy League, double degrees, all this. But do you think there's something to be said that founders are more at least first principled or more in touch with cutting edge technologies versus the venture community?

8:54100%. I mean, I actually think I haven't been for another podcast another time like I'm kind of a sell on the whole education and the brand around it I actually think you know I've lived a world where 99 % of the value creation is the execution never the idea and I found the most interesting entrepreneurs have in their life been trained in resilience whether they went to school or not it actually doesn't even matter is they have lived they're obviously smart they're obviously passion and I think more and more like the third party like validation of what intelligence is is going out the window that's like pretty exciting that's one of the exciting byproducts of ai but i come back to like what have you done in your life that required survival because that's what it is and that's like that's that i'm drawn to that i completely agree as a double ivy i agree i know you went to ivy league as well so that's we're trashing our own our own pedigrees but i think it's necessary but not sufficient i'm not up to date on generation alpha and generation z as i probably should be but there still seems to be this from the door this opportunity that comes to those that have the ivy league degrees even if you i would argue you don't learn that much or you don't learn something that you couldn't learn online let's just say or through ai today but it still seems to be very important and i have such a hard thing to ab test obviously this is why peter Teal created the Teal Fellowship.

10:20We backed a fund based on Teal Fellowship called Valerian for this very reason. I'm a huge believer in that. But even that's credentializing. So if you're not part of the Teal Fellowship, which I think many people will take over a Harvard, Princeton, Dartmouth, et cetera, you still need that stamp, don't you? I think the brand of education still exists in the world. But I think back in my own experience, because I was a middle-class kid, grew up in Philadelphia, went to school at Princeton. And I think back, what did it do for me? It probably gave me validation whether I deserved it or not. I don't know.

10:50Did I learn anything? No. But what it really triggered in me was ambition. Because the one thing you can say about the Ivy League, there's a lot of people there who have come from a fair bit of wealth and affluency, and it triggered ambition. And then I'm a competitive person by nature. So ambition and competitive, I wanted to win. And one of the ways you win is being successful against your peers. and that's the thing i look back on with 30 years of hindsight at the time i had no idea but i look back i'm like man i was really it ignited an ambition that i probably didn't appreciate you also saw what great looks like that doesn't mean everybody at princeton was smart but the top 10 of princeton are shaping society and doing all these things you got to see what what does it mean to be extremely smart the average person politically incorrect does not necessarily know the difference between a very smart person and extremely smart person they just don't have that context going to ivy's you're able to see you're able to also see your gap when you meet somebody just exceptional you're like holy crap there's like levels to this i 100 agree and i think even though you have a stanford's and like like then like the other schools like you want to be impactful you like i think every entrepreneur by their nature they want to change the world and create something but they're also competitive as hell and they want to be the best in their class whatever that means and um i think you have to harness that and believe in it and that's why i I think these founders, they're so valuable to, frankly, society.

12:12You've seen venture across multiple decades. As I mentioned, you're on the Midas list. You went out and raised$100 million for Revenants Fund One. What did you learn in that process? I learned, and the whole idea around a small fund was to get in business. And then also, one of the interesting things about Revenants is we have a co-invest program. So every deal we do, we try to offer co-invest to our limited partners. and as a student of venture capital and really in the last 10 years i started to see a lot of these smarter family offices want direct access they love their blind pools but they love their direct access so revenant was purpose built to be small so i need co-invest partners people who can actually do it and write a check alongside me into a cap table so it was literally that was part of the mousetrap the foundation was the gp lp and then i went after all family offices that actually could do co-invest.

13:06So it allows me to flex up and be a little bigger than 100. But also, I think you can create meaningful multiples of capital with a$100 million fund. Yeah, your fund size is your strategy. Yes. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI-led expert calls, their TGIS call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer, purpose-built and knowledgeable-based information to conduct high-quality context-rich conversations on your behalf, acting as a trusted extension of your team.

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15:01It's so underrated to raise a fund and get it to a certain size, but just get into business. And as I've interviewed hundreds of LPs and GPs across the years, realized one extremely obvious point in retrospect, which is everything is upstream of your first close. If it's very difficult to do$150 million first close today and do a$300 million fund, do the second best thing, which is do a$50 million first close, do a$100 million fund. And by the time you would have gotten to that$300 million, which I would argue would be highly unlikely, not even saying it would take two years, I think more likely than not would not have happened.

15:41you're going to be on your second fund which at that point you could do 200 250 and people are just i think they're set egotistically on a number or they're just anchored on a number or again going it goes back to this memetic copying their friend from princeton raised a 200 million dollar fund they're like that guy's an idiot i should be able to do 300 million dollar fund not understanding all the context maybe they raised two years ago maybe they had an anchor investor that came in early getting into business is just so underrated in every aspect but certainly when it comes to fundraising, which is more binary than people realize.

16:11People think it's, you know, like a typical sales process, like a SaaS company. You go talk to a hundred investors, somewhat of them convert, and then you have this magical kind of pool of capital. It's not like that. It's a momentum game and it's entirely contingent on that first place. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

16:38I was actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go.

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17:46Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square, and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups and everything stays synced in real time.

18:23You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square.

18:54Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square.

19:25They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are in store, online, on your phone, or even at pop-ups and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly, whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through square checking. They also have built-in tools like loyalty and marketing. so your best customers keep coming back.

19:57And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square. Get started today. A couple of things to unpack here. One of the ironies of asset management is you can run a strategy with a smaller fund, be very successful. Then you raise too much money. You can't run the same strategy. You have this brand and people back this brand. And I was a big believer in like, you want to run the strategy you want to run to keep the fund size at the right level.

20:26You can create ancillary products and ancillary things to take on more capital, but do it in a more intelligent way that works for the LP and works for you. But keep the integrity of your fund size the same. Where you're going was, it's like, one, the GPs gave me deal flow and validation. Then I got some pretty well-known family offices. And then you're downhill and you play the scarcity game. And there's no better way to fundraise than scarcity. And the way you do that is you keep the fund size tight. How do you communicate scarcity, have a scarce product? Yes. Well, so I mean, you do a lot of marketing, you get yourself to a certain level.

20:57And then when you launch, you're scarce. Last time we chatted, you said something that shocked me, especially given that you've been in the industry for several decades. You said you're not looking for power loss. My career has been made on underwriting really good people and underwriting some semblance of information. My experience in the quote unquote power law game is I have an hour, maybe 12 hours maybe a day to make a decision and i have very stifled access and it feels like i'm playing a momentum game and it's very successful that those are comfortable that those can do that i live in a world where i want to sit across or at least have a zoom with somebody i'm backing and i want some semblance of information to underwrite and the power law there's been such a frenzy and there's so much competition around it that my process doesn't necessarily work in that world i still believe in it i don't think about what i don't do what i do do is i underwrite great teams in really interesting markets.

21:46And I come in as a secondary buyer, oftentimes solving a problem. Just to play devil's advocate, doesn't that break the venture model? Don't you need that power of law outcome to drive the entire portfolio to three, four, five X? Secondary buyers look at their loss ratio. Venture people don't. Well, my loss ratio should be close to zero as a secondary buyer because I'm coming in and underwriting in a meaningful moment when it's a more mature business. What stage are you going into? Like I said, I mean, as early as I've gone is 25 million. revenue and as big as$900 million. So it's a very wide swath.

22:19I'm really trying to pinpoint an inflection about to happen to the business. And that's how I've been underwriting. Is there no opportunity to buy secondary in a fast-growing AI company that has an incredible cap table and has some implied expected value and potentially a very high expected value? We look at these deals when we can. Our challenge has been, or at least my challenge has been, really trying to get access, the right amount of access, which I committed to my LPs in terms of access to a team a little bit, access to some semblance of financials and what's happening in the business. I kind of hold myself to that standard, a higher underwriting standard.

22:59And it doesn't matter the deal. Like I would love to do a late stage AI deal if I got to meet the founder and like you said earlier, maybe I pay 10%. There's a trade-off. Yeah. Maybe I save 10 % above par. I'm not looking to discount. If I want to be in a business, I'll pay the price I need to if I've underwrote it appropriately. Mark Andreessen recently said, there are no diamonds in the rough, only diamonds. Do you agree or disagree? Well, first of all, it's a little self-serving. If I ran a$15 billion platform, I would probably say something like that to some degree. I guess he's right, but I don't view the company as the diamond.

23:26I view the founding team. I view the founders as diamonds. So tell me about your portfolio construction. Yeah, so my portfolio construction, like I said, it's a wide swath, industry agnostic, not focused on themes here or there. what I'm really focused on is this inflection point. Am I buying into a business right before it triples? Am I buying into a business right before the valuation doubles? And so I traffic and I need to be introduced at the right time in that moment by usually one of my GPLPs. And then I access some shares and then enjoy hopefully the performance that happens afterward. Last time I took a deep dive into the secondary market, I saw this natural gravity to push prices close to the 499A or to the last round.

24:07Is this something that you're benefiting from, this natural, I guess, discount in secondaries that gets done? A lot of times I am very efficient because I was a VC myself around, can I make five times my money? So I really price things off of what I believe the potential will be versus a discount. That's why in some examples, we have bid par or even north of par because you see the inflection point happening or you have really good inside knowledge from maybe an insider that X, Y, and Z is about to happen. And that gets you comfortable that you can pay a price, but I'm really trying to underwrite to three to five X quickly.

24:46And that's how I think about pricing, less than a discount. You have several pet peeves about the venture industry. What's your number one pet peeve? Man, there are a lot of pet peeves. I probably would say groupthink. I would say, I think the industry, from LPs down tend to talk each other into the same kind of deal. And I'm a big believer, you got to go where people aren't. And the group think mentality is probably the thing I dislike the most. Close second is, it's all around, it's really the founder. VCs, they sometimes get a little bit caught up in the investment they did when they really, they just found a really good team and they executed and they overly uh attribute their role in the success i invested in seed round i took the company from seed to a hundred billion dollar company that might be my greatest pet peeve that they don't appreciate it's really all about the founder and you were fortunate to witness greatness and i'm sure you made an introduction here too but you witnessed greatness and you took a risk and you should be applauded for that but let's just let's be really clear on what you actually did in building this business just to play devil's advocate are they're not VCs that come in and completely change the trajectory of a company?