Minisode: Answering Uncertainty, Venture’s Vibes Problem & the Limits of TVPI

0:00Nick Chirls: I love the fact that he thought venture was about answering uncertainty because everyone says venture is so uncertain. It was a little bit of a mental flip, right? I love that. What have you proven and what have you learned? And I thought that was a nice way of turning it back on its head.

0:30Nick Chirls: in the show notes and in the end of this episode.

0:32Alec Litowitz: Welcome back to the Origins Minisode. This is the podcast that dives deep into the business and venture capital, where we learn how the people behind the capital, both GPs and LPs make decisions. I'm Nick Churls, GP at Asylum Ventures.

0:45Nick Chirls: And I'm Beezer Clarkson, your LP co-host, managing director at LGT Capital Partners. We just had a fascinating conversation with Alec, founder of Magnetar Capital and founder and managing partner of Qstar Capital. And in this minisode, Nick and I are unpacking the things that stuck with us the most. I loved his ending. So just to start with the end, I loved his comment about agency and where the human still matters in the equation. Because if we outsource our decision making and just say, oh no, AI, tell me the five things I need to do. Life is bland and we're avatars. And Nick, my first thought was what you need are artists.

1:22Nick Chirls: And then I was like, oh, look, it's Nick. But everything he talked about with the pivoting and the rethinking and the reagency just made me think a lot about the creative aspect, right? He didn't use that word, but there's a lot of that. Yeah, for sure.

1:39Alec Litowitz: Yeah. So we'd recommend you listen to the end of the podcast at the very least.

1:44Nick Chirls: My observation is what I thought about Alec has such a powerful mind because clearly he's an exceptional thinker. When you look at folks who are trained to learn how to think and break down these structures, and you see this in other GPs that were derivatives traders or you yourself were a banker, they're very structured. And it's a very powerful tool. I'm sure there are folks that just intuitively decided an idea is great and have also been very productive. So this is not saying there's only one kind. But I was really struck by, and again, he wrote a book about this, but just thinking through, like, he has a structure that he uses every single time and especially in early stage venture.

2:19Nick Chirls: And I'm going to go all hail, you know, Andy at USV. You have to use a process. And it was just watching his process unfold in all these different areas. And he's such an articulate person that it was very powerful to me and very reminiscent of how other folks kind of attack problems that are very hard and unruly. Yeah. Right.

2:41Alec Litowitz: I mean, there was a bit, I don't know if this was like a public meme or in some chat I was in or something, but like this meme that, uh, like you understand how much of venture is just vibes from like actually listening to and speaking to like a serious public markets. hedge fund investor and like i mean you probably see this i mean i i know you don't spend as much time with hedge fund managers on the lp side but there is a certain level of art oh it's just so clarity structure frameworks that is uh you is much rare and if you vibe your way into a massive

3:23Nick Chirls: ipo good on you but it is a wildly different way of articulating the process right i don't know how

3:31Alec Litowitz: much like uh seed investing alec does we didn't really dig into that but i i i i do wonder like how structured the frameworks can be for seed um and maybe that's me just justifying not having a more structured framework for it but um i mean we do we do have a process um um but maybe using alex language there's so much uncertainty there there are so many variables that are uncertain at seed that that i think it's actually pretty hard to apply like very specific

4:16Nick Chirls: frameworks around investing there correct but you do a lot of testing which is what he was I was hearing him talk about. Probing. Yeah. Probing and the, how do you, the pivot sort of seemed to speak to some of his.

4:30Alec Litowitz: Yeah.

4:30Nick Chirls: I love the fact that he thought venture was about answering uncertainty because everyone says venture is so uncertain. It was, it was a little bit of a mental flip, right? That I thought that was, I love that. And that it was answering uncertainty. And what have you, what have you proven and what have you learned? And I thought, I thought that was a nice way of turning it back on its head.

4:50Alec Litowitz: It would actually be, I mean, this is maybe for your process, but it would actually be interesting. Like, you know, there's a lot of GPs that do portfolio reviews with LPs. And you talk through, here's the company and here's the founders and this is their market and this is their revenue. But like, it would actually be, I think, interesting to do portfolio reviews with GPs. I'm happy to be a guinea pig that just walks through the portfolio and discusses like what are the uncertainties across each company and have there been things that have been resolved for each company? Because that might actually be like a betting better.

5:30Alec Litowitz: I don't know for sure. Like revenue is probably the best leading indicator. But like, you know, or revenue is actually probably a function of uncertainty being resolved.

5:40Nick Chirls: Yes.

5:41Alec Litowitz: It would be interesting to walk through like a portfolio review through that lens. No, I love it. In the past two years, what have the portfolio companies actually resolved?

5:51Nick Chirls: It kind of gets at a different version that we've talked about with our managers sometimes is what are the underlying metrics in the company? Because to Alex's point, TVPI can be a false signal, good and bad, right? And right now we could argue the market has a lot of, oh, it's 2020 again. Like there's a lot of TVPI in places that we're not, we don't really know if it's ever going to matriculate.

6:11Alec Litowitz: I think his point is, was very interesting about the SAS regime versus current regime. And TVPI was probably a better metric then in the sense that like there was a, you know, hesitant to call it, but like a factory line of SAS companies. And so your TVPI was probably a reasonably accurate reflection of where those companies were in their cycle. And then 2021, all that ended. Like TVPI now includes a lot more technical risk, capital raising risk. It used to be just basically a metric of like how well is your SaaS portfolio doing, you know, and probably a much better or more predictable conversion into DPI than a lot of the portfolios of companies today.

7:08Nick Chirls: Assuming the multiples VCs were paying was tied to a revenue multiple that equated to actual revenue multiples that you'd see in the public markets. Because a lot of times private markets pays way higher multiples. Totally. So here's what I'm saying is there's a little bit of fluff in there sometimes. But yes, right now we are seeing a return to a lot of very fast follow on rounds. And this is where I defer to you.

7:32Alec Litowitz: Do LPs even look at TVPI anymore?

7:35Nick Chirls: Oh, some LPs get paid on TVPI. So a hundred percent. Yeah.

7:40Alec Litowitz: Okay.

7:41Nick Chirls: But, but, and also when you're, well, this goes to your point about metrics, when you're going to underwrite a fund and you want to understand what's going on in a company, there's not that many things that are get collected to share revenue being one of them, but maybe there are these other conversations where you can say what risks are being taken out of the equation and it's more of a qualitative assessment but really useful to then understand what's happening in the company and you don't have to do something as broad brushed as what's the top line number but what's everything that's really happening.

8:09Nick Chirls: I don't know. Let's do it. You and I can do it. We'll just do it as a beta between us and see what happens.

8:13Beezer Clarkson: I'm down. Okay. I'm down.

8:15Alec Litowitz: Well, amazing conversation. I always love our little jam sessions, Beezer. And thanks for listening to the Origins Minisode, the show where we discuss the venture ecosystem through the lens of myself, a GP, and Beezer and LP.

8:29Nick Chirls: Keep an eye out for more by following Nick and I, as well as OpenLP on X and LinkedIn. I'm Beezer Clarkson.

8:35Alec Litowitz: And I'm Nick Churls, and we'll be back soon. Thanks for listening.

8:43Beezer Clarkson: Opinions expressed by participants are their own and do not reflect the views of LGT Capital Partners, asylum ventures, or their affiliates. The content does not take into account your specific investment objectives, financial situation, or needs, and is not intended as a recommendation, an offer, solicitation of an offer, public advertisement, or recommendation, to buy or sell any investment or other specific product. Information is based on sources believed to be reliable, but no warranty is given as to accuracy or completeness, and it should not be relied upon. Alternative investments are speculative, involve complex instruments, and carry a high degree of risk.

9:09Beezer Clarkson: Investments and strategies discussed may fluctuate in value and may not be suitable for all investors. Listeners should make their own independent investment decisions. No funds are being discussed on this podcast.