Finding Alpha Before Consensus: Data, Judgment, and Early-Stage Venture

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0:58Welcome to Swimming with Alligators, the VC podcast from the LP perspective. With your hosts, Alexa Benz and Ernest Scott. You ready? Let's dive in. So welcome. Thanks for being here, Kelly. Thank you all for having me. I really appreciate it. The opportunity. Absolutely. Can you give us your own version of how you go from journalism to fun events? yeah so um i'm from tennessee but i went to school in colorado um and i had an interest in stories right finding the truth i will say there's some type of sense of justice there but some just intellectual curiosity so um that led me to think that i wanted to study journalism so i went to the journalism school at university of colorado um really thinking you know at that point in time paul is on at cnn larry king live like these deep dives into people and in 60 minutes uncovering the truth of stories and what's going on um and there i also worked at the athletic media relations department um for the university of colorado and so it really became about stats right and so i was always pretty decent at math i like math and um i really liked the business classes I was taking and the business people better.

2:20The people in the business school were more of my people. And so realized that I could take that curiosity and that data could tell stories too, but data could be misleading as well. And so really understanding, you know, if we had a terrible game, football game at the University of Colorado, we could say we had the longest punt in history. Like, so always trying to get under like, what is data, you know, that never believing the headline of data, but really understanding the analysis and pulling the threads to try to get what the actual data means. And so that began my curiosity in using data to uncover truths.

2:56One thing that stuck with me in our pre-call and then just your first answer here is this kind of desire to find the truth. And that resonates with me because my first job out of college was being an equity research associate. And that's essentially what you're doing. You're trying to find the truth of what's the true value of a stock and a company. You then took like a path of some different stops like Credit Suisse, RPX, Capital Group. So you went into the finance world. How did were you able to continue to feed that need to like find the truth or true value of something? Yeah. So the data and the numbers took me into finance and that was Capital Group.

3:43and then Credit Suisse. But I wasn't passionate about it. It was about making money. There's no more meaning there. The people that worked around me, you know, are about one thing, money going up. And I was sitting in San Francisco where all my friends that were truly passionate about what they were doing, that like were energized and excited and felt like they were doing something, worked in tech. And so for me, I was like, I want to be passionate about what I'm doing, right? I'm curious and it's you know going through the motions of doing work it's fine but I wanted to be passionate about what I was doing and so for me you know there's always been an interest in tech to be honest but it wasn't my natural skill set and so I you know did a startup myself which was point of sales analytics again data focused and then when I joined RPX we created it was a defensive patent aggregation play.

4:38And I joined when they were creating a new product, which was an actuarial model for the smaller tail, long tail of companies. And, you know, that was, again, using data, but in a startup sense, building something, creating something. And I just love being a part of startups and building. It's really cool. Is there anything from that last kind of that journey into RPX and dealing with those data models that you still apply today? Any lessons from that? You still apply as an allocator? Yeah, I think, you know, for an actuarial model, you're not trying, like, in venture, we're trying to say, okay, what's gonna be the best fund?

5:17We're like, where are we gonna find alpha? You don't know that for like a really long time. And so trying to back into the data that actually matters and trying to find correlation to performance. So, you know, I think everybody looks at benchmarks on TVPI, DPI, NetIRR. That's great. But in early stage venture, it doesn't matter for like five years. Right. I mean, you can tell something that like is going to underperform early, but not where the outperformance is going to become come from because the compounding really happens at the later part. When you catch the outliers, it's a power law game and that compounding and movement really happens in the last part of the fund's life.

6:01And so what along the way can we say gives you the best chance of that happening? And so is it the traction of underlying companies? Is it certain people, other firms leading the follow ons? Is it a type of founder quality or customer quality? So trying to figure out the shape so that we can benchmark earlier when investing in emerging managers, because that's our focus, and looking at re-ups. So I think taking the actuarial models is, you know, it's great if you have like one or two data points, but like looking at the nuance below it and how we can really learn to truly assess earlier on than having to wait 10 years.

6:39What is that actual process look like? For us analyzing the data? Mm-hmm. So we built it over time, right? When I joined, we were keeping valuations, round sizes. It was on a spreadsheet. Obviously, that doesn't scale. I created a data structure. I use Salesforce. I'm not technical. I know SQL. But we built out different data systems over time. And we have a Sisense as the BI tool we use, but obviously using much more of Claude and OpenAI at this point for analysis. but I think it really took like okay let's add in KPIs let's add in customers let's add in founder backgrounds let's add in you know what can we add in and are is there any correlation and is that correlation only because that was a point in time in the market or is that still relevant today and so it's a it's an iterative process of like how much you know our data team could add how much I could add and then once we added a data team how much data we can actually track and add um you know garbage in garbage out but it's also what you do with the data so like it's you know we can use it and it might not be relevant today but we're still going to track it and maybe it'll be relevant um in three years and that's how i always kind of felt about it is since we anchor funds and we're typically the first institutional believer like we want to have this close relationship so hopefully we can get more data about the underlying portfolio that can give us insights.

8:09And then we'll figure out over time how to analyze them. So it's been very iterative, always coming up with new analyses to do. And checking, we have 78 dashboards with dozens of widgets. We can always check the prior analyses of what we do and where they stand, but always coming up with new ways to look at the data and see if there's any correlation we can find. I'm curious, Kelly, as someone who is very data-centric, how do you cope with a job that is both using data and feel and how do you kind of quantify for that yeah you're correct I'm very data driven and I work an early stage venture which is you know about the person I think you know the data is useful for re-ups or understanding an angel track record I think the hard part is is once it's there's something evident in data the GP and where that investor was in life is no longer where they are today and so it's very backwards looking and so I use the data we use the data more for like portfolio construction of our own portfolio of the portfolios we want to look at you know in this market because the graduation rate is lower in series A's if they make the series A bar which is less likely now it's much more expensive so less reserves more companies right and so like i think we look at what's going on in the market and apply what worked previously and what the market is today so it's the marriage of those two um and then the data you know we launched two new business blind products with it which is a co-investment fund and a secondaries fund that utilizes the data but as far as assessing early stage managers it really is about the gp um and so the data i I would say like we can benchmark and do whatever we want, but it really is about the GP.

10:06We glossed over a bit that today you're with Sendana and it's used by our guests almost like Xerox. Like this is, there's the endowment model and many of them are now following the Sendana model. Yeah. What are people saying when they say they're sort of following your model? And is there sort of a nuance that you think is sometimes missed about what you all actually do, that people think they're building an internal fund of funds like you? Yeah, I think an important part of Sundana is the relationships, right? And so I think that's so big when you are diligencing fund ones and GPs. You're really getting a sense of the co-investors on the cap table, the downstream investors, the operators, the founders, and really understanding who has the biggest magnetism right now in the market.

11:01You know, I've had my entire career here in San Francisco. We have teammates in New York. And so ingrained in these ecosystems of where we feel like we can get that true, honest feedback, because that is the bulk of what we're doing when identifying. I think, you know, as you said, there's a lot of people doing this now and, you know, emerging managers or fund construction. But our look at fund construction changes with the market, right? So what we were looking for in Fund 3 when I joined, 50 % reserves, lead checks, all of that is not how we're investing today. And so I think you have to have a first principles approach as you're building out your venture book or focused on emerging managers of what do you believe to be true, who has a right to win and where the alpha will come in early stage venture today.

11:46We still think there's alpha in early stage venture. That's where historically the top returns have come from. And we don't think that history is going to all of a sudden change and that the market's totally gone away from that. But we just think there's a little bit different way to approach it than what we are doing in Fund 3 now that, you know, we're investing out of Fund 6. One thing that I loved about our prep conversation is you spoke about when you first jumped in to Sedona. You did an analysis, of course, on brand, and you found that pre-seed outperformed seed. But you said since then you've become more skeptical of that conclusion.

12:25Could you explain that and how that's kind of taught you not to be trapped by data insights? Yeah. So, again, I'd never been an allocator before. The only reason I knew what a fund of funds was was because I'd known Michael Kemp for 10 years before I joined Sedona. So this wasn't like I was a well-researched allocator. Again, I had worked in startups and in the venture ecosystem and been my adult career around here. But I didn't know exactly what to do. So the first thing I did was get our data systems up and running. And then it was like, OK, well, we have kind of two distinct buckets now because the rounds look very different.

13:00Right. Seed was getting larger and pre-seed was getting larger. But, you know, it was very there's enough delta in the pricing that they look different. and they were called different things and the managers operated differently um there's some revenue at seed there's no revenue or even product at pre-seed and so it's different risk and so let's look at the analysis and so literally uh pre-seed was the same on graduation rate even though there's more risk it was the same on mortality which is crazy but i think that was probably because of aqua hires um it was outperformed you know on the year of entry moc uh so not just venture the fund vintage but the moc entry dates um and so looking at that it's like wow you know for taking more risk you get more alpha like why would you not less money um i think that's you know it's one of those things that worked in a market at that point in time.

13:56And it's really just about the best GP. And so, you know, there's this opportunity in LA or New York or other places or even San Francisco, right? Well, San Francisco has so much capital focused on early stage now and institutionalized angels and seeds became a thing that pre-seed kind of probably arbitraged away in the Bay Area specifically. And so like just looking at why things worked at a specific point in time and applying that data to today. And so I think that was a learning for me of like, oh, this analysis I can look and this is working in the portfolio. And really, you know, that's applying the lessons from that and what worked and why it worked.

14:32And then what does that mean for today? And what where we think the market's going? I would love to hear where you think the market's going. Where are you coaching your LPs that you're spending your time? I think we're looking, I mean, it's we're looking for the best investors, right? We do think there's something really special about funds ones and twos. We think that, you know, either your more recent to your operating experience, founding experience, you have built a personal brand that's big enough for you to spin out. By fund three and beyond, you're spending 70 % of your time supporting companies versus sourcing.

15:09You have full portfolio, so your time is different. And you've had to, you know, you're further away from that experience. The networks that you had from operating right those people probably founded companies so you've had to rebuild networks networks have a shelf life so you've had to rebuild those and so we just think you know funds ones and twos are really special if you can find the right ones and then there's still some that will out continue to outperform but they'll look different and typically they scale at that point too and so it's really working with our gps closely and understanding what they're building where they're spending their time, what lessons they've learned from sourcing and supporting, and where they're leaning into, what lessons have they learned.

15:52Everybody's building a business. They happen to be in venture firms investing, but how are they building that business is really important to us. Are there any trends that you all have seen that you're getting cold on of different structures, different focus areas that you think are just kind of like overplayed at this point, or just won't be competitive in this new market? I would say we get pitched a lot of 15 company portfolios, so concentrated. And you just have to be able to articulate why that's the right structure. 2 % of all companies become unicorns. 8 % of our fund one companies became unicorns.

16:31So I think that was a time and place in the market. There's less graduation rate today. Fewer companies matter and they happen to be bigger. So for me, you know, just being an analytical mind, I get a lot of these. well i have you know this hit rate and my prior angel track record and it's like okay but like can we really articulate why that's repeatable right and so i i think for me the 15 company portfolios we've seen quite a bit of and um it's just something i am not sure about i think we see a lot of defense tech national security uh and deep tech right now um we have been investing in deep tech i think our first investment was 2015 a specialized fund our generalists have always touched it um but i would i would say with that and we we actually have a lot of um gps that focus on students because ai native founders tend to be younger and so i would say anything something becomes consensus as venture is a time to kind of understand has all of the alpha been arbitraged away if you're focusing on defense tech you know palantir and shield ai and and roll you know those were started way back when.

17:44Do we think that there still can be others built today? Yes. But once it becomes a trend, the top companies were started years and years ago. And this is historically true. You know, we're talking about AI in 24, 25, 26. Well, when was OpenAI Anthropic formed? So I think in general, like, we are looking at for people who can see around corners. And, you know, AI is obviously a part of everybody's story today, even if in your deep tech how is ai affecting you how are you using it um so i think there we're really looking for and not to negate podcasts i listen to a podcast every day on my way to work and home um but i think there's a lot of talking points that venture you know every gp kind of has the same thoughts and so we're looking at you know for a new thought that we haven't heard before our new angle um or some type of way of thinking we know that this is best founder driven and that the founders should, that some of, you know, thousands of founders should be smarter than any 1BC.

18:43But if they can articulate a contrarian or first principles thought, that gives us conviction that they are thinking about the world in a way that will find the non-consensus ideas that is really what drives the alpha in early stage investing. What are you telling your prospective LPs that they're missing if they're only getting into Andrile, as you said? I think if you look at like, let's use Facebook as an example, because we're talking about large IPOs that are happening that at that point in time was the largest IPO ever. You know, if started 2004, the round of 2005, you would have had an 8 ,000 X by the time it IPO.

19:21If you would have invested in the late stage rounds that happened pre IPO, you would have a 14 X today, 16 years later. So 8 ,000 X in eight years, a 14 X in 12 years. So I just think, you have to put that into perspective, right? Early stage venture, getting in at idea stage is where the true alpha has always historically come. The late stage, there's more private capital. There's more private companies of scale than ever before. There's less public companies than ever before. And to treat it all as like one big thing, it's not the way you treat public markets, there's small cap, there's mega cap, it's treated differently in private equity, there's small middle market, there's mega buyouts, they're treated differently.

20:09And I think you have to view the same in venture now with how the quantum of capital that's been raised and how long companies stay private for and how large these companies are. And so I'm not saying there's not an opportunity to make money at late stage. I'm just saying it's silly to put all of the eggs in that basket because there will be a wave two of AI. There was a wave one, two, three of internet, of mobile, of any technical revolution. It's built on the prior tech that became big and allowed the next companies to be formed. And so if you're only focused on the late, then you're missing out on the next wave and where the alpha is truly generated at the early stages.

20:49Now we're going to take a quick break to speak with our sponsor. On the show today, we welcome Mike Podoni. He is a partner in Sidley's Emerging Companies practice. And while primarily on the company side, as an attorney, he also works with VC funds negotiating their transactions. Mike has so much useful information to share. Thank you, Mike, for being here. The Sidley Emerging Companies lawyers seem to be suddenly very busy. What has been keeping you busy lately? Well, I would say obviously the answer is AI, but it's a little deeper than that, which is, you know, I would say that the level of growth and sophistication of startups from just day one to during the first year has become so much more complex than, you know, even five years ago.

21:45And so we are being sought out by a lot of different startups at different stages that are realizing, hey, we need really high level, sophisticated advice from day one. We're thinking of, you know, selling GPUs to China. We're thinking of expanding operations across the U.S. and navigating privacy laws across various jurisdictions. We're thinking of raising money, not just from VCs in Silicon Valley, but from VCs in Europe, from VCs in Israel. How does all of that work out? You know, a lot of sophisticated questions. So they're realizing, hey, we need somebody that knows the entire global landscape, not just a local firm that can help get me incorporated, which frankly, you know, has been, thanks to AI as well, democratized to a point where that's not the competitive advantage.

22:36So we're busy because of the expertise that we offer. We're also busy because a lot of things are happening in AI, thank God for now at least. And we're also busy because we're getting a lot of exciting repeat work because people are seeing that they can come back to us and get a similar quality of work, but also similar quality of expertise, which they can't get elsewhere. Yeah. As VCs, we obviously have a huge preference for working with repeat founders. are you finding that those are the repeat founders are the ones that are sort of coming out bigger and with more complicated requirements out the gates?

23:16This is like they see an opportunity. Yeah, this is, you know, it's funny you mentioned that. I often have this conversation with my new clients where I say, listen, since you're a first time founder, this is what you should focus on. But I can also tell you the kind of questions I get from second, third, four time founders, because there are different questions and they usually focus on hey i had a successful company i had an exit and in retrospect i wish that i a maximize my my or should say minimized my taxes or maximize how i plan around taxes i wish that i maximize my ownership or control of the company vis-a-vis investors i wish that i planned better for an exit and thought about what that means for me, my employees, how to motivate people and so on.

24:06There is definitely value in having seen those journey many, many times and being able to advise founders on where they can, you know, optimize and do better. But there's also, in my opinion, value in knowing how that can go over with the VCs and the investors and the GPs and what you should be focused on as a first time, second time, or a fifth time founder and how much leverage you have in those conversations. Yeah. No, that makes a lot of sense. What is one thing to keep in mind for tax consideration or tax optimization? I would say these days it's QSBS. That's what everyone's focused on. Very different than if you asked me this five years ago or 10 years ago.

24:52A few accounting firms have now created designated QSBS-focused groups that help our founder clients and our GP clients maximize their QSBS. There's various ways to do that. There's ways to structure your investment through various funds. There's ways to think about it. The rules were very recently amended through the big, beautiful bill to make access to QSBS benefits easier. But that's something you cannot reverse engineer. So it's something you have to plan for in advance. That's the main focus now of of most founders and investors. And we on the Sidley side are very focused on that as well.

25:41So not only are all of our ECVC lawyers like me trained on this, but we also have a group of expert tax lawyers that we bring in as early as incorporation to talk about that as early as the first kind of seed rounds talk through that with investors. That's a great example of how it helps to have such a large team at Sidley that you've got those experts. Thank you so much, Mike, for joining us on the show. If you or one of your founders has questions for Mike, you can please email michaelpodoni at sidley.com. That's M-I-C-H-A-E-L dot P-O-D-O-L-N-Y at sidley.com. And now back to our LP interview.

26:22Not to ask you to do too much of looking into the crystal ball, but what do you anticipate will happen after a number of these mega IPOs come out? How is that going to impact our market of focus early stage venture? Do you think it'll loosen up kind of the capital markets and interest in early stage? Or you're just curious on that. Yeah, it's interesting because I've, you know, allocators typically set their plan, endowment model, and like this is what we're going to do. But there's still this pull of like, you know, we don't have enough SpaceX open AI anthropic exposure. We're missing out. And so that's where the energy and effort goes.

27:08I think there's enough, you know, 11 Labs, Cursor. There's enough of these later stage AI where it's like the next interest of like getting into one of those before they exit. So I think if anything, the current market shows 75 percent of the capital and venture has been raised by these mega funds. that continues. I don't see that changing, unfortunately. I think, you know, the good thing is, is that I think the markets become more efficient at early stage. Like, you know, right now it's right now it can be, I think 21 was not, it's not going to be a great vintage, right? For anybody. And it's not just valuations.

27:50It's that there's too many people got funds. Too many companies were funded. And so a constraint of capital and best ideas only making it is not a bad thing at the early stage. And it actually will be good for early stage returns, which then will increase. The cycle will happen, right? An increased allocation to early stage venture, money's going there. Then like the competition increases and the returns are arbitraged away. But I think if anything, it gives me conviction that the next vintages will be good if so much focus and money is going into later stage. That's capital for the companies that are being formed and started today, right, of where we're playing.

28:24So they have to put capital into something with that money that's being raised. And, you know, it's for the early companies that truly can hit scale. We would be remiss not to ask you about some KPIs, given this is where you spend so much of your time. What are you actually paying attention to? Which are the ones you consider actually worth tracking? I think understanding revenue and customer quality is important to understanding, especially in AI right now, because you see a lot of this hockey stick growth. But actually understanding so you can, you know, you might have four of the same flavor in our portfolio of AI companies attacking the same.

29:07How is their go to market different, right? Like what's their revenue profile look like? Like we don't have much legal AI compared to what's in the market. But like I would be very interested in tracking like what like which customers they have. What are the ACVs like? What's different about the businesses and makeup? Because I think that's important today of like the quality of the companies versus just the king making marks quantum of capital raised. Again, I think you see these companies that are hyperscaling. But can you be efficient with the capital that you're raising as well? You know, I know a few of your portfolio managers and not only have you picked great funds and fund managers, but also you all get them all together in a way to be able to really share ideas and see where the market is going.

29:59I'm not going to ask you to give any secrets away from that, but I'm curious on with the changing of the market, with graduation rates being like extremely different and more efficient, as you mentioned, than they were in the past. How does that change what you even look for in diligencing a fund one or fund two? Right. Because it's just a tougher, like they have to get so many things right with finding even that one or two companies that can be a fund returner. Yeah. And I mean, typically by the time you're raising fund two, there's not enough time in two and a half years for a company to bake or an outlier to occur.

30:41I mean, in AI, it can happen, but let's like, that's not what we're looking for. I think it's that there's enough progress. And that goes back to the KPIs that are important to me. It's like, are these like, do they have a product in market? Were they able to ship quickly? they should be able to, right? Everybody should be able to ship quicker than ever right now. So what is the traction? What has been the customer feedback? What is their sales plan? An understanding. So we have core tiles of revenue. And so I'd say that's why that's important. And again, it's what I just said about portfolio construction of people are like, oh, I'm going to be more concentrated.

31:14Actually, if graduation rates are lower, that would mean that you should probably have a few more shots on goal today. because things can look good at the early stages. You can get an A and they can still go to zero, right? I mean, I think people think things are de-risked by an A or B. Like Bs are still very, very risky. And so I think in general, it's that, you know, and we do try to impart what we're seeing, but take feedback, right? We do monthly calls with our managers, each of them individually. But I think, as you said, we try to get people together. So what are we hearing on these calls so we can share it with one manager to the other?

31:52Well, we heard this is happening in the market. We have a slack for them to ask each other questions. But we do a lot of in-person so that they can share ideas and, you know, insights. We think we hear this from founders on reference calls of like, we really love spending time with the other founders in the community and be able to learn from each other. And so we try to do the same thing with our GPs of really facilitating being that human router for connection. You described at the top of this interview that you've developed a couple of different newer products since the emerging manager fund funds.

32:27Can you give us sort of the like where that demand is coming from and how you've structured those? What they look like? Yeah. So we have a joint venture with Klein Hill. and Klein Hill is a secondaries focused fund based in Greenwich, Connecticut. Obviously, broad secondary, so they do some venture, but it wasn't their specialty. And so obviously taking our data and relationships and that kind of came organically. Obviously, we have the data and relationships. So secondaries would love us as a pipeline. And we've known the team there for a really long time. actually the people on point uh worked at cambridge associates and under wrote sandana fund one so it's a long time relationship um and so we came up with that product and really what we're focusing on is like you know where do the companies have traction and the managers still has conviction and there's still growth typically pretty late stage 100 million of revenue plus um but it hasn't raised in quite a while so the multiple to valuation um looks like a great entry price right now and so we're really looking at what's working in the portfolio and then you know it really came about also because our gps um the makeup of fund ones and twos are a lot of family offices and they're not as you know sturdy as a endowment and so some of them would look for liquidity along the way and they would come to us and say hey you know we have a family office asking for liquidity um and so now we have a way to actually transact on it um and so that's for the secondaries.

33:58And for the directs, you know, there's 250 plus of series B and beyond rounds in our portfolio per year. And our managers are not focusing on emerging early smaller managers. They're not set up to do series B and beyond. They can do an SPV, an opportunity fund eventually, but we created a way to share carry back to them. And so, you know, using the frameworks of the data where we saw alpha. So really cutting those 250 opportunities down to 50 of where we're focused per year. And then we'll do about eight of those per year. On the kind of subject of secondaries, in past cycles, we've had, you know, secondaries, kind of founder secondaries happening at probably not the best times for the companies or kind of thinking of kind of the long-term stability of a company.

34:51You mentioned to me that the founder secondary sales should probably be more aligned with GP secondary sales. Could you walk us through your logic for that? Yeah, well, I think people who took secondaries in 2021 look really smart. And so thankfully, we had managers proactive in our portfolio when they got these huge markups, they de-risked and took about 10 to 30 percent of their position off the table. We always kind of advise never sell 100 percent unless there's like complete a complete reason to. But de-risking the position along the way again I think companies stay private longer these marks they have to grow into time cost value risk that can happen.

35:35I think you know half of the 21 vintage uniforms have never raised again. So you can say half of those are dead probably. And so looking at that, like it's probably smart to de-risk positions along the way. When it comes to founder secondaries, I think one thing to think about is like the capital that we raise, we like to raise for mission-driven capital. And so a lot of the capital that goes into venture is hospitals, endowments, foundations, pensions. And so when you're cashing out and taking money before you send money back to these hospitals, like you're taking their money and pocketing it.

36:09And so I think if a founder is taking some off, like understanding that founders take less salaries, but it should be a line of conviction in their own company and almost taking that as a signal is it's time for you to de-risk some too, if they think taking that capital that came from your investors into their pockets is kind of the right path. And so I think like just the game of venture and early stage venture is so much focused on sourcing, picking, supporting, you know, winning and supporting. But there's a whole portfolio management side that I think has been missed along the way. And like, we're really waking up to how important that is and venture and understanding when to exit is almost as important as like the right companies to be in.

36:56And so I think it's just an important way. And one of those signals to look at is, you know, if a founder is how much of how much of their shares are they selling and how much are they pocketing at that point? Like, is it enough to buy a house and like give them some breathing room or is it enough to make them extremely wealthy? Right. Any other advice or opinions on that portfolio management, financial management side? Yeah, I think it's good to do portfolio reviews. I think like, you know, this is a game of power laws. And so people don't want to write off a company that might inflect. Those are very, very rare, to be honest.

37:32Like it's very rare that after year seven, a cockroach comes back alive and they just didn't give up. And, you know, it goes back to like, is there a way to support companies, you know, getting liquidity back if it's really going to be the five companies? And that's your job as a capital I investor to identify like what you think if, you know, So after several, five years, you should kind of know which five companies really have the potential with the talent, the traction to break out. And so the others, like, is there a way to manage it and get one XDPI for like the other 30 companies in the portfolio back to your LPs?

38:09Aquahires, you know, when we look back at our historical returns, 10 percent have come from Aquahires and 10 percent from that modest exit. So F-Wires actually do return capital back as much as a modest exit. And so I think, again, that everybody just kind of focuses on the power law. But, you know, portfolio management and actually getting capital back to your LPs quicker, it comes from portfolio management. And it goes back to the secondaries, too. understanding if you were going to underwrite this company you know if it was a 21 unit record how many years of the current growth rate does it have to have till it grows back to that valuation how likely is it so like really like thinking through what the math is and what the impact to your lps and to your fund will be so i think it's just a lot more exercise on the actual portfolio well and i had an interesting conversation this week with a gp that i'm a small lp and he has since retired, this is an older fund asking, what are the things you would, in retrospect, have done differently?

39:11And he described always letting the market actually judge the next round, you know, that enthusiasm you have if you're the insider. He said, you know, maybe jumping the gun, they really should have market tested every single one of their deals at every single round. and you're providing that in a way as a secondary, second voice. It's like you're still, as the GP, I love that you're still like supporting your founder. You're finding them this secondary market, but it's being marked by a totally new party. And I think that's really healthy for everybody involved. Yeah, and I think understanding that, where that mark is coming from, right?

39:57Like, is it a decent size check for you, but is it like a drop in the bucket for that fund? So like how much conviction do you think they actually have? And just understanding like all of these dynamics and making your decision based on kind of that market check. We've spoken a lot about the changes and how they're impacting GPs, but allocators are being impacted as well. and one thing I loved talking to you about in the earlier conversation was around the dynamics of how the venture asset class has maturated and how it's kind of setting allocators up for not success or failure when you're lumping in all the different types of players in the market.

40:44And you said the analogy you used was around it would be like if all public equity allocators had to put micro cap and large cap and mid cap all in one. So could you could you talk about kind of like how it's impacting our industry and what's another approach that we should take when looking at the industry? I think, again, like private equity evolved to this. Right. And I think there's a lot of interest in the mid-market and, you know, small cap in private equity. I think people are concerned about the large cap, you know, mega firms in private equity because it's harder to exit there. And if I just take like, OK, we've learned that lesson and allocators kind of allocate between the two buckets and one exposure to both.

41:33But they're looking for the spin outs. They're going to do the smaller, earlier stuff. then that same you know if we fast forward this like you know ventures a mature enough asset class now to where there's a quantum of capital that's raised that's a very different structure you know a billion ten billion dollar valuation is very different than a 10 million to 20 million dollar valuation like those are so different profiles of companies of funds that invest in them and so they be should be treated differently and you can have your like opinion on where to allocate within the venture but like totally disregarding one part of it and then going to the other that's working today is probably not the right approach um but again like i i think again we work on early stage i don't think you should be all early stage but i i think if you're saying like everything that is late stage because duration is long and venture and so i'm going to only do late stage because there's a 10x multiple that can happen from 10 to 100 billion, there's still risk there.

42:37It's still venture. There's still risk. Getting from 100, getting from a billion to 10 billion is very hard. 100 million to get to 500 million. You're having to go to internationally, new products. It's a very different skill set and hard for some founders. And so I just think there's still risk there, and it's a different profile company and a different profile of return when you're raising billions of dollars of capital and managing those. And then it's a very different thing to, you know, be at the forefront of innovation. And so you are not correlated with the market at all at the early stages, other than there being capital for these companies in 18 months, if they get everything right and understanding that.

43:20Right. And so I think there's a risk spectrum. But again, I think it's just allocators in general that have been around venture since the beginning are seeing this and investing across of it. But like new allocators that have not don't have as much history or, you know, more fresh portfolios. I think understanding where venture is today and making sure that they're covering it in a way that aligns with their conviction on the spectrum. Anything that's just driving you nuts right now. Kelly, you crack me up. I want to hear what's going on right now. Like, if there's something that you're just like, holy cow, everybody has this so wrong.

43:56Or like, what are they thinking? Huh, that's a good question. I just think the FOMO and momentum, like, I think everybody's excited about AI. It's been dizzying being in San Francisco. Like, you know, I will tell you, like, it's been hard for me to have conviction on something I've waffled. And I think, you know, years into this, I finally felt I got that. December was like the most dizzying time for me when Cloud Code came out. But I think where I am today and building in our own AI tools and where I am today, I like because I'm actually building with these tools as well. I think I'm finally like, OK, humans are all going to have a job.

44:34And I think, you know, it drives me nuts that and this is one thing I think there is a part of when you're investing in early stage venture, you are investing in the future of our country. The economy like tech has really like brought so many jobs and the marketing that we do and the loudest voices kind of drive me nuts because it people don't like us across the country. And they're skeptical of the technology and they think it's coming for them because of the marketing and how it's done. I think this overhypiness of what it can accomplish, too, is going to set people for failure. I mean, OpenAI and Claude still make a lot of mistakes when I ask questions, right?

45:15Are you going to just let it run your business? No. Like, there's still a human in the loop. There's still a need for humans where the technology is today. And yes, if we automate things away or you give me power, I can do better work or deeper work. But there's still a need. And I think just the marketing angle and that the loudest voices kind of dictate how everybody views venture and views the tech ecosystem. I don't love because I don't think that speaks for everybody. And they are the spokespeople for everybody publicly. Great question. I agree with all of that stuff and great answer. Kelly, thanks so much for being on Swimming with Allocators.

45:57We've really enjoyed your insights, your story, and we'll have you on in a couple of years. And you can tell us what next is bothering you. I really, really appreciate you guys. I will say it's, you know, we're typically always asked about the GPs we look at and every, you know, the nuts and bolts of Sindana. But really talking a little bit more macro was fun and really appreciate the questions. They were great. No problem. Thanks, Kelly. Thank you. See you later, Allocator. after portfolio tile investing with a smile

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