The Investor Who Bet on SpaceX, OpenAI and Anthropic Before You Could | Term Sheet

25:08How so?

25:09Allie Garfinkle:Lockup period ends. Yeah. Scary place. Scary place. Already scary just in terms of the possible glut of shares that hit the public markets. Yeah, yeah. Massive amount. Unless they do some type of, by the way, there's no traditional IPO anymore. They all look different. They all have different bells and whistles to try to hold back this flood of shares. So let's see what that looks like. So we'll see actually how they handle it. But one thing that I do think is going to happen, and you alluded to this earlier, and I want to bring it back. is there are going to be a lot of people who invested through SPVs who realize they don't own shares at all, or they own a lot less than they thought, or they didn't read the paperwork and the return is not what they thought it was going to be.

25:53Allie Garfinkle:And it is going to create a wave of litigation. Matt Levine rules apply. Everything is securities fraud at a certain point. And it is going to be an entirely different era in the market. And there's going to be a lot of people tied up in it. Yeah. Yeah. I don't think you're far off from probably what reality is. My belief in general is that people are inherently good and they want to do good work and people who are trying to run a business, regardless if it's a business like ours or another traditional manager or an SPV shop, they're trying to hustle and make money and provide a good outcome. With that said, there are plenty of bad actors.

26:33and we have a regulatory environment in which some of them probably should be regulated and they're not. They probably fall below the radar. A firm like ours, fully regulated, SEC regulated, we opted into the regulation from day one. We've lived that life the whole time and you have to have the custody of shares. I mean, you have to follow it down and every once in a while we'll do some SPV investing with other quality managers and that due diligence is in some cases harder than when we're doing the due diligence with the companies because it's it's one thing to tie out the share ownership that's just that's a piece that's a moment in time but constantly tracking to see if there's been any changes in the SPV is another thing because it's

27:31Allie Garfinkle:not just that first time that's right over time it could change it's not static it's a living it has a life of its own so there's a world of people too who may be originally yeah they felt they did good work they checked all the boxes they followed the custody they read the paperwork they everything tied it out and then um someone sold the spv brought people in and out who knows and a lot of those those layers of the onion that I like to tell our own limited partners if they choose to do these things outside you got to peel the onion back and then but you got to constantly grab the new onion and keep peeling it back you can't you can't ever stop unless you're doing it with a very high quality third party that is regulated and provides audited annual statements and all these things that exist.

28:27And by the way, there are plenty of great SPV shops that are out there. They exist. And they're hustlers.

28:32Allie Garfinkle:To be clear, SPVs definitionally aren't bad. Yeah, yeah, yeah, yeah. They're not like any other. Like any instrument. But as the access continues to get tightened, you'll see more and more of these layering effect. And in fact, now, just full transparency, one of our portfolio companies, Polymarket, is trying to figure out a way with a partnership with NASDAQ private markets, who is one of our partners, to figure out how to do this in a way that actually provides real data to understand what you're buying and not suggest that you're owning an underlying share. Playing more of the prediction of the value in the future and that's super interesting to me and that's all all of this still comes from the genesis of the secondary market.

29:24And for me, 15 years into running the business, and now we're closing in on north of$8 billion of assets, it's remarkable to see the journey of this industry. From taboo and don't talk to me, we don't want anything to do with you, to we need your help. When you think about financial services and history, the time that it's went from you're bottom feeder to we need your help, in my mind, is remarkably fast. And I don't think it goes back. I think that the need of help for companies staying private longer, we're just at the beginning. You could have 20 massive IPOs this year, and it's not going to come close to solving the problem of pent-up liquidity.

30:09Allie Garfinkle:I was going to say, why is that? The average age just in our portfolio of companies is 14 years old. The venture community builds their funds based upon a 10-year fund life. And that's the average age. That's the average age. So if you think about the GPLP relationship just in preferred shares, 70 % of the stock we buy are from other funds. It's not from employees. Wow. Well, it's also one of those things, too. One of the key narratives about the secondaries market that I think is, as far as I can tell, true. Yeah. is that a lot of volume does concentrate around the biggest companies. But it sounds like what you're saying...

30:46In times of today, yes. So as the momentum's carrying and chasing, few names are relevant.

30:53Allie Garfinkle:Who's relevant right now? Well, the ones that are all written about. So it's SpaceX, it's Andril, it's Anthropic, it's OpenAI, it's Databricks. It's the ones that people... Stripe. It's the ones that people are drawn to because of the scale. They're really, truly, remarkably, you know, differentiated assets. And what they're achieving at scale, it's insane, this size. And it's accelerating at scale. And private companies, it's important to say like this, didn't exist in that form 25 years ago. No, even 15 years ago, the average age was three years from inception to exit. Five years. Then the middle part of our thesis, it was like eight years.

31:36And now with what I was mentioning before, with the GP-LP relationship being a bit frayed, meaning if you invest your money in most GPs, there's a staff that's followed in our industry, which is contribution-to-distribution ratio. It's at all-time lows, meaning for every dollar you give a traditional GP, what you receive back in actual cash return is much lower today than it has been in history, like 50 cents on the dollar. so that pent-up demand for liquidity is only getting more as companies stay private longer because you sign up for a 10-year fund life companies now are 14 years old they're not exiting so how do you get your money back as a gp to go raise more funds you have to sell it and so this is existential it's an existential risk to their business model so the companies have a choice to either try to embrace it and stay private longer to solve the problems not just for their employees with change of life scenarios or they don't want to lose them to a public company.

32:36So there's a tender process all the way down to the early and mid-stage managers who invested seven years ago at year four of the company's life cycle. And now they're through two extensions in their fund and they can't get liquidity. So they come back to you to raise more funds and all they have is paper gains. You're looking for actual cash. And so as we've develop our business, now our toolbox we talk about, we have to solve the issues for the best assets in the world, but also our peers. You have to be a trusted partner. So the SPVs fit in that from a standpoint of the massive need of liquidity.

33:11And as monetary policy loosens, and if interest rates come down, there'll be more entrance to the public markets. But with the 10-year yield and the federal funds rate being as elevated as they are, I don't think that there's a robust IPO window around the corner. If it's open, it's open for a few, and even the amount that they raise won't be a lot compared to their private valuations. And I think this SPV movement that you're referring to continues for some time.

33:41Allie Garfinkle:And is that sort of... Assuming that's true, which I think it probably is. I think there's a higher probability that it's true versus not. Like Roger Federer, you just have to be right 54 % of the time. I think the odds of the SPV movement kind of continuing are better than 50 % percent. It's better than a coin point. It's a new industry. It exists. Yeah, and I think it exists regardless. And I think it maybe is worth asking directly. By the way, it has existed for a decade plus. Yeah. Well, and SPVs themselves, as a vehicle, have existed for decades and decades. Yeah, yeah, for sure. I think it is worth asking, though, directly.

34:18Allie Garfinkle:Yeah. How much fraud do you think comes out of the SpaceX IPO? I think it'll be similar to Twitter and Facebook. I think there'll be enough that it will be known, but it's not as much as probably people think. It's not what I stay up at night worrying about. I think there's right to be worried, but maybe for a slightly different reason. Less about will there be economic value in what they bought, but it's what price did they buy it at. That, to me, is the real problem with it. because you can't fundamentally underwrite it to know what you're buying you're just playing momentum you're using third-party validation in these brokerage groups that really are basing their data on what we call smoke and mirrors there's very little transactions actually closing on their platforms and people saying that one of our companies is worth X when we go try to move a half billion dollars worth of paper to someone the value is not x it's x minus something it's much lower than what the the the the the private you know groups are saying it's worth well and i think this is actually a good place to ask because it sounds like you give lps a lot of advice about how they should be thinking about this if they did go about themselves today are the space the company we're focused on investing in the world's fastest growing most dynamic technology companies and helping them stay private longer.

35:44It's inherently filled with the logos we're talking about because that's what we're after intellectually. You know, invest through a primary lens, but using secondary to buy value. That's how we operate. So these companies are going to be in our portfolio. So our LPs come to us and say, well, you know, I can buy this business over here through this broker. And my first question is, that's great. follow through to see who owns the shares, number one. Number two, are they giving you any data? No, fine. And three, you know, do you believe in the price? Because without the data, how do you know what the price should be?

36:29And all these things are based upon trading momentum. It's like when everything's rising and all the boats are lifting with the tide, and there's no alpha being generated it's just all beta in the public markets there's there's no ingenuity in it just stick your money in the s p 500 for the past five years it's hard to beat i tell our lps if i can beat that we've got real alpha and that's very hard to do without the data i i would say it's impossible to do without the data unless you're just blindly lucky which some people are sure i mean if you would have bought sp you know spacex and spv in 2016 you probably feel pretty solid

37:08Allie Garfinkle:right now, assuming. Yeah, even though they've had a bunch of rockets blow up and failed launches and all this, over time, Elon, you've got to get. All those weird mergers. All those weird mergers and Twitter becomes X and you buy Cursor. Why? Because you're just, you're failing the AI race and you read the S1 and it's all about AI spend and people living on Mars. What is the actual business? Well, I actually said at one point, I was like, it's a Frankenstein business at a certain And betting against Elon is not a good way to make money typically. You know, he has a history of creating a lot of shareholder value.

37:43Allie Garfinkle:Well, and any last words of advice for how to think about this question of price? Because I'm going to be real with you. Yeah, yeah. I don't know how I would do it. And I cannot imagine a situation where I have not seen the financials with my own eyes and I'm willing to wire X number of hundreds of thousands or millions of dollars. The difficulty of the companies that we're talking about here with you today is even with the data, they're impossible to model. The companies don't even know how to give you forward forecasts. So it's nearly impossible, other than a snapshot in time to try to understand if you're buying value at the time that they're raising a primary, to know where they're going.

38:24Because they don't ultimately know where they're going. and the the underwriting it now you have financial tools at your fingertips with awesome businesses like mercorn perplexity and all these ai uh tangential businesses it's it's phenomenal what's at people's fingertips today and i built an app on replit in an hour i'm a vibe coder

38:45Allie Garfinkle:i'm a vibe coder my dad also vibe codes it's amazing we had we just had our lp day in london and we had the founder ahmad from replit there and i left the meeting and i'm like i have to try this and so I run a large operating farm I'm like I'm gonna make an app to run my farm and I did it in an hour expecting you to say that I was fully not it's a it's a what's it my point is is at the fingertips of people and enough public data is available now and enough exposure you can use Claude you can use it to come up with relative yes and so just with the amount of data that's publicly available today which is better than ever before people without actual underlying company data if you spend the time my advice would be just regardless of the logo gather as much data as you can do some work with AI to help you like they're your analyst I call my my chat GPT Chuck he never asked for a raise he works 24 7 and now he gets better by himself he iterates on his own it's amazing yeah Chuck he's a little woodchuck with a top hat with glasses and I made them our own internal GPT.

39:55So people can do that themselves and you should and come up with what you think is realistic on pricing versus historical multiples. History doesn't repeat itself, it often rhymes. You can get a sense of what you're paying today and is there real value tomorrow besides just getting to the first tee box and telling your buddies that you own, Anthropic or OpenAI or SpaceX. Actually do the work and ask yourself, is this a fair price with the fees on it in the SPV world? And then go through the pain of trying to get that person, trying to sell you that piece of paper to actually give you proof that they own the shares.

40:37If you feel good after that, give them the money. Why not? It's an amazing environment in which we're working in today. and true value creation happening with these companies that we've never seen before. But if you can't get comfortable there, wait for the next shiny logo. Because what we've learned in 15 years is every three to five years, there's the next N of one. They keep coming. And what's happening tomorrow, we don't know yet, but they'll be the next one. So, anyway.

41:06Allie Garfinkle:So where does all this go over time? Do secondaries ultimately go the way of, say, index funds? and become something that everybody in some capacity is invested in? Do they go the way of SPACs or is it something else? Yeah. So the SPAC thing, I think, you know, SPACs were always a financial instrument that helped the right company become public. I think we all got a little too bored at home during COVID, right? I did too. We developed a SPAC strategy, raised two SPACs in like a week. You're like, yeah, I did it. We did the SPACs. It might as well have just went to my fire pit in the back of my yard and lit all that money on fire.

41:49It probably would have been more enjoyable than the process we went through. Not that we didn't have every right intention. It's just when everybody else is running to do something, don't run and do it is my advice. Be counterintuitive a bit and take a perspective that's different, which is, by the way, in our industry, not popular. right when everybody wants to buy something is when we want to move on from it it's it's like when the house is on fire everyone's running out we're running through the front door and and and but the SPAC thing I don't think it goes by the way of the SPAC that's it's like gone by the way the dodo bird you know I agree with you I think that the the problem that exists will not be solved with the current AUM of the managers that exist today.

42:41And so, and I can just see this in the work that we're doing with the companies. What used to be a mega cap private round was 50 million. It's 60 billion today, and they're done in a week.

42:54Allie Garfinkle:50 million is a nice seed. It's nothing, right? So, the problem to solve for these companies, all those employees and shareholders that have a constraint on time because of the legal documents, there's a massive need for this. So it needs to be solved with more products. Get the doctors and dentists of the world into a product. And by the way, the KOTU brothers, I've been fans of them for a long time, love the fonts. They built a product that I love and I think is the way of the future, a tender product that's available on a lot of different wealth platforms. I'm trying to shouldn't give them you know all the money's gonna flow to them maybe can they listen to your podcast so Thomas and Pierre I think they're doing okay I think they're doing okay but the point is is it's bringing the product to the masses with high quality managers actually get the direct access and fundamentally can underwrite and know what they own and that movement isn't gonna it's like the toothpaste is out of the tube these index funds or ETFs wanting to get access to the tender products or interval funds or quasi liquid evergreen structures.

44:04That's the direction it's going to go. And as a manager in the space, we can either embrace it. Or. It's like the the train tracks, if you if you're on the right track, but you don't move, you're going to get ran over. Right. So you have to evolve in this industry to meet the needs of these companies, because it's not going to go back to being public in three years, four years, five years. There's just systematically structural issues in the public markets that companies aren't interested in it. And they're going to stay private longer. And you have to be able to provide a service to be relevant.

44:41And you need capital to do that. And the SPV market, in my opinion, provides a major proof point that the appetite is there for the masses to get access to this asset class, which is now we can say it's an asset class. For a long time, firms were like, we don't know where to put you. Are you growth? Are you primary? What are you? No, we're a growth secondaries firm. That didn't exist. It does now. And that's a segment of the industry that's getting bigger and broader and more capital. And I think it's really early innings. Ten years from now, just to give you the last ten years, the volumes went from like 30 billion of global secondaries of all types to 300 billion.

45:29And I think it goes from multi-trillion dollars in the next few years. It's just the beginning.

45:36Allie Garfinkle:So secondaries get bigger, probably more regulated over time. I think regulation in this, I'm typically a free market type of person. I do think more regulation in this space, and it's selfish to say it, right? It's going to help me as an established firm in it that embraces the regulation, I think will be helpful. It will be helpful to help the public protect themselves. And I think we need to get there sooner rather than later. As we were sitting here, the news broke that officially Anthropic is the most valuable startup in the world, surpassing open ai with a valuation of 900 billion reaction not surprised not surprised either it's uh not i mean congrats to dario and team i mean we've been a part of the story for um a number of years and when we first got involved i could have never imagined it would get three you know a third of the way to where it is today um it's really remarkable and congrats to them.

46:40I'm not surprised. I'm excited for them.

46:46Allie Garfinkle:I'll tell you why I'm not surprised. There was so much chaos that I was hearing about in the market for Anthropic shares in the lead up to this round that I was just sort of like, yeah, that makes sense. I've seen that number already. Yeah. And by the way, internally, a great team, the CFO, Christian Rowe, we've known for a long time dating back to Airbnb and then to Fanatics and now at Anthropic. Fair but difficult group inside of Anthropic, really trying to build a transformative business. And I think they can probably say they've done that. $900 billion, does that seem high, low, fair? Based upon the financial metrics that they provide today, these businesses change constantly, right?

47:33It's the forecasting that they provided investors a few years ago, they surpassed in the few months after they provide them. And, you know, I think it's one, as I mentioned before, them trying to understand how to model their own growth, inertia kind of took over, right place, right time, solving a need, and a really high quality product, and done in a very different way than OpenAI has achieved their valuation. OpenAI, every time they've raised money, I feel like they've pushed it. They've pushed the price. And they've had all these interesting deals that kind of add it together. Some of it's cash, some of it's compute.

48:16And you get it all together and then you get to$852 billion, I think it was. But there's some interesting components of it that's not straightforward.

48:29And it's been way more frequent than we've thought they would, you know, and I think they would say that too, is the need of capital is clearly more than any of us thought it would be. They kind of just get a deal done quick, maybe leave a little money on the table, and wire the money in a week, you know, versus this long drawn out process. So they've taken two different approaches. But to think that we're a part of both of those stories from the time that we got involved several years ago to now, I would have never believed that if you would have told me we would have this conversation, they would both be valued close to$900 billion.

49:08I would have told you, you know, maybe we are in Mars or on Mars doing this. Got here in a SpaceX shuttle and Elon's going to walk through the door and we're going to fly around with R2D2 on the front. I would have thought that was – An actual real-working R2D2. I thought that would have been more of a possibility than us sitting here.

49:28Allie Garfinkle:This is maybe a dumb question, but do secondaries investors have the same rules around conflicts that traditional venture investors do? Because if you're both at Anthropic and OpenAI, they have beef. I don't know if you've heard. Yeah, yeah, yeah. I think for us, obviously we don't share data with anyone. Even our LPs don't get data on these types of businesses. It's, I think, more of a perceived conflict than an actual one. I mean, our job is to take capital from LPs and invest it into companies and provide them with a return that's outsized to what they could normally get in a liquid market.

50:13That's our job. And if we can outdo that more often than not, we're going to have a business. I think the companies and the boards over time, as long as we're not in the boardroom and we can be active and help them in ways that are beneficial to what their needs are and not show that we have any conflicts, it's pretty common for us. uber lyft turo get around we tend to back multiple winners and one ultimately becomes the outsized winner here we're fortunate enough to be part of two great businesses that are truly individual businesses that are changing our lives every day and different to different people and different to different companies.

51:03And there's enough probably for three more of them. That's what's crazy about it, is they are the clear winners. They will be here for a long time. They are our generations of the Googles and the Microsofts. That's who they are. And we're a part of that value creation. To have one, awesome. To have two, that's got to be a little bit of luck, you know, in the portfolio.

51:27Allie Garfinkle:You say there's room for more, but I wonder if there is enough capital in all the world. That's where the public markets come in. There's still a lot of capital in the public markets, and these companies will access them because they have an unbelievable need for capital. The exciting thing is all the time. It's a sincerely historically unprecedented need for capital. It is, and every time you think that they've exhausted it, they somehow just in a very short period of time are able to put together a massive amount of money. But when you look at the capital flowing into companies today privately, it's a handful of businesses that are getting all the money.

52:06So it's very counterintuitive to traditional macroeconomic trends. When you have high interest rates and low equity risk premium in the public markets, it's actually lower than it was in 2000 today. to have a few companies attract all the capital what's happening with the rest that's that to me is is is is the scary part it's not will they succeed is this price fair they still will go up and up up likely and to the right it's just at some point when do they become wildly profitable and I don't know if anyone knows the answer to that question.

52:55Allie Garfinkle:They definitely don't know. No, they might. They might. I think they don't. That's my hot take. We can ask Chuck. I bet Chuck has an answer. We'll leave it there. Larry, thank you so much. Thank you, Ali. Thanks for having me. This has been fun. And that was Larry. This is going to be a summer and possibly a fall where the usual laws of financial physics do not necessarily apply. That's it for Termsheet. I'm Allie Garfinkel and I'll see you soon.