2024 VC trends, portfolio construction, & more with Churchill's Raja Doddala | E1914

0:00The amount of cash being invested in pre-seed and seed is now at a 13 quarter low and the number of deals also has come crashing crashing back down. I think the last 10 years, everybody just went crazy. LPs went crazy. They forgot that there's a J-curve. Managers deployed too quickly. Companies raised very quickly, spent too much money too fast without any new information, new milestones. Looks like we're back to sort of normal way of doing venture. And this is, I think, the danger of how attractive venture capital can be. We never seem to learn our lesson or we forget it after 10 years. People get too excited.

0:41They put too much money in and it breaks everything. This Week in Startups is brought to you by LinkedIn Ads. To redeem a$100 LinkedIn ad credit and launch your first campaign, go to linkedin.com slash angel pod. Mantle, the AI powered equity management platform designed for modern founders and operators. Get your first 12 months free at withmantle.com slash twist and dev squad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one US developer plus 10 % off at dev squad.com slash twist. All right, everybody, welcome back to twist this week in startups today.

1:30We're thrilled to have Raja Dodala on the program. He runs venture and growth at Churchill Asset Management. We'll hear a little bit about Churchill in a moment, but we want to talk about the VC world and exits and how capital is being deployed. Raja, welcome to the program. Thanks, Jake. Thanks for having me back. Yeah, let's get right into it. Bunch of data that we'll just level set with the audience. Let's start with the deal value in 2023. This is the National Venture Capital Association and PitchBugs data that we're showcasing here and look at the number of deals that occurred in 23 versus previous years.

2:12And this is a quarterly chart. What we see here is that the deal count is sort of down from the craziness of 21 and 22. It's down, but it's sort of back to what I think is sort of a normal pace and normal amount of financings, I think. We're reverting back to our average 3 ,000 deals a year occurring, whereas at the peak, we broke 4 ,000 or 5 ,000 deals going on per quarter. Per quarter, that's a lot of deals. And the deal values are what we see in the blue bars. So the value of those deals rocketed up to, looks like almost 100 billion deployed, 80 billion at the peak there. And now we're back down to the 40 billion every quarter being deployed in something around 3 ,000 deals.

3:03So the madness is over. We're back to what is normal. Let's go to the next chart here. This will just show the yearly. And so if we abstract this on a year, it becomes even more pronounced. What do you see here in the yearly chart of deals and the volume of deals in terms of dollars? Just back to pre-pandemic levels, it's still a little bit elevated if you compare it to 2015, 2016, but just generally back to divert back to the mean, I think. Yeah, we had 170 billion in deals in 2023. Obviously, even though the number of deals has come back down, looks like 15 ,000 deals for the year. And we were averaging in that 2014, like 11 ,000, 12 ,000 deals.

3:43So it's still elevated the number of deals. And it should be growing. Venture grows, capitalism grows. So there should be some growth, typically. yeah i mean definitely this is probably you know ai you know round sizes evaluations and round sizes are quite elevated and that probably explains the deal value so this is where where you can start to get a little bit more granular pre-seed and seed deals here uh this is q4 pre-seed and seed deal value slumps to 13 quarter low so the amount of cash being invested in pre-seed and seed is now at a 13 quarter low as of q4 this is q4 2023 data that's come in and the number of deals also has come crashing back down so when you look at this overall raja a healthy thing right we're too hot yeah yeah very much so i think last 10 years you know maybe seven you know it's just everybody just went crazy lps went crazy they forgot we as i said they we forgot that there's a j-curve managers deployed you know to quickly companies raised very quickly you know spent too much money too fast without any new information new milestones looks like we're back to sort of normal way of doing venture and this is i think the the danger of how attractive venture capital can be when venture capital is a boutique industry when we're doing a small number of deals when things are concentrated and we don't have venture tourists coming in yeah people plowing money into venture because they get excited about it when we don't have entrepreneurial tourists people starting companies who you know hey they might have been a great cmo a great cto a great vp of sales but then they get the ceo slot maybe they're not cut out for it right and the talent gets spread a little bit thin you need a little spreading the peanut butter too thin and then you don't have this you know talent so on both sides it gets a little too loosey-goosey and it feels like this keeps happening in venture every couple of decades whether it's dot com web 2.0 now with this you know 14 year run-up we had i guess what we're going to call the zerp era all three of these we never seem to learn our lesson or we forget it after 10 years people get too excited they put too much money in and it breaks everything yeah no it's true i think even though there's a lot of data that suggests that work, at least some of the industry is back to sort of normal art, sort of a boutique way of doing things.

6:16But if you look at AI, J. Cal, I think there's probably still some of that behavior still sort of people using AI sort of as a cover to still do that. Brian Singerman, I think was on your podcast. He was at a conference that I was at upfront a couple weeks ago. He basically said AI is uninvestable. And his thesis is why? Because the valuations are too high? No, I think his thesis is a little different. I think the way they do it at Founders Fund, they like to be non-consensus. They think it's completely consensus investing in AI. So he feels like, for him, it's completely uninvestable. But from what we see, I think some of the reasons why, even though the deal count is down, the valuations are still record high for seed and pre-seed, even higher than 2021 and 2022, or round sizes are also having budged.

7:08I think that's probably a function of AI. And let's pull that up here. So this is where we can start to get super granular. We can actually look because we have some good data here. Now, pitch book data is not perfect. And the NVCA's data, nobody's data is perfect in this regard, but it does show a decent trend. Carta also releases some good data crunch base releases some good data and the fine folks at tech crunch so you can kind of triangulate this data and it all kind of will bring you to the same place here this chart we're looking at here these two charts median precede deal size remains the same as 2022 so somewhere around 2019 we started to see the valuations of these um the deal size rather how big pre-seed deals were started to climb in other words more cash was given to pre-seed companies so pre-seed company to level set here it's typically a two three person company two or three founders building a product yeah we would agree yeah i think so i think you know uh use 600 000 is what uh looks like pre-seed you know that used to be you know just a couple hundred thousand um back in 2013 and that's a 3x um increase and that hasn't budged and so when you look at this this means founders at the precede select founders are getting a larger dollar amount and um i am still seeing founders raising 500k so it is quite normal to see a 500k around i suspect because these are averages i mean if you look at the 75th percentile it's like a million and a half um you know at the top end like a million and a half are you are you seeing that uh million and a half seed rounds i guess once in a while we will see somebody break out in a pre-seed and do a million and a half what to me is shocking is then we have seed deal sizes which is the second chart on the right and again those four lines we're looking at are 25th average median 75th percentile and when you look at that 75th percentile i mean you're talking about raising 5 million, which to me is a series A.

9:14No, I think you talked about this in other episodes. I think the seed is the new series A. All right. Listen, B2B marketing is hard. We all know that. Why is it hard? Because buying cycles can be long and B2B decision makers are hard to find and they're really hard to target. So here's the best solution for B2B marketers. You know, LinkedIn ads, everybody knows LinkedIn because it has over a billion members. We're all there every day, hanging out, looking for a new executive, sharing our wins, and just generally staying informed. But did you know out of those billion users, 18%, 180 million are senior level executives, and there are 10 million C-level executives.

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10:22So here's a call to action. Make B2B marketing everything it can be and get$100 credit on your next campaign. Go to linkedin.com slash angel pod to claim your credit. That's linkedin.com slash angel pod. for a$100 credit terms and conditions do apply. What should a startup have demonstrated? In other words, what risk has been taken out of the investment at pre-seed when there's, let's say, three founders versus seed? We know when maybe there's three founders, a couple of employees, and maybe a product's in market. How would you define these two? Because this is kind of a sticky issue. Right. Right.

11:03So some of the best pre-seed seed managers that we have in our portfolio when I ask them this question, and they say the difference is, used to be, especially 21 and 22, just a PowerPoint deck and the founder and idea, especially a second-time founder, no questions asked, you can get a half a million bucks. now you got to have a product and even maybe a pilot you know if it's enterprise maybe a early pilot or two for seed um a real contract like a real customer or two um with some real traction and revenue uh is what they're looking at yeah so pre-seed just so we're clear here the definition would be a couple of co-founders they've got a proof of concept a demo and maybe somebody you know beta testing the product they may not be paying they could be on a pilot but there's somebody giving some feedback whereas previously precede would have been the friends and family around i would have defined preceding friends and family as the same thing yeah angel we're just passing the hat a couple of folks and an idea a business plan a mock-up but because it's easy enough to build products now people kind of get the prototype done then at the seed stage definition is you got paying customers uh somebody took out their credit card and paid for it and maybe you can even start to talk about growth maybe they got 12 weeks maybe they got 24 weeks of people using the product you can actually maybe dig into the engagement stats and see who uses a product every day who uses it every week who signed up but stopped using it and so maybe everything just has moved over to the left one where you know we're looking at here is actually seed and series age seed and series a deals going on here is another part of this the attractiveness historically of the seed round and the pre-seed rounds has drawn investors down.

12:54GPs are saying, you know what? Series A is too competitive. I'm up against Sequoia, Kraft, whoever, Lightspeed, Pick Affirm, Kleiner. They're all battling it out for the Series A. Maybe I don't want to get in that mix. The seed stage and the pre-seed, certainly, there's five to 20 people in the round i just need to secure an allocation i don't have to be the lead i don't have to join the board yeah that's a user you know it is i think you also said another sort of key word there is the lead so where we we we see is two places that are super competitive one the lead position at seed stage you're a seed firm um then you're trying to sort of you know you started out as a 20 million dollar sort of firm and you sort of graduated you raised you know, raised fund three, now you have$125,$150 million seed fund.

13:45And now your portfolio math requires you to get some ownership and a lot of times lead. And there's super, you know, some of the multis, the platform, you know, funds are now sort of wanting to lead seed stage deals and they want 12, 14, 15%. And that's getting very competitive. And then Series A obviously is, you know, as competitive as ever. and in terms of metrics um used to be you know yeah some early product market fit you know a couple of customers that are real now they're looking at customer cohorts are there similar customers you know more than three four you know contracts that are sort of similar meaning that the product sort of is a you know hit you know sort of popularity with a segment of customers so a little more predictability might be a way to say it yeah so you got your third customer and they look like the second who looks like the first and now if you got those three you can just extrapolate from there the next 300 and then on to the next 3 000 and 30 000 and if you have a business that gets to 30 000 customers you know at a thousand to 25 000 per year you got a real business on your hands so that really is what i've learned investing is about the price goes up the valuation of the company and your ownership goes down as the founders figure more things out and risk is taken out of the business yeah you get more cards to build definitely yeah and so if you're pre-seed you have no customers valuation is going to be low single digits now you got three customers all of a sudden your valuation starts to get towards high single digits that's right now you start getting predictable now you've got an eight figure valuation and then if it's year over year predictable, you know, you're in year three, and you went from 100 in year one to 500 to 1.5.

15:33And guess what, now you get to have that$50 million valuation and qualify for the series A. Right. And so this is where founders, I think, I don't know if this is your experience. If you're a founder, and you're aggressive, you always want to get credit for the next level of work, maybe work you haven't done yet. Yeah, because you're aggressive, and you want to be recognized and this is a hard i just had this come across my desk desk king slack had a company we liked at a founder university our pre-accelerator we offered them to come to the accelerator 125k for seven percent just like everybody else my combinator 500 global tech stars launch all the same terms basically and they said you know what we got some angels to put in at let's call it seven eight nine million and so would you put the 125k in at that level and we would say you know what maybe we'll wait for you to get to 10 customers 20 customers yeah because you don't have paying customers yet so you know and that just takes discipline we might like the company but you know that's your typical entry point is it not jason you know where your accelerator is kind of kind of where you you try to get in and sort of build a portfolio and then sort of double down and the sort of the winners that that's yeah so this is like i think a great pivot point for us which is portfolio construction and so maybe just to level set with the audience because we kind of got right into it.

16:51How do you invest? Who do you invest in? And then what are your expectations? And then I want to jump into the exits chart and then go into portfolio strategy. Yeah. So the way we think about it is, I mean, you had a couple of really interesting contrasting LPs on your podcast. You had Michael Kim, a sort of early stage, pre-seed and seed, sort of - Fund to funds. Fund to funds, concentrated. They take a big chunk of the funds. And then you had David from VenCap, um sort of very concentrated 12 um sort of platform funds it's terrific 12 terrific 12 that's terrific you i know you kept trying to get him to tell you that which which 12 and he wouldn't you know the way we're probably somewhere in the middle um the way we think about venture is it really like three products in there uh three asset classes if you will pre-seed and seed is sort of a different risk profile difference you know stage of the company um really company creation stage.

17:51And then you have sort of series A through D that sort of really used to be sort of what used to be called venture. That's why I think PitchBook still calls it early stage, series A. And then sort of post-series D through IPO sort of growth stuff. We play in the first two. Pre-seed and seed is sort of one cohort and then A through D. And the way we think about our own portfolio construction is series A through D, we think, On a risk-adjusted basis, A is probably the best point of entry for LPs. So because of that, 55 % to 60 % of our total committed dollars going into series A through D. And the way we select managers there is very much like David.

18:33We're sort of concentrated 8 to 10, approaching 10 now, and we'll probably stop there. And so those 10 managers, as long as they're doing well, according to the way we think about investing, they'll be our sort of marquee sort of names in the portfolio. Then seed and pre-seed, according to the historical data, returns are higher in pre-seed and seed. And so there's the alpha there, but also it's risky and it's volatile. because of that we sort of have a long tail of 20 to now approaching 25 smaller managers smaller for us is anywhere from 25 to sort of the top end maybe you know top out at 100 110 total fund size right yeah total fund size that means you like to put three to ten million dollars into each of those three to ten we like to be anywhere from five to fifteen percent of the fund perfect so 25 percent if it's a 25 million dollar fund you might put in two two and a half you know two and a half two million we're willing to do that and a lot of this where institutional investors are our size don't like to we see a couple hundred to three hundred funds a year it takes a lot of work sort of sifting through you know what is that person's comparative advantage why are they going to get three four five seven percent ownership but you know seed and pre-seed are they going to be able to help and graduate etc so we we think some of them won't make it some of them won't graduate to fund three and four but we think it's important to play in that space because that dollars wise about 35 to 40 of our dollars kind of go into that space but it's a long the seed and the pre-seed long you know and then we like to you know just like you know you like to to sort of layer in additional capital in sort of outliers yeah we we sort of have close relationship religion you know with our managers and we like to do co-investments you know sort of post product market fit you know reduce the duration of the holding period potentially lower fees a little lower risk these are companies that we you know technically will know beforehand and where we can get access you might see this company in a seed stage and you watch one of your series a funds invest in them and now they're at series c or d they're you know maybe projected to be two to five years off from an IPO and you can put in an extra 10 million or 20 million into that one deal?

20:57We'd even do smaller. What we like to do is we want to make sure that it's easy to make room for us. Some of these rounds, there may not be enough room for 10 million, but we're willing to do, in a three-year period, we'll probably do 25 to 30 of these. Direct investment. Some of them would be one to five million range. And more often than not, more than one firm in our portfolio will be part of that, you know, at some point in that company. Look, business leaders face a maze of tasks today. We all know that creating and managing your company's ownership shouldn't add to your stress. Well, meet Mantle.

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23:43Airbnb is growing. Coinbase is growing. Uber is growing. DoorDash is growing. You know, they would just stay private longer, right? Stay private longer was the move. But then we saw Airbnb, Uber, Coinbase, DoorDash, you know, get out and eventually great IPOs. They were a little bit sticky and it was a little choppy at the beginning. Maybe they were just overpriced relative to where they were at. But here we go. So maybe you could describe what you see in this chart, this quarterly chart of exits. Just to put it into perspective, I think the narrative is that exit environment is really tough, which it was.

24:20But if you look back, some of us have been around a while. The exit value was low. In total, 2023 exit value is about$68 billion, something like that, down from$800 billion almost in 2021. And that 2021 exit value is completely bonkers. It just never, that never happened before. Yeah. That's a complete anomaly, and that's probably never going to happen again. I mean, you know, we did have that dot-com era, you know, a bunch of people got out, so you did have a spike there. As I like to tell people, fortunes are made in the down market, they're collected in the up market. Right. A lot of what we saw in this crazy 2021 era were companies that 10 years earlier, 2011, were invested in by folks, whether it was Robinhood, Uber, DoorDash, Coinbase, you know, the companies who went public.

25:09And then I guess M &A being turned off in the EU, the UK, and the US, the Japan, and everybody just sort of putting the kibosh on M &A, that means IPOs is the only way to go. Right. And we see something like the Adobe Figma deal, that was$20 billion that should have been consummated, some here, maybe in 2023 somewhere. And so that$20 billion would have popped up one of these quarters, right? That's right. It would have come back in terms of LP dollars back in the system. But what's interesting, though, J. Cal, is that as bad as 2023 was, the total exit value, about$70 billion, that's not completely too far off.

25:51If you look at 2013, 2014, 2015, it's typically around there. It's just 21 and 22 are complete anomalies. And also the 87 % of all exits, this is the last 10 years worth of data. starting in 2013 87 of all exits are less than a hundred million dollars right it really is the power law at work correct most of the exits you're just getting cash back or yeah there's the preferred stack right gets paid back but nobody's really popping champagne corks here except maybe pre-seed people who invested at five million it exited at a hundred million 50 million yeah maybe they got a 10x 5x it's okay yeah but it's not a 50x or 100x which is really you know we need to be hitting 50 and 100x hits uh you know in our portfolio and this is one of the reasons why i think we have 20 you know 20 odd firms that are 25 to really 50 to you know 110 million range i just did some quick math if you're a billion dollar fund and if you want to do 3x dpi net in 10 years that means you have to create about four billion dollars worth of exit value in 10 years um and that's about 14 15 percent irr um that you know that's not easy to do it's double the stock market so if you parked your money in qqq or whatever s &p vanguard fund you would hit seven or eight historically and so when you put that four billion there you got a four billion in exit value because a billion is going to be management fees and carry correct then you got three billion left net to your lps to hit that if the billion dollar fund had 50 bets of 20 million and that 20 million bought 15 got diluted down to 10 that means you have 50 companies you own 10 in that's right that means to hit the four million dollar number one of them has to hit 40 billion dollars so in the last 10 years uh jacal the number of exits above a billion are 300 that's it so now do the number of exits above 10 billion you can you can almost count them on one hand you got snowflake you got uber doordash yeah about 5 billion is like 55 in the last 10 years so i mean they're incredibly rare very rare and that's why it's really interesting you know venture sort of market um there is you know smaller firms that are still somewhat doing traditional you know if you're a hundred you know again math on hundred million you know a hundred million dollar fund to do 3x net you'll have to create total exit value roughly 400 million i mean that's you know i can see a number of paths to doing that you don't have to you know you don't have to hit a billion dollar exit at all well we could do the same math here let's say you own on average five percent at exit not as much as the other firms five percent at exit if it's a billion dollars that's 50 million and so here if you were trying to you know if you hit a company that hit five billion and you have five percent of it okay you know now we're starting to talk about a you know a decent return there uh well the median exit is like 87 million yeah um even if you had a few i mean you know if you even if you had a few of those i could see a you know a hundred million dollar fund getting to a 3x net without even a billion dollar exit at all whether you've got an idea or an mvp or a ship product the next step is to transform it into a fully fledged reliable business that can support a growing customer base and that demands more resources on the product side of course and searching endlessly for a rare developer capable of handling every aspect can be time consuming or you could quickly build a complete product team and start developing and launching your product with our partner, DevSquad.

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30:16Choose a team primed for immediate action. Visit devsquad.com slash twist and get 10 % off your engagement. That's devsquad.com slash twist. And this is the math I have learned and studied. And so let's just pull up also the yearly chart here. And then you had a question for me about portfolio construction. I have an update on that and I can get your feedback as an LP and a GP, which is one of the reasons I do this show is for me to get smarter and you know having these conversations will make you smarter there's that crazy peak 2021 you got almost two trillion dollars in exits uh it's 800 billion 2 000 yeah it was 2 000 exits and what's the dollar amount there where's the 800 billion almost 800 billion it's incredible when you think about 800 billion like whoa yeah now it's important for people to understand this is not the total value of the companies this is the value of the equity owned by the venture firms correct the majority of the equity you would think 50 40 actually maybe it's you know a large chunk is owned by the founders in the team that's right that's right so lest anybody think oh there's a hundred billion dollar ipo for airbnb or uber oh the hundred billion goes directly to these numbers no about half of it goes to these numbers in all likelihood and then it just plummets which is just incredible to show you what happens we went down 90 percent in terms of the exit value.

31:36The number of exits went down 25%, 2000 to 1400, so the 30 % or so. And then it's gone down even more. Yeah, I think the exit values are down, but I think you're right. The reason that number looks high, like higher than 2017, there's a lot of seed and pre-seed stage exits. They didn't really return a whole lot of money. Aqua hires in some cases. And this is what people don't understand. Maybe you could explain an Aqua hire, the dirty little secret of those transactions. Yeah, definitely. A team, you quickly decide that there's no viable path. A Facebook or a Meta, a Google, or Apple, someone acquires them just for the talent.

32:18And then if there was$20 million put into that company, let's say the company gets bought typically for? $17, maybe, if you're lucky. Or it might get bought for$5 million. And that$5 million might get carved out, 2 million to the employees 3 million to the pref staff which means whoever the latest investor was who put in 5 million gets their 3 million gets all of it everybody else gets washed out that's right and these are incredibly frustrating um sometimes but you it's part of like understanding what happens in ventures you got to just keep it classy let the acquihires happen nobody's really getting rich although i do get a little perturbed sometimes i don't know if you've seen this and zuckerberg was the master of this um he said at one point to chris sacca one of his startups he told the founders like screw your investors we'll give you guys like five million dollars in equity over the next four years and we'll give nothing to your you know investors we'll give you 500k just five million into the company they get 10 of their dollars back but we'll just give you all the equity which if you were the acquirer you do you want to give money to the vcs or do you want to give money to the to the people that you know yeah they motivate yeah motivate them to work for them yeah so i have a simple standard when these acquires happen i just say give us the total value of the employee the founder buyouts and the you know preferred stack just keep it like 50 50 i don't know something like in that range and you know it's like sometimes we'll see you know 4 million and 1 million i just say maybe three and two three million to the founders two million to the investors can we just keep it somewhere in the 50 50 range not that it matters but i just think it's better hygiene i agree this is where i think having republicans in office not to make this political um but when republicans come back in office which seems like it's a decent possibility for anybody who's terrified by the concept of a another trump presidency i might be one of them uh like how chaotic it's going to be the one silver lining for venture investors is m &a might open up again and they might tell lina khan to hit the road and hey m &a needs to come back because this anti-capitalistic approach is really frozen the market we need to get billion dollar to 20 billion dollar exits with the big companies medium-sized companies buying them what's your thoughts on keeping the market competitive while allowing m &a is there any solution here no i think you're right you know so i think there's got to be some i think the pendulum looks like you know swung too far uh like amazon buying a robot you know vacuum cleaner i don't really i don't know what interests uh consumer interests are protected by that you're right i think one of the you know speaking about you know comparative advantage you know our country is is innovation and that cycle of people starting business and businesses and then getting you know liquidity off of that and then doing it again and again and again that's that flywheel no one does it better than us i think in the long run if we lose that that asset class i mean we just talked about how difficult it is to start a company to invest in a startup and underwrite that and you know seeing that through all the way to the exit it's really difficult and and that's a you know sort of a key driver of our growth and if we disrupt that you know i don't know that that's a that's in the long-term best interest of our country but i'm not you know uh i'm not saying there's there there aren't legitimate competitive issues but it looks like the pendulum has swung like the competitive issues were probably both manifested by a series of three acquisitions youtube by google instagram and whatsapp by meta aka facebook if you look at all three of those none of those would have occurred under lena khan right hard they would have been stopped now if you double click on those i think youtube probably would have failed i think they would have gone out of business they were unfundable they had a multi-billion dollar a significant chance youtube would not exist if it had not been bought instagram and whatsapp instagram bought for a billion whatsapp for 19 billion i believe for the two no yeah so if you look at those two i think there's a good chance that instagram would have been worth 25 billion at ipo and today would be sitting at 500 billion 250 to 500 i think the distribution proved to be the really more valuable in that case both google and you know facebook's case you know than the product and you're absolutely right to to argue sort of the other side of that i think as a result of that i think we have three four five sort of you know i think the five largest companies in the world are american um you know they're tech companies and do we want that as a nation i think we do so yeah uh you do do we want that you know chinese uh companies to have to to have that or american companies that you know i work for american companies i think there has to be some balance it seems to me that the balance um is not quite there yeah i mean if you look at the top 25 companies the companies that are not american on that list by market cap lvmh french aramco uh saudi obviously uh and then you got a handful of the alibabas uh and taiwan semiconductor which would be chinese or taiwanese you know and i guess by dance is still claiming they're claiming they're singaporean maybe i don't know where they're down where they claim to be domicile i think we all know right so in one way the instagram founder the instagram founders and the instagram investors would have been better served if lena con had blocked it and i know because ruloff did that deal like at uh sequoia man that would have been incredible so let's start at the top here oh berkshire i heard i forgot about yeah so microsoft apple nvidia saudi aramco Oh, two trillion.

37:59Eli Lilly. So number four. Oh, Eli Lilly has raced up the charts because of Ozempic. Yeah, he won. Yeah. So number four, number nine, and number 10. Yeah, those two raced up. Yeah, Visa, Tesla, JP Morgan. Yeah. It really is a challenge, actually, when you think about it, because it would have been really nice to see Instagram beating Facebook in the market now. And that would have been stopped by Linux. So, you know, it goes both ways. I think for LPs and VCs, if Uber had been bought or Airbnb had been bought, you'd be sitting here with probably a$10 billion,$20 billion exit, as opposed to whatever they're trading at now, $100 billion,$150 billion.

38:40This is the thing about being patient. I made more money on Uber, even after I had sold a bunch of my shares early in secondary transactions at$30 or$40 a share. and that took 10 what you 10 11 years i think from seed to eggs to public and then if you look at the public four years i made much more money off of the last couple of years as a public company going from you know 20 to eight dollars a share than i did in the first one so those last doublings can be very very material i'm hoping that's the same for robin hood which i've held on to my 100 of my robin hood shares i'm hoping that works out let's talk about portfolio architecture architecture and how you what have you seen that works really well and when you're evaluating this portfolio construction what are you looking for at the seed stage series a and late stage what is and explain portfolio construction generally because i think it is a evolving science slash art maybe a bit of alchemy i think it's a bit of both yeah yeah so let's call it this alchemy of portfolio construction everybody's got their own views on it what are your views Yeah, so from where we sit, so let me first sort of address sort of the fund of funds, you know, people that invest in funds primarily.

39:55I think what's been one thing that's sort of different, you know, it feels different this time around, sort of overhang from Zerp is fund sizes have gotten bigger. I mean, some of them have come down a little bit, but not really. um there is it occurs to me that there's two different products um in the market today there is the mega funds and there's sort of the smaller funds i'd put the smaller anything under like a billion i mean even under a billion there's a seed and that are smaller but it occurs to me that they're really at this point they're um really created for different kind of lps um these mega funds really are for people that are to your point earlier as long as you're getting 500 600 basis points on top of you know what an s &p 500 you know a you know a seven percent return it gives them a different kind of exposure different stage you know they're different you know class of companies and they're not really you know nobody has said this to me directly but my inference is that they're not really trying to do the multiples game they're not trying to do a 3x net it's more of an absolute dollar return as long as you know they're not going to lose money and they're probably not going to underperform the smp they're going to be you know you know so they literally might be going for that you know seven eight nine ten percent and then hoping hey well maybe i get a lottery ticket on top of it and i do 15 there may be you know i did it you know you or you know an uber you know once in a while and that might put them to 15 ir but it's really you know i have to guess uh on a 12 you know now that j curve is back it's gonna take 10 to 12 years for the funds to resolve themselves it's a 12 to 14 ir game and that may be okay for a certain class of lps but you know this i think lps are trying to figure this out and if you're you know like us we're we care about multiples um you know we try to you know hit at least three to five x net not all of them will do um so we'll cash in cash out i put a dollar in i want three four or five back after all the fees after all the carry expenses i give you one i got to get three back would be amazing to get four or five in 10 years 12 years whatever it wants to be i said 10 years five backs is 18 ir yeah and that's hard to do just with funds so you have to do a little bit of direct investing sort of like i was describing earlier you got to put some additional money into some winners, then you can target 18, you know, reasonable to get 18%.

42:30And that's what, you know, I think, you know, a certain class of LPs are trying to do. And because of that, I think we're focused on finding smaller managers, seed and pre-seed, where we can figure out a way to underwrite them, which is not easy. When we think about portfolio construction, let's go to the seed. Most seed, when I got into the business, you know,$10 million fund, 100K, 100 investments, yeah hope you hit a unicorn luckily in my first one i did 109 names hit four unicorns worked out well 5x on paper yeah 1.x already dpi i think you know somewhere between those two numbers is where we wind up or maybe things grow maybe it becomes six or seven who knows right we still got time so let's talk about then the critique of seed funds is hey they don't have reserves etc we did a little analysis on my first fund for unicorns in that fund robin hood superhuman density and calm yeah we looked back on it we knew three of them were unicorns it was just obvious you know like when did you know series a series b oh it was just it was obvious that they were the winners in the big outcome you you don't know how big but you know that they're going to be large companies exactly it was very clear based upon certain signals mainly growth of the business you know actual fundamental growth of revenue and users um with density it wasn't as clear because they were in the product it was a hardware product so they were deep in product discovery mode but you know it's pretty clear with those three we didn't place a second bet if we had placed a second bet on any one of them we'd be a 15x fund 10 15x fund if we had done two it would have been a 20 25x fund that's informed everything i do now same thing with my sequoia scouts i did about 650k deployed returned 120 million hit three unicorns in about 18 investments one every six never going to happen again but you know uh got lucky and so i guess how do you think about how much should a gp how much should a fund keep in reserves to make those second and third bets at the seed state yeah so So I've talked a lot about this with our managers.

44:40One thing that I've sort of learned to appreciate in venture, you know, see preceding, it doesn't matter where, is there's a number of ways to get to, there's a number of paths to get to 3 to 5x. But it's hard for me to see how you can do that if you didn't put in more money into your winners. I mean, you know, we can debate whether you're going to be consistently be able to identify those, you know, those winners or not. That's more probably art than science. I think, I don't know who said this, probably Adam Fisher at Bessemer. Most of the value in a company is created in the last like 18 months before exit.

45:18Yep. And, you know, some people are confident that they, you know, like in your case, you kind of, you know, you don't know how big, but you knew they were big and you knew enough. to put more money into those companies we intuitively think that makes sense but there are some that are adamant that there shouldn't be any reserves at all big mistake you know big mistake so uh i i think now based on being you know i'm deploying out of our fourth fund right now i have architected it now and obviously this is subject to change based on what happens in the fund 50 in reserves is is my best estimate now it could be 30 or 40 yeah i can say more than 50 but i think i want to have the flexibility for 50 and so you asked like how we're doing it's actually interesting now based on portfolio construction i have the investment team aware of the portfolio construction on the front lines you know running the programs found university pre-seed accelerator and then our actual accelerator i have explained to them hey we need to hit 10 ownership in you know like at least two dozen likely winners yeah and then we want to get to 15 ownership in five definitive winners so i've really focused on this language likely definitive mentality i think you got to have that mentality in you know in in we agree and as you've heard me say we like to do the same thing we like to layer an additional capital in the winners where we're able to do that yeah and so i had them give me the numbers yeah so i'll just share them with your broad strokes here it's kind of interesting um because every i mean we're deploying about a million a month right and we've already put about 11 million into 102 investments so on average it's 110 35 accelerator those are the 125 38 found university those are 25k checks 18 and about yeah looks like about uh another 20 direct investments so you know it's it's kind of where i thought it would be but the more interesting thing i've been asking them is how many of these did we make a second investment in and then how many of these are getting up rounds from investors who aren't us and i don't have that last piece of data but i do have a number of these companies where we have ownership i'm just looking at one two three four five six seven eight yeah nine ten so it looks like at about 10 of the companies wow very interesting in 10 of the companies we made a second investment already and this is 10 and And so we did, and in those companies, just ballpark looking at them, our ownership percentages are 11, 12, 8.5, 8.5, 8.5, 8.5, 11, 14, and 14%, and then 5 % and 7%.

48:06So, you know, we've really done a great job of getting to that 8.5 to 12 % number in what I think are the likely winners. And then we would get diluted down if we don't take another pro rata to six or seven percent, six or seven percent on exit,$100 million exit, six or seven million,$50 million fund. Hey, we start returning 10 % of the fund with those, what we would call singles and doubles. Yeah. No, I think that you got to have those, you know, you know, base hits, you know, whatever you want to call it. Otherwise, I don't know that you can get to, you may be able to get to 2x without it, but I don't think you can get three to five, you know, four or five X, you know, without, you know, what you're doing.

48:43I mean, you may discover that maybe you need 50%, maybe it's 40%, maybe it's 30%. But I absolutely agree with you. Unless I see something different, the evidence to the contrary, I think that's a good strategy. What I like about this doubling down strategy is it makes you a better full lifecycle investor. I started doing this JTrading. If you go to JTrading.com, I started publicly trading some equities. I had a couple of million dollars in an account that was just like an index fund. and I just started to actively trade, just like one and a half, two million, and shared the trades. I might think of it on this very podcast because I wanted to be better at understanding the public market comps because I'm frequently faced now with exits where I personally have to make a decision.

49:28Do I sell or keep my shares in Square or NewBank or DoorDash or Uber, Robinhood? So I got to make a decision personally. Do you have to become a public markets investor whether you like it or not? You have to start making, And also you have to make that decision for your LPs. Do we hold Rumble? We have shares in Rumble. Do we hold them? Do we distribute the cash? What do we do? Boom. And so this is, you know, it's not a perfect science. What do you think fund managers should do? In our case, you know, we want, we're paying you to be a private markets investor. So the J-curve expectations, as well as sort of what we're hiring you for is to be private market investors we prefer we tell our managers we prefer that as soon as your lockups um over um distribute you know the shares and we we usually do not hold it either um because my mandate is not a public you know mark i don't have the skills to be a public market investor so we we immediately liquidate yeah so that's i think the key is understanding your lp base and what they want we're yeah i think we're in the distribute the equities if we can it turns out distributing equities to a large number of lps is super complicated it's not it's not easy and in a lot of cases you just have to sell the shares especially if there's like people are getting three shares of something the cost of sending the three shares it's more more yeah it is uh more than the cost of the or the value of the share so it's challenging uh there's no easy solutions this to me seems like the setup for what i think will be the best vintage of our lifetime perhaps or maybe second only to the the beginning of the zerp era boom when uber airbnb coinbase and that cohort got funded what do you think the next couple of years is going to look like and how do you think about it from an lp perspective yeah i think the reason i think you know so this vintage and next and maybe next two to three, four years is interesting is AI seems to be real.

51:32The technology seems, you know, the advance seems to be real. You know, venture industry is back to sort of normal, you know, the right way of doing ventures, more boutique, you know, way of investing. And there's pent up demand for, you know, IPOs and M &A. The dam's got to break at some point. So there's definitely going to be liquidity, you know, coming our way. I think the only thing that I can't figure out yet is there's going to be with AI, there's going to be a period of disillusionment because people are overestimating the impact of AI in the short term. One of the things that we do that people told me that's still different as an LP is I used to write software.

52:15I grew up in a corporate setting and I talked to a lot of CIOs and they can see those. and they have a lot of top-down pressure to do something with AI, but it's not clear. What should they be doing? What should they be doing? Can they measure when the CFO comes calling? Can they show ROI? Those questions are going to be asked. Do the tools work? Are they proof of concept or are they ready for primetime? like if you look at like writing blog posts or creating video creating images like maybe get you 50 of the way there 60 70 of the way there but it's not 100 now in some pursuits like writing a blog post yeah maybe 60 is really great because you're gonna polish it you know yeah maybe yeah yeah but you know if you're making an image it's either it's done or it's not done right you can't take the image of the video 60 70 of the way there in my experience you might as well just start from scratch so i think that's part of the challenge here and it also seems to be that it's helping incumbents with distribution and making their products better um in the short term and there's going to be you know use cases where there's not any clear incumbents and we're going to find those but the sense that i get is that we're probably two three you know maybe four years away from sort of critical mass of you know new value being created so that tells me that you know uh maybe there's next three four or five vintages that you know might might be good so we're oh that's actually a really interesting way to look at it is yeah hey we're in this 23 24 25 vintage but then there'll be a 25 26 27 vintage maybe that's the one that actually hits your microsoft and nvidia you know you know you you or even snowflakes of the world you know you might be better position in the next two to three years where incumbents products are a little better well you know it's interesting you say that there was this expression somebody told me early in my career in the dot-com mirror the first first guy up the hill takes the arrows you know and the next guy kind of like walks over their back there's no arrows left to be shot at you and that actually i watched that happen with web2 you know there was a cohort of delicious my company weblogs ing friendster my space they all kind of ran up the hill 30 million 100 million 600 million dollar exits but facebook and air b &b and uber you know they ran over all those carcasses and they built the truly lasting 100 billion trillion dollar companies in the space yeah yeah if you're a fund that you know you know a seed fund and you're a hundred million dollar seed fund and you have i don't know 10 companies that on your portfolio and the median entry price is 25 million at seed um we'll see if those are too early um and they'll be lapped by new technology maybe by open ai maybe a new class of companies maybe it's time before you know post the the the valley of disappointment before we come back um so the dip but it's definitely an interesting time to be an investor and to be deploying capital this is where time dispersion uh is super important maybe you could explain this concept and what lps expect from gps and why gps sometimes go too fast and they should probably pace themselves.