Mark Suster and Samir Kaji on the 2024 Venture Market, IPOS, and Secondaries | E1899

36:33Could you talk a little bit about that? Yeah. I mean, an example would be, you do a seed or series A deals, typically seed. It's usually the seed investors, they do a deal, maybe it's a$10 million post. A few years later, the company is scaling and it might be a great company that's really this rocket ship. And they have the opportunity to sell the whole position. And it returns like a third of the fund or half the fund, maybe, and they sell it. And what they do is they want to sell it because maybe they're raising the next fund, right? So to show DPI back to the first investors or in their, you know, maybe it's two funds before and to show prospective LPs, hey, we have some DPI because everyone's focused on DPI is probably not the reason if that company as a GP, you think can underwrite to another two or three turns of the fund.

37:18And so we have seen a little bit of that. I can't say we've seen it. It's not been ubiquitous, but that would be a reason of taking a short-term gain of getting DPI to be able to raise a new fund, show people that at the expense of the long-term return. Because if you're investing in a seed fund, you are expecting to get at least a 3X, but really a 4X net or higher. that's why seed funds are becoming popular these days i think with lps that's what i've heard being a pre-seed fund and a seed fund people are like the average for seed funds is so much better than the later state or not so much better but i slightly better i think though the one thing is look i think right size funds matter like we never increased our fund sizes above 300 million in a world where people were raising 2 billion because it changes your strategy it changes how you deploy cash.

38:07And it requires you to have huge sophistication on how you're going to exit this at 3 billion or 5 billion or 7 billion. And there just aren't that many$5 billion publicly traded tech companies. You know, there aren't, you know, Jason, do you have any idea how many publicly traded companies are actually unicorns? Yeah, it's a great question. It's going to be, gosh, over what time period? You're just all total venture as of today, from that from a venture start so we would include apple in that yes google and that everything okay oh wow um it's gonna be low i'm gonna say 75 to 200 somewhere in that zone okay well that that's low like most people assume because there's 1400 private unicorns okay right i would say 20 get there 300 more so maybe there's 300 now 343 oh you helped me with my math because i was gaming i like i think 20 get there yeah and so that is the the what do you what is uh so you call those uh paper corns yeah paper corns um i call them companies that are valued at a billion dollars but that doesn't mean they're worth a billion dollars right and the problem is then you kill all the incentives like management team no longer has upside you have seed funds that are 6x TVPI, 8x, 12x TVPI, but no DPI.

39:32Okay, so they look good if you're an unsophisticated LP, because an unsophisticated LP won't understand that that cash is never going to come home to roost. So the problem is between 2015 to 2022, we've had all these markups. So there were 723 net new unicorns in 2021 60 of those were priced by just four vc funds okay hold on hold on i gotta grok that what was the total number 723 okay so 723 60 of those so more than half of them like 400 of them were priced by andreessen horowitz co2 tiger or something like that i'm only going to name two of the firms soft bank and tiger got it okay i won't name the other two but let's suffice it to say you could have an educated guess so so what i what i tell people what i tell people is at least the two that i mentioned are not active in venture capital right now so if i were an lp doing due diligence i would look through my seed funds and I'd say which one of those had markups in 2021 or 2022 because I mentioned 723 but it was something like 429 the year after right so I would take those two years and just like draw a line through those and and they're probably massively overvalued starting a business used to be a pain you needed a lawyer there were hidden fees it was a mess Now with Northwest Registered Agent, it only takes 10 clicks and 10 minutes.

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41:49Mark, you mentioned 1 ,400. How many of those are dead men walking? You have 1 ,400 private unicorns over under. I think that at least a thousand of them will never exit at north of a billion dollars. Wow. Two out of three. Two out of three. That's pretty wild. But I think that's true because some of those companies were able to get a billion dollar valuation at a one to, in some cases, one to 150x forward-looking revenues, which is crazy. And so, Mark, I think you mentioned the number six to ninex forward-looking revenues in the public markets. which basically means as a company to even get a billion dollar valuation in the public markets, you're at 150 to potentially$250 million in annual revenues.

42:36How many companies reach that? And that's just software companies. Like if you take marketplaces, marketplaces, 20 year average is 20 times, sorry, it's two times net revenue. So you take net revenue next 12 months, average valuation is two times over 20 years. If you look at a 10 year average, it's three times. So marketplaces are valued between two to three x. Maybe if it's an end of one, you could say three and a half x, but three and a half x net revenue, like it's pretty predictable what they're going to exit out ultimately in a market that's paying rational prices. Yeah, we are in rational price land, but the founders have taken the medicine.

43:15I think that's the one thing I'll take solace in is, you know, our conversations on all in for two years of like getting fit and taking the medicine i don't i mean who's who hasn't taken the medicine i do does anybody have examples in and around their portfolio of people who are still in denial of all i can say jason is god bless elon yeah because what elon showed our whole industry is how bloated our companies had become and god bless uh bill gurley for talking about stock-based compensation. Like it's a real cost. It's an expense to the business. And in some cases, people are taking six, 7 % stock-based compensation per year.

44:00Now in a company that grows from 50 million to 200 million to 800 million to 3 billion to 10 billion on paper, everyone kind of said, oh, okay, well, we have to incentivize people. It's a real cost. and it's real dilution that shareholders are paying including founders like founders are getting diluted too and they just didn't really think about the math of it but between elon showing people just how much inefficiencies was in company and he gave air cover to mark zuckerberg to then go and do it and then even mark benioff right yeah like one of our industries one of our industry's great leaders like who's led based on growth for his whole career said it has to be growth plus cost focus right yeah and so as a result of that you have more efficient companies and that's what i love about capitalism that's why i'm so short china that's why i'm so short russia because command and control markets they can do well for a little while but capitalism creates much better outcomes yeah because it's a competition right and when you start rigging the system it's like and picking the winners or picking the losers i thought that was the crazy part about China just just a great read for everyone go read chip horse and go read about the competition between the US chip industry in the United States and Russia and how Russia we were so scared in the 1960s that they were going to pass us and they talk about how the command and control because they were sworn to secrecy they were controlled by the government there was no one trying to mess each other up or get ahead there was no collaboration because no one wanted to talk So they got like caught up with us and maybe they looked like they were going to get slightly ahead.

45:43But the creative destruction of the United States produced better results. Same thing happening with China right now. IPOs? I know we want to talk about IPOs. Yeah, well, from China command and control to American public markets. Moving on, F Prime Capital, formerly known as Fidelity Investments, put out its 2024 State of FinTech report last week. In this report, F-Prime analyzed the pricing of public fintech companies across payments, insurance, banking, lending, and wealth and asset management, arguing that public stocks have come off their 2022 troughs. F-Prime argues that 2024 will be a pivotal year for fintech IPOs.

46:22Samir, what do you think about this? Well, I mean, fintech was the hottest period or the hottest sector for most of the 2010s. I think going back to 2021, if you look at the public market fintech multiples, there were about 26x. And then they crashed down to roughly what the standard is, 4 to 6x. So fintech, and we've seen these large companies, whether it be Robinhood and Coinbase, go through a lot of difficulties in the public markets. Fintech was one of the most, in my opinion, overfunded and probably overvalued sectors. Now, fintech is everything. So every company to a certain degree is a fintech.

47:03Have the public markets completely reverted? Well, I mean, the public markets did really well in 2023. So if you look at 2022 versus 23, 23 ripped. Now, most of it was a small group of companies. Most of the fintech companies in 2023 still had a lot of deterioration in terms of stock price multiples. I think that fintech is still very difficult. And I do think that from an IPO standpoint, it's hard to see a lot of fintech companies going out because I just don't think they have the fundamentals to go out in terms of what the public market will pay for. Robinhood doing great today. I think they're here for the long term.

47:43I didn't sell my shares. We were seed investors. We distributed them. That was a crazy whipsaw with Cathie Wood buying a bunch of it you know i think she bought it 50 or 60 it went way up we weren't able to sell we were in lockup probably hadn't the opportunity to sell at a higher price than we distributed at in the private markets talking about secondary before but we believe in the company i still believe in the management in the company i think that's going to be like a company for the ages but i'm holding my personal stock forever i i believe in the company and that they're executing at a very high level but yeah fintechs razor then margins and not being differentiated is hard It could be a commodity business.

48:19Mark, what do you think about the fintech market and the overall IPO market for 2024? Well, first of all, I'm very long fintech. I'm long fintech because it's, you know, a significant part of GDP. It's got significant inefficiencies in the market. I'm less bullish on alternative banks because most of them end up just being marketing schemes. Like they don't actually have fundamental banks beneath them. And so you've got to compete with financial institutions with basically what's a front end for a different bank. Where we've been investing in fintech, we've been trying to do things that are novel.

49:03And I'll just give you a couple examples. We invested in a company that does something called Dynamic CVV. What they do is they take a credit card. Well, this isn't a credit card, but imagine it was. And on the back, you have the little CVV code and they use e-ink to iterate it every time you use it so that you never have the same CVV twice. They own global patents on it. They can manufacture it at scale. And it turns out that there's a really big growing problem called CNP fraud. CNP fraud is card not present e-commerce. so what they do is they pay mafia rings and restaurants and retail stores to take photos of your front and back of your card and they send them to criminal rings that then run up as much e-commerce transactions as they can before they're discovered dynamic cvv that can't happen that's just one example but like we're trying to do things that are novel pieces of technology or infrastructure that are different than what exists in the market um so i remain bull aside like we're trying to solve problems in the biggest industries that exist in our country that are intractable and other people generally don't want to invest in because they're hard.

50:18And fintech is very idiosyncratic. It's unique. How do you diligence fintech companies versus other industries? I mean, it's hard because there's, in a lot of cases, there's regulatory oversight, We actually own a fintech company that owns a bank. So we had to go get compliance done. It took three years to get approvals to host the national bank. It's a very interesting company. Also, it's called GIKO, J-I-K-O. What GIKO does is it effectively has created a treasury T-bill trading desk. So it takes your cash deposits and it puts them in T-bills. but it built its own ACH rails so that you can take money out of the T-bill markets and use it as cash.

51:03So it allows a seamless transition between cash and T-bills. What it allows you to do is earn a T-bill rate. So you can earn 6 % on your cash. You can build a ladder of 3, 6, 9, 12 month yields and still pull your cash out anytime you want. So we're investing in infrastructure like that where what we've built is truly unique. It doesn't guarantee success, but it's truly unique. And we think therefore likely to be valuable. Jason, you're investing sometimes at company formations very early on, you're seeing the next generation of fintech companies. What are you seeing in the fintech early stage market today?

51:42We're definitely not seeing crypto that's out the window. So just zero crypto pitches, which is great because those founders were you know largely scam artists not real technologists they were just writing white papers and telling some story about how a blockchain would be better than airbnb and everything they learned about consumers and you know all kinds of nonsense um you know there there is a lot of this kind of like rapper bank stuff that mark is talking about where it's like a thin veneer on top of stuff and we're not super interested in that we do see the very common education or personal finance kind of stuff and again that's not differentiated enough so frankly i'd like to see a little more ai driven finance stuff and i did see a couple of let's call them ai tax and accounting type softwares which is tangentially fintech but helping people with their taxes helping people with complex bookkeeping or even basic bookkeeping so i do think there's going to be a massive ai you know my thesis is every business that locked in a win in the cloud or locked in a win on mobile has a chance to be unseated with an ai chat interface or a better interface and so really excited about that i don't think most of them get disintermediated, but I could see Pilot or, you know, QuickBooks or something be disintermediated by somebody who does a better job with AI doing your books.

53:19Samir, you have fintech, fintech only funds on your platform, you have these multi-stage funds like Andreessen and Andreessen like Andreessen Sequoias that have fintech practices. What's your take on fintech as a whole industry? I'd probably share the same sentiments as Markham, you know, obviously, we're a fintech company as well. So we're very long term in terms of what it means to the macro, both here in the US and then globally. It's just overfunded, like a lot of things, it was amplified by a lot of overfunding and, you know, things like the neobanks, which I think everyone, you know, is referring to, you know, you're basically building something that was technology, but you didn't get all the benefits that banks got in terms of the net interest margin and things like that.

54:02So we are going to see a washout, it's going to be painful for some folks. But long term, there's going to be some great companies. And I think AI, whether it's in wealth management, whether it's in accounting and finance, we're still at the first or second inning. And I think that's where we'll see sort of this long-term value creation. And I think fintech, it's only been a term for about 13 years. And so as we look forward, the next 13 years are going to look very different. And I think better fintech companies are going to be found. And they are going to disintermediate some of the big players, both legacy and some of the gen one fintech companies that were funded back in 2013 to 17.

54:41Should we move on? Yeah, for sure. Yeah, maybe do our top threes. Top threes are Kleiner on AI. How about if we at least since you brought up Kleiner Perkin, I just like to do a shout out for them. I work with so many venture funds. I have so many boards that I sit on where people barely do any work or just like cheerlead CEOs. is Kleiner Perkins has made a tremendous turnaround since they brought on Mamoon and Ilya and probably other people that I'm not mentioning, Bucky and other people. They're just such a pleasure to work with. Like, Ilya does the work. He has knowledge. He cares. He dials in.

55:19He pays attention to the details. Founders love working with them. Mamoon is the same. I just think it's the most under-told story in our industry, just how much KP is back. 100 percent and you know i know this is one of the questions and i just wanted because i have spent a lot of time with both mamun and ilia in fact ilia and i talked last week about you know sort of this regeneration of kleiner this also highlights the fact how hard it is to maintain this durable for kleiner for for those that don't know it's been around 51 years and if you think about kleiner in the 80s and 90s along with sequoia that was these were the top of the top and over time they had some partners leave like finote kosla of course left you had the entry into certain areas like cleantech which you know didn't work out the way they thought they added a bunch of products you know the growth product of course now mary meeker is left to start her own firm bond capital but now that they've been doing this for now six and a half years so mamoon comes in from a social plus or social capital and then you have ilia coming from index, Kleiner is, you know, it's hard to say what is back.

56:29But from a directional standpoint, you look at the companies they back, whether it's Figma or Rippling, that firm is now firmly in the minds of every founder right now. Mark, you mentioned about the story about Kleiner. How did they do? How did they reboot? And how does a firm reboot like Kleiner? There have been just fantastic people who have come out of Kleiner who did not get anointed to lead the firm. Aileen lee as x kleiner matt murphy who's an excellent investor he's over at menlo ventures now um samir mentioned mary meeker was there for a period of time al gore was there for a period of time like they they had like murderers row for a little while and um you know they just didn't quite figure out like how to hand from john door again john door and mike moritz are like two of the legends of our industry and how much they succeeded at sequoia and kleiner they both back google um you know when google was this in infancy um i think they each had i think 10 of google but someone can fact check me um but anyway there was a period of time where john didn't just find the right person to hand off the firm to um and i say hats off to john because he stuck with it he did the hard work um they have that other gentleman i'm forgetting his name older guy who's still there i don't know session planning is hard i mean they have a guy who's been there for a long period of time who knows the venture business i'm just blanking on his name but they didn't quite get it right and uh and i think they they actually tried to bring in mamoon years before they actually were able to bring him in they were trying to recruit chamath exactly they were So originally they tried to buy social capital and put Chamath in charge of everything.

58:15And then when Mamoun left social capital, I think they went to Chamath's, you know, previous, one of his previous lieutenants, Mamoun, and they've done a great job. I mean, like if you look at upfront, so we've been around for 28 years. I joined in 2007. I wasn't the founder. And the founder is still to this day actively involved. And he's a close friend of mine. I've worked with him for 25 years. His name is Yves Cisteron. You know, he backed Starbucks, Costco, Office Depot, PetSmart, you name it. And so a really storied investor. And between 2007 to 2011, we did things together. In 2011, he gave me the nod and said, I think it's time for you to run the firm.

58:55So I've been running up front since 2011. And we have an incredibly talented bench of young people. Kevin Zhang, who's been with me, this is his 12th year. and he's got the hottest hand. He's leading our healthcare practice. It's 20 to 22 % of our investment is in healthcare. And then you've got Nick Kim on the other side, who's only been with us for about a year and a half, but he's leading all of our hard tech and national defense, which is also about 20 % of our investments. And both of those guys are mid thirties. You look at Aditi who leads our fintech practice, mid thirties, right? So like it takes the wisdom and maturity of someone like me in my 50s.

59:36By the way, in order to have lived through the global financial crisis, the rise and fall of the GFC, you have to be in your 40s. In order to have seen dot com rise and fall, GFC rise and fall, you have to be in your 50s. That's why we didn't do NFTs. That's why we didn't do crypto because I'm like, guys, like I think like inherently there's some value here, but everyone's overpaying on prices. But the reality is you also need 35 year olds and 28 year olds who are connected to the networks of the next generation of founders who are going to do things in a different way than we did. You need 10 years to do this.

1:00:12Like if I remember when Ruloff went to Sequoia and Alfred Lynn, and I just watched those guys who brought me in as a Sequoia scout, obviously. And you know, they they were mentored for a decade to take over and become the stewards and you know i think sequoia really figured out a new concept which is to become stewards of the brand you know not to run the brand necessarily the ceo of the brand but the stewards of it it's almost like inherent in that word is you will be doing this for a period of time and then you will be handing it off to the next group right um and they did a really good job of that and then i can tell you just from hanging out there and i was there last year and saw doug leone there and then i came back another day and saw doug leone there again and michael moritz another time when i was in the san francisco office like they're not done there it's not wasn't like a hard handover like here's the baton go and i don't have the baton it was more like hey you know we'll we'll we'll lay back you know we'll lay back and when i got there and they had funded one of my companies they um you know some of the previous you know don valentine was there sitting in the back of the room watching michael moritz and doug leone run the show and jim getz right and but valentine was there he was in the back of the room he came up to me after i pitched the entire firm and asked me a couple questions and introduced himself and i'm like who are you oh it's the same thing you'll still see eve you know you'll still see eve around up front like he's a large part of our culture and training young people and providing wisdom it matters mark you've had a career right up there with moritz and door uh when are you going to hang up how much longer how much more it's in door first of all like they're a different status than i am they've achieved more than i have but they're also more than a decade older than i am i'm only 55 if i was running for president you'd say thank god someone young is running so i'm i'm all in you know i'm an empty nester as of september um this is my thing this is what i do but i will tell you that my goal is to make sure that the next generation within up front many of which who have been with me seven to 12 years, that they understand more than just writing checks, that they understand portfolio construction, that they understand risk management, that they understand cash distributions, that they understand incentives.

1:02:26We're now an RIA, so they've got to understand compliance and SEC. And by the way, I have a whole ops team, right? Like that's the thing you're blessed with when you've been around for a while and you have a portfolio. You know, Stuart Lander actually runs the firm the day-to-day. I don't. He's phenomenal. I have a guy just does IR. That's his full-time job. He's phenomenal. My CFO is ex-Goldman Sachs banker, and she was a two-time CFO in startup companies. She knows how to run finance, so it means I can stay focused on the job of writing checks and sitting on boards. How much of VC is an apprenticeship model?

1:03:04It seems like all the top VCs are all apprentice. Is there another model that you've seen worked, or is it pretty much apprenticeship? Samir, why don't I let you talk and then I'll jump in? Yeah, I mean, I guess from my perspective, I mean, running a VC firm is more than just investing. And so when you, you know, Mark mentioned some of those things around operations, hiring, talent acquisition, it's, you know, how do you create some repeatable model to add value to founders? It does require a certain level of apprenticeship. I think it's very difficult. to not have done at least some level investing, whether it's angel, you can do angel investing.

1:03:37I think you learn a lot. You learn pattern recognition. And for a lot of folks that start angel investing in the beginning, everything looks good at the beginning. Everything looks good. When you meet 100 companies, 1 ,000 companies, 2 ,000 companies, you start to actually do a small percentage of those deals. And you start to realize how to actually look at a particular company and understand the probability of success. So our view, and this is something that I've seen so many times over, is that you have to learn the craft. And the craft is incredibly hard. So most people don't know this, but the 25-year track record, if you look at top decile, is a 3.06.

1:04:18Top quartile is a 2.4x. And so what that suggests is a very small percentage of people are going to be consistently successful. Not just one fund, but fund after fund. And what it requires is methodology and consistency. So we brought up Mamoun over at Kleiner and, you know, prior to working at Chamath, you know, learned a lot. And going back to even before that, when he was, I think, at InterWest, learning, you know, the craft. Well, those folks learned the entire craft of not only investing, but running a firm. And so I do think it's an apprenticeship. Now, with the amount of, you know, content and what, you know, Mark and Jason and other people do, you can accelerate.

1:05:00And I think the learning curve can be quicker, but you still have to learn. I think it's important to have a belief system and to not do what other people are doing. I think you make money by having a belief system that differs from other people. And that's a really hard thing to do because VCs, they want to go to their cocktail parties and share with all their friends, all the generative AI companies they're doing. And in 2021, all the crypto deals, they were doing. And in 2017, all the AR deals they were doing. But you have to have a fundamental belief system that's different than other people.

1:05:35I always preach the idea of triangulation. Triangulation, a term that comes from sailing, is like looking at multiple points to sort of figure out your reference point for which direction you're sailing in. So if you have that as a metaphor, go out and talk to all the VCs you admire and understand what makes them unique. So I want to give a plug for Jason. You just hosted a brilliant show. I don't know how long ago it was, but it was with Brian Singerman from Founders Fund. Everyone should go listen to that. It's a great interview. It's a great discussion. I went to see Brian when we both started.

1:06:12So I started in 2007. I think he started in 2008, but somewhere around there. And maybe I went to see in 2009 and he said something heretical to me. He said, we're looking to invest in people who don't want us on their boards, don't need us on their boards. I'm like, what the f*** are you talking about? Like every VC I know says you have to join every board. And he said, okay, listen, like we'll do board seats, but we want to back founders who fundamentally don't need us. Like, what do you do on a board? Set 409A valuations, talk about the budget, talk about Susie and marketing that you're trying to recruit or whatever you're trying to do right and he's like i don't know those aren't the world's most talented founders the most world's most talented founders don't need us and he said and it was so heretical but i had a hard time mentally arguing against that i'm like that's not who i am but i actually think that's pretty f***ing smart and it always sat in the back of my mind second conversation i had was keith raboi and i had a conversation with keith when he was at cosla ventures i'm like i keep seeing you write two million dollar checks into rounds led by other people and you're not taking the board seat like what the f*** are you doing like how can that's bcs don't do that he said bcs are so dumb he's like if i could put two million dollars into work into a deal led by a partner in sequoia that i hugely admire and respect with the founder i really think the world of and they're going to do all the work and i get a free ride i'll write 10 of those so everyone has a different belief system about how they're going to make money and i'm not saying they're all right or they're all wrong um i think the jason calcana style is is amazing i tell this story all the time so you know jason like i always say i i did it once with you present which is i compared you to donald trump okay but you have to hear me out you have to hear me okay so so donald trump goes on stage and he says all sorts of wacky stuff on stage every day not that you do but he does all sorts of wacky stuff but over time he develops an intuition for what his base really cares about what are the issues so by the time he's on the national stage he knows what the he's talking about okay then steps up a guy five times smarter than him called michael bloomberg he gets on the stage without ever appearing in small comedy clubs first and he goes to film his netflix special let's call it like the debate yeah and he gets eviscerated by kamala harris eviscerated in one time because there was no stage leading up to that what you do jason by doing your show on a consistent basis having debate ideas having to talk to people seeing patterns or whatever then when it's time to write a check you just have that intuition for where the market is so i think it's brilliant i tell people that all the time i used to i used to do your show when you had this week in vc and yeah you know i did that together and i felt like that made me a better investor definitely thank you for that um i do think having great conversations is a key part of my strategy because it it it makes you sharper right and you know i when i came into the industry there were two schools of thought spray and pray ron conway chris sacca 100 names in a fund 200 names in a fund y combinator tech stars whatever and then there was like concentrated classic you know fred wilson or up front you know benchmark 300 million five partners whatever 30 names in a fund and i studied that but then by having all these conversations i learned what sequoia was doing with whatsapp i learned what brian singerman did with airbnb and spacex and then when i did portfolio construction you know i was really thoughtful in my fourth fund and you know i kind of discovered in the third fund which is well if you have massive deal flow and you can get enough surface area and you have the rights to put more money in and you have a way to track the spray and pray which is a derogatory way of saying you know making 200 investments well if you actually know which four of those are unicorns and you can back up the truck and get to fit 10 15 ownership you're going to be in a great place i mean that's what that's what you said on the show you said you're willing to do up to 20 percent of your fund if your wide net that you cast if we could put a better term on it the wide net that you cast happens to catch something that looks worth backing yeah and so that that's the you know that i would have never come to that strategy if i wasn't having this debate and having lps tell me this makes no sense you know who was years ahead of his time was dave mcclure he called up 500 startups i'm like what a nut job and then uh but i love dave and i've always loved dave and then i sit down with them and i'm like okay he's got a different point of view than i do but it's pretty hard to argue against the principles i think the only issue was he didn't have a system to figure out who to double down on and that's what i spent the last three years studying was looking at the existing portfolio and when did i know robin hood uber calm what he didn't do is he didn't have never double down follow-on vehicle or the capital to double down on twilio but he had twilio in their seed round but did he know that's the other piece like did he know twilio was the one you have to know it he knew it yeah so if he knew that's the tragedy and so what i've he didn't have the capital i think to properly back in can you imagine what that second bet would have done if you put a million dollars go back to the mistake that vc managers make is um not understanding how to run a venture business by the way like we only invest 42 percent of our fund i reserve 58 percent i have enormous reserves to then go back our winners um but i think the largest percent historically you've put into one company we've never put more than 10 like i god bless brian for writing 33 of his fund into one deals one deal like i don't have the conviction to do that that's a different strategy than what i will do but um but i just think like understanding the need to put time into lps i think a lot of vcs don't put enough time into relationship with LPs.

1:12:14And the truth is, and no one wants to hear this, but I believe it in my bones. I think LPs are your customer. Because what's your job? Your job is to raise capital and return more capital than you get. How do you do that? By investing in startup companies. But like your end customer is an LP. Yeah, I'm learning that now. You know, when you get to your third or fourth fund, you actually have to develop an LP relations IR function, you have to learn how to do that and they're so different like every time you meet with a with a family office you're like yep this had nothing to do with the last meeting this this is literally has nothing to do with the last 10 and then you meet like one sovereign and so yep the sovereign has nothing to do with the four other ones they have a completely different strategy completely different organization oh yeah they both have a you know a ceo and a cio and but like how they make decisions completely different you're just starting over every time incredibly frustrated Samir, you coordinate these conversations with LPs.

1:13:16What are mistakes that GPs regularly make when interacting with LPs? The biggest mistake is approaching every single LP the same. So Jason mentioned this, a family office is very different than a sovereign wealth fund. In fact, there's this old adage, you meet one family office, you meet one family office. And I think that's fundamentally true. So what I often see is GPs going into a pitch room, going into a discussion for the first time and just pitching, talking at the LP. Not really understanding what the objectives are, not understanding the person. Those first five to 10 minutes, Mark, you and I have talked about some of the things that you do.

1:13:51Mark shows that he actually cares about the other person across the room and what they care about. And then from there, Mark is able to provide a better perspective of how to tell the upfront story in a way that's going to resonate. And so that pitch and talking at people simply doesn't work. And when you think about the VCs that have been very good, in fact, the time for fundraising for a fun one or fun two is about 17.7 months. I mean, from start to finish. It's a long time, a lot of people is that you really got to you really have to know the person. Second is you need to know how to move people through the funnel.

1:14:27It is enterprise sales. And so those are the two things that I think people struggle with getting to know the person and treating LP discussions as enterprise sales. I've had to fix that in my game because they're always like, pitch us, tell us everything about you. And I had to change that. It's a trap, right? Yeah. The advice I give people is this, and it's going to come from Zig Ziglar, one of the greatest sales coaches, teachers of all time. He's a bit older, so young people don't know him. But he said something that always resonated with me. He said the following, people don't care how much you know, until they know how much you care.

1:15:05And if I look at LP relationships, Jamie Sparron's bet on me in 2011, when I just took over for upfront, when everyone else said, I want to see one fund, two fund, three fund. And he said, I believe in you, I'm going to put$22.5 million into your $195 million fund. That fund right now, I think will return north of 5x in capital, We've already returned more than 2x the entire fund. We have another 2.5x in TVPI and a lot of upside remaining. And he left Morgan Stanley where he made the investment, I don't know, eight years ago. He doesn't deploy capital into VCs anymore, but he's a super close friend of mine.

1:15:51He's a consigliore for me. I still call him for advice. I know his kids. I know his family. um like these are long-term relationships lyndall eekman like he wrote a check from utimco into my fund and then he left a year later to go to foundry and i'm like damn it you know because i really wanted to work with rambo i wanted to work with and also i love lyndall and to this day he hasn't been an lp of mine in many years but like he's such a good human he has so much wisdom he really understands how the industry works he's a really good human being and I consider him a friend first and foremost. Mark, you hired an IR person.

1:16:30How often do you meet with LPs? I probably meet three to five LPs per week. Consistently, like, I don't know, like, I'm a broken record on topics. Okay. I tell CEOs, ABR, always be raising. ABR. I have the same philosophy inside my own fund, right? Like it's my job. It's not my 50 % job or my 80 % job, but it's 15 % job. And so I always just try to do 15-20 minute calls, half hour call, 45 minute calls. If someone's coming through Los Angeles where we're based, I'll always take time to meet them. I'm not necessarily doing 90 minute meetings, but I try to really keep calls and relationships active.

1:17:17You know, we also co-invest sometimes with our LPs. So sometimes they're contacting me to want to understand more about our portfolio. That's my job. My job is to tell them like, I know you want to write a check into that company, I really don't think it's the right move for you. Or I know you want to write this check into the company, you should do everything you can to write in that company. But you got to go meet the CEO because unless the CEO knows that your dollars are going to be valuable, he's not going to take money from you. So let's get a final segment. Last investments that our two GPs have done.

1:17:48Mark, we'll start with you. Last two. Okay. So one is called Bland.ai. Think of it as Twilio, but instead it enables AI voice bots. So we have 7 ,000 developers on the platform. You can go to Bland.ai. You can build applications on top of it. And we are the fastest to serve up lowest latency platform you can use. It blew my mind. I was super skeptical that you could have voice-based AI. And honestly, there were a couple phone numbers. I actually dialed the phone numbers and I can't stop showing it to people. It's so impressive what you can do with it. The second one is Kubera Health. It's such a talented young lady.

1:18:32She's out of South Carolina. She got into med school at 16 years old. And by the way, she went to Brown. So, she graduated from Brown with an undergrad and MD in five years. She's worked in the industry. She's knowledgeable. She went from Brown to McKinsey, from McKinsey to Harvard Business School. So take that background, a young lady named Roja. She could go work at a hedge fund. She could go work at Goldman Sachs or McKinsey. She's so driven to work in a startup solving a problem in the healthcare sector. What It sits between the payer and the provider and helps manage the billing. If you look at healthcare, 17.3 % of GDP is healthcare.

1:19:20It's enormous,$4.5 trillion market. And the problem is only 15 % of the dollars consumer spend go to doctors. That's it, 15. 35 % go to administration, just overhead costs. And this is the kind of overhead cost that exists. So payers are increasingly doing something called value-based care with providers. And that arrangement of billing has a lot of inefficiencies. That's what Kubera Health is doing. And the third is we're doing a lot in defense. So we're putting 20 % of our dollars right now into hard tech and defense. Here are the categories we care about. We care a lot about satellites right now because that's going to form the basis of a lot of national competition.

1:20:03So there are dozens of spin outs from SpaceX based here in Los Angeles that all ran things like the satellite systems for SpaceX. And they're all building their next company here in Los Angeles. We're backing a ton of them. We want to back more. The second is shipping. So we're doing a lot. The US has inability to create new ships. So we're looking a lot at how can you automate the process of shipbuilding. that's another example we're doing a ton in cyber we very proudly backed an amazing company in israel solving cyber security problems right now they're very busy as you can imagine um in the middle east solving actual problems but like very proudly doing cyber security shipping hard tech and national defense amazing jay cal you're up oh i'll just give you a trio of marketplaces i've made a a lot of our returns on marketplaces first one stone algo pretty straightforward kayak for diamonds you do a search uh we found these two developers they went to uh buy diamonds up on 47th street i think in manhattan it was a chaotic experience for them and they decided to index them all and make their own zillow score for that then um you know we uh do a lot of events and we came across this website gigster they help you book locations for events so they started with film locations so you're doing a tv show you're doing a movie you want a database of the spaces but then they realized people were doing events productions photo shoots music videos social stuff birthday parties and then this new category came out you want to rent a pool you want to rent a tennis court you want to rent a basketball court you can do that too and so they will just help you find you know a tennis court for you and your friends to play pickleball or tennis um and uh you'll be off to the races and you can rent it by the hour so kind of like airbnb for everything else and then um meowtel you know uh turns out this incredible founder who went through our accelerator refuses to take additional investment she loves to run a profitable company and every year she exceeds our expectations um and there's been all these overfunded dog uh walking services cats are weird cat owners are weirder uh and and so she was like yeah no you you need to like stay at the house you need to be like vibing and so she found all those weird cat ladies and cat guys and people to create this other marketplace so three marketplace you need a diamond you need a cat sitter or you need a location for a party or a photo shoot or your tennis love marketplaces Well, it's been another great episode of the Liquidity Podcast for Mark Schuster, Samir Kaji, Jason Kalikanis.

1:22:53This is your host, David Weisberg. Thanks for listening.