The $97 Billion VC Panel | E1987

0:00We always have conversations about what's going on in the market. If you're not, that's kind of irresponsible in my point of view. But we've always had a dictum that our strategy dictates the fund size and fund size does not dictate strategy. And every single GP will repeat those exact words. And so for us, it's always like, okay, we're trying to lead rounds that are B's and C's and in the occasional D and even sometimes an A, but how big are those rounds? If we want to write the lead check, how big is that lead check for the premium companies on average? and we want to write 30 or 40 of those checks per fund over three years, that tells you our fund size.

0:36I'm struggling with a number of managers where there is no succession plan. They're well into, this is not like funds two or three. Succession plans are incredibly important, especially for long enduring, you know, kind of funds that we hope to invest with into the future. This Week in Startups is brought to you by Squarespace. Turn your idea into a new website. Go to squarespace.com slash twist for a free trial. When you're ready to launch, use offer code twist to save 10 % off your first purchase of a website or domain. Google for Startups. Accelerate your startup journey with the Google for Startups cloud program.

1:19Get up to 200k in Google Cloud credits or up to 350k for AI startups, plus training and guidance. Apply at startups.google.com slash twist. And Brex, the financial stack founders can bank on. Brex knows cash is king for startups, so they built a banking experience that takes every dollar further. Get the business bank account trusted by one in three U.S. startups at brex.com slash twist 24. Welcome back to this week's liquidity podcast. With me today, I have Tom Lovero of IVP. Next, we have Dana Johns, head of private equity at the state of New Jersey Division of Investment, which manages a whopping$90 billion.

2:03And of course, we have Jason Calacanis from the Launch Fund. I'm your moderator, David Weisberg, co-founder of 10x Capital. Today, we have many interesting topics to discuss. Secondary pricing is giving us hope of a potential recovery in the VC market. VC leverage is at the same time an all-time high against startups. We look at the metrics there. We discuss the NVCA monitor and what it spells for the industry. And finally, there's a new hot sector in the startup ecosystem, and it's not AI. We'll finish with the latest three investments from Tom and Jason. Let's get right to it. Last week, we saw some positive news with some promise of DPI coming back with Sequoia's planned purchase of Stripe.

2:44This week, we're seeing another bullish signal. tech crunch reports that the median price for companies secondaries is at a 31 discount coming up from a 46 discount just seven months ago secondaries market has heated up recently with industry ventures new 1.45 billion dollar fund raised in september stepstone raising a 3.3 billion dollar secondaries fund to focus just on venture and blackstone's rumored secondaries fund that expected to top its previous fund, which was a whopping$23.5 billion. Tom, you spend a lot in the mid-stage and later stage venture, Series B and Series C. What are you seeing from a valuation standpoint today?

3:26The chart you have of secondaries is, I think, pretty representative of what's happening in primaries as well. Jason, you and I have discussed the Great Extinction event, which if you draw a line on that chart, that was published in January of 23. That was probably around the low point of valuations and liquidity as well funding. But we've seen a really strong rebound, but in a healthy way, like everybody's very cognizant of the public multiples that people are getting now. So I think on average, things are rationalizing. It feels pretty normal to me. Yeah, I think what's interesting to build on those comments, Tom, is that investors, GPs, have a certain amount of time and bandwidth.

4:07And in a cataclysmic event, like we witnessed when the market, let's call it what it is, it crashed for private companies. You had to give maybe 80 % of your time to your existing portfolio and stabilize it. In some cases, it was 100%. There were some VCs I know, I would forward them an interesting accelerator company that say, JCal, not the time, I'm doing triage. And so this is the finite resource. Capital is not a finite resource. The capital allocator time is very limited. What this represents to me is, well, there's three places you can spend your time one your existing portfolio companies two finding new ones and then there's this third place you could find value and that's the secondary market and so for people who are looking for value a lot of these companies are known entities they have known management teams they have functioning boards and so then there just has to be a clearing price and so i think we went through a period where there were no bids on these companies like even for great ones, you know, Instacart, great product.

5:10Market cap was obviously at a sync with market realities and potential IPO, Stripe, same thing, 100 billion, 50 billion. Now it's 75 billion, I think in this in the Sequoia secondary that they did recently. So, you know, it's not like these are bargain hunters, necessarily, I think these are people looking for value. But even myself, I have to look at my existing portfolio and say, is my next best investment a company that we've already funded or the next new company and that's great for capital allocators to now be looking at the existing you know cohort of companies that raise their series b c d aren't ipoing necessarily anytime soon but they're also not you know in tech stars or y combinator or you know on seed extension four so this is a extremely promising sign Now, I do wonder about this data and David, which is, you know, is this a company's clearing market?

6:10In other words, there must be a large number of companies that aren't even on these secondary markets because there is nobody buying or selling them. Or I should say nobody buying them. Therefore, there's nobody selling them. There might actually be buyers. So it's a great sign. Combined with last week's news, these are two great signs. Dana, how do you feel about secondaries in the secondary market today? We're super excited about secondaries, but I'll set some context for why I'm so excited about them and how I'm going to include them in my portfolio. Our private equity portfolio is about$11 billion in NAV.

6:45It's largely skewed. It's global, but largely skewed to North America, large buyout. And that's primarily because over time, you know, we invested in buyout managers who are in the middle market who have now just, you know, kind of grown up and are now mega funds. We've had very little venture in the portfolio. The venture that I do have in the portfolio, we were accessing through partners where we have SMAs. We have about 30 % of my portfolio is managed by separately managed accounts with different partners. We leverage those partners. our investment process is fairly challenging. It just takes a long time.

7:25And sometimes with venture, the fundraise is six months. It takes us sometimes over a year. The secondary market has primarily been focused on buyout. And there's been, as you noted, industry ventures and Stepstone have the largest secondary focused funds, a lot of these larger funds, you know, haven't really focused on venture. It's just been too hard for them, primarily because, you know, kind of relative to the pricing and trying to price a NLP portfolio, venture has always been much lower, 25 to 35 % where buyouts getting, you know, depending on the timing and the quality of the funds, like 80%.

8:12So it's just been, you know, challenging for, for venture, but I do think venture is catching up. I do think because of liquidity needs that LPs need, um, there are, uh, more opportunities for really great portfolios to become available. Um, and for someone like me, who's trying to build a venture portfolio where I'm trying to, um, do a couple of things. I want to, I'm missing vintage years. I'm missing managers. I'm, you know, so I'm really excited about, you know, being able to, we just actually today in building out the secondary program at New Jersey, I just kind of, I always think of things as like three pillars.

9:01So we've just approved, a buyout, more European-focused, but buyout secondaries manager, which does LP and GP-led structurings. But anyways, so I could go on about why we're excited, but we think it's also from the perspective of duration. I would like to shorten the duration. This is a long duration asset class, if I can get in at a point where these assets, these portfolio companies are mature, not seed, but kind of more mature, then kind of shortening the duration, mitigating J-curve, and smoothing cash flows. No one knows your product like you do, but knowing how to build something customers want is only half the battle.

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12:46There's really two large buyers. One is existing people on the cap table. You might have an IVP on the cap table and someone selling shares. A lot of times the main investors will actually have the right of first refusal, the rofer on the shares, they'll be able to go that. And of course, the company loves to have existing shareholders buy those shares because they don't have to bring new people on the cap table. They Then you have these other parties with these secondary funds, industry ventures, Blackstone. Also, Lexington has a pretty big sleeve in this. And the reason they're willing and able to get into these opportunities is because they have a really good reputation.

13:25So if you're looking at like Wiz, they're raising money and somebody comes to them, they say, I want to get out of my position. Another way to look at that is like, I want to end my relationship with you, Wiz, the company. They don't have a huge incentive to accommodate them for many reasons. most of the time they don't want them sharing any information in the market because a lot of times jason you've seen this like you'll have somebody blast out their information to like 20 30 40 buyers right because they're getting out of position they want to maximize their their price because the secondary market you have two main drivers price and information for those buyers that have perfect information oftentimes they're even able to to to bid higher so i think that's interesting And then you've had this new retail class of secondary buyers via platforms like Forge, where you have, it's typically like very late stage companies, pre IPO companies, they're two, three years away from buying.

14:15So I think it's an interesting space. It's a space that's largely driven by the ability to transfer shares, but information and also frankly, regulatory VC funds like 10x capital, like IVP, we're not able to hold more than 20%. right of our AUM and secondary funds or else you get kind of in this dreaded RIA area where a lot of funds don't want to go although it's becoming much more much more acceptable to do that so there's a lot of interesting things that lead to the kind of this these returns in the industry it seems like the trend though has been in one direction over the past you know 19 years at least that I've been in venture which is towards more and more liquidity both on the LP side with secondaries and also on the cap table side of the companies themselves for employees and founders.

15:05You know, it's interesting, like I don't know where that naturally ends, like how liquid do the private markets become 20 years from now? Because there is a pull, you know, and a push between people wanting to be able to sell at any time they want, but also the companies wanting to control information and wanting to control who's on their cap table. But my sense is things are going to still get even more liquid both for for gps and lps in the future you mentioned retail i mean if retail can get access to this asset class in a predictable trustworthy way this could get really exciting um and you see that with this um i've been tracking this company i had the founder on destiny 100 or something he basically raised 100 million to buy secondary and he got himself an allocation at spacex and a couple of other things and he's got this publicly tradable i guess it's an etf where you can buy it and man it has been like a meme stock and so i don't think that that's the ultimate uh format for doing this but it does show like crypto did that retail wants alpha they want to swing for the fences they want access to you know really um high potential high risk venture assets and so you know i don't know which administration would be most pro this but i I have a feeling JD Vance would very much, with his venture experience, help us push through more fluidity in access to the asset class, which would benefit a lot of emerging managers and create more liquidity.

16:40One thing that's been interesting to see is some of the most progressive thinking companies have instituted these tender processes. SpaceX famously has a tender twice a year where they let all their employees or their current employees sell via a specific price. They control the process. They bring in the buyers and everything. So I think that would be something that would benefit a lot of companies. But you do get in a position where you have NVIDIA. I don't know if you saw today, Jason, something like 73 % of NVIDIA shareholders are millionaires and 25 % have over 10 or 20 million. Are you talking about employees?

17:18Employees. Yeah. That becomes a problem because somebody comes to you and says, you know I want you to spend all of August in the office and you look in the bank and you're making 20 million your salary is 200 ,000 dollars that's a bit of an issue there part of the process you know there'll be like Google you know and Apple and Microsoft before them Tom's much older than me he's much more experienced I'm joking it's a little bit older but that is what creates you know the next wave of companies is people who make their 10 or 20 million dollar chip and And they got a chip on their shoulder and they want to be the CEO.

17:55And they think they can do it better. And they saw some opportunity. So, you know, it's short-term pain for the company to have to turn over staff. But, you know, every time I've seen companies turn over staff, more times than not, the company is stronger because the company knows what it needs more. And there's an infusion of new talent and energy. So, there were a lot of Google millionaires also who, you know, started other companies. I always say there's a reason there's a four-year vesting schedule. at most startups. It's not a number we just picked out of the, you know, out of the sky. Like there's a shelf life for how long or half life for how long people want to be at a startup.

18:32And it's usually somewhere between four and eight years. And so that's why we grant equity in those schedules. It's very rare for somebody these days to be at a company for 10 or 20 years. And that's a natural thing. That's okay. Like that, I think as everybody here knows without the non-compete laws in California. And equity vesting that doesn't go on forever, it allows people to jump jobs and take skills with them to the next thing. So I think it's very healthy. And Tom, you have a lot of CEOs ask you about secondaries and when is the earliest that it's appropriate for a founder to get liquidity via secondary?

19:07Yeah, I think it's all a matter of degrees. It's one thing to take a few hundred thousand dollars to make up for the fact that you're barely paying yourself for the last few years or maybe to buy the first house. It's different if a founder's taking 50 or 100 million off the table. There's no perfect guidelines, but I like to think about it in terms of how stable is the company? How close are they to a liquidity event? How do we think about the other founders, the other employees and fairness and trying to be more inclusive there? There was definitely a point though in 2020 and 21 where I think founders pushed it a little too far and VCs were more than happy to oblige.

19:46And it feels like that's been dialed back, but we're also not going back to like the early 2000s where founder secondary was this like super taboo topic that would ruin a company and nobody even wanted to broach. Now it's like, hey, man, yeah, you know, San Francisco is expensive. You just had your second kid and you need to move houses like, sure, that makes sense. There's there's a good reason for that. So I think the world is more rational when it comes to these things. It's kind of like how LPs think about GPs and GP stakes when a fund is taking on capital, outside capital, and how is that capital being used?

20:21Is it being used for growing the firm versus taking money off the table? You know, a little bit different, but, you know, it's kind of signals, right? You know, how dedicated are you? Yeah, I love this parry pursue term, not just how wonderful it sounds rolling off your tongue, but just in the reality of it. You know, we've had many situations with founders and other investors, who gets to sell, right? And it does seem profoundly unfair when one group has that option, another group doesn't have that option. And, you know, we've seen that in companies. when this first was bubbling up zynga had a bunch of secondary interest and harry milner was buying shares and this group was buying shares and you know mark pincus was not letting people sell shares he wanted to control the company who was on the cap table it was a very unique moment in time evan williams went a different way with twitter where you know he let chris sacca ron conway some others i think create vehicles to manage that process and uh it all kind of got hashed out there which is if people have access to the information and they're making a thoughtful decision and to tom's point it's not life-changing fu money uh which technically starts you know at 20 million uh yeah the last thing you want is a founder thinking about planes you know at the board meeting and you know what houses they're going to buy it i've seen i've seen it i've seen it very distracting um especially for a young founder you know it's 100 million 200 million off the table and actually that's where a lot of times the test comes in when they do actually make those big sales that's when you see a founder drop out and then you see the other founder double down right and then that's when the board can make a decision hey this person's checking out this person's doubling down well then that tells you how compensation should go from that point forward so it's a good test um and i i think this is really going to help us go long in the industry and the longer we can go in an investment and the more independent it can be the greater the chances of an IPO the greater chances of a sustainable company that doesn't get bought by Microsoft Google and Apple and meta and that's actually healthier for the ecosystem as well it'd be really nice if you know this gang of seven was a gang of 70 or 17 at least and we didn't have you know Amazon Apple and Google ruling the roost as it were all right founders one of the things you always ask me for is hey will you invest in my company and sometimes you want some advice I now.

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23:51One gauge of the market is the investor startup index, which shows that VCs are near all time high as it relates to leverage against startups. Up from a low in Q4 2021 when startups had leverage on VCs, as Tom mentioned earlier. Not all metrics in the report were positive, however. Price to sales, the technical term for price to revenue for VC companies going public, was down to 4.9x from 12.6x at the height of COVID, signaling that now may still not be the best time to go public. Dana, you got a chance to read through the report. What are some of your takeaways? I know this sounds kind of bizarre, but as a long-term investor, I think about macro trends.

24:35And I think about, I think in decades, I don't think quarter to quarter. I know I read my quarter. I, Tom, I read the quarterly reports. I do. It's thinking about, you know, kind of a private market investor versus a public equity investor and a private market investor thinking about I'm putting ground, you know, I'm putting capital on the ground today. And I'm thinking that it gets invested over the next three to five years. I don't have a crystal ball, So I don't know what five years, 10 years is going to look like. But I invest with parameters, which are basically, you know, kind of return.

25:10What's the return target? Is this manager going to meet those? Have they met that? Have they met that target? We have like 52 GP relationships, over 100 funds, definitely over 100 funds. So as we're managing, I'm actually like kind of head down into what's happening in the portfolio. And then I like stick my head up, you know, kind of quarter to quarter to quarter to, you know, kind of figure out what's going on in the world. And then I kind of go back in, you know, from a monitoring perspective, making sure that our managers are executing on the investment strategies that, you know, we agreed upon in committing capital to those managers.

25:54this is why dana's been a great partner for us for a for a very long time because you want your lp your lps to think like other venture investors in long periods of time and whenever i meet a potential new lp or or somebody within one of our existing lps and they're trying to time the market that's always a sign for me there may not be a fit because if you think you can time the venture capital market, man, that is a tough thing. So it's way more interesting for me to develop the relationships with the managers than not sleep at night because the market's really volatile and what is going to happen?

26:38I can't predict that. But what I can predict is in developing relationships with our managers, that that's more important to me. Yeah, I mean, I focus a lot with my team on, you know, what are the strategies that we have? How are we executing on those strategies? And then any data that we have that we're learning that would inform evolving those tactics and strategy. and the game of venture i find is really a very tactical strategic discipline and much like playing poker which is why many of us are addicted to that game because you have partial information and you're trying to unpack you know some strategies here and to make decisions with it with that partial information because you cannot you cannot um control outcomes you know the there are many crazy outcomes that i've seen and if you told me your top three investments would be a cab company a stock trading app that doesn't charge users for trading and a meditation app i would say in a marketplace for you know handymen and handy persons whatever you call handymen today uh i'd be like what but you know that's uber thumbtack robin hood and calm and you have to have some humility here to control the things you can control and you know when i talk to my team especially the young researchers that were turning into analysts and the analysts were turning into associates and associates were turning into principals.

28:02I said, how many meetings did you do? And how many check and calls did you do with these founders? And what are they telling you? You know, and where are your notes? You know, that I can work with, but you know, I can't magically have them, you know, create a, um, a follow on investment for the portfolio, but we can set them up with meetings with investors and then talk to those investors and say, what did you think? And those investors will tell us like, yeah, you know, really love the company but why is it growing so slow or why is their product velocity so bad or you know that founder is really interesting on a product basis but where's the cfo and the you know chief technology officer and the director of sales like they're doing everything you know what's going on with the management team jake out and so that's what you're trying to do is really make sense of what you have in that portfolio and what are the strategies you came up with and what did just sell to the lps i'm constantly thinking about that we said 50 of the fund's going to go into these 200 names the next 50 of the fund's going to go into the top five to ten percent of those okay we're almost done with those 200 investments and we are looking did we actually find something great in here if there's not something great in there okay well we need to maybe call an audible here maybe we need to change the strategy for the second half of this fund and I think that that's the name of the game now.

29:22I used to think it was just being a great picker because I got lucky, if I'm being honest, with hitting some half-court shots. But I don't think you can make a career of half-court shots. You all do respect to Steph Curry. What are you focused, Tom, in that sort of regard on strategies and tactics? What is the strategy or tactic, and how has it evolved recently? I'm curious. Yeah, we've been, I would say, strategy-wise, pretty consistent over the past 23 years or so. And just to name it, the strategy is to invest in companies just as they hit product market fit. And that can be a variety of things.

30:00Like when we did Twitter and Snapchat, they were both pre-revenue. um typical software the company though has some revenue and we're trying to and only invest in the things that can go public one day that strategy hasn't really changed much but some of the details the tactics have um for instance we opened a european office we've got five people there now uh in london uh we've done more secondaries over the years it used to be zero percent now it's you know probably 15 almost 20 percent of a given fund um and 20 years ago 15 years ago on average i think we said hey a startup needs at least 10 million of revenue when we're investing now of course revenue models have changed they're more predictable um there's no hard and fast rules for that we're just looking for that like magical product market fit so it's it's same strategy, sort of year in, year out, tactics have changed, obviously.

30:55The other big thing is, as Dana knows, if you're going to be around like IVP has for 44 years, the team's also going to change and you need to go through generational transfer, which is some combination of tactics and strategy there too. And I would have to say, like best in class, like evaluating so many managers that IVP does it right in terms of succession and how transparent they are with their investors, their LPs, and the plan for this is what's going to happen. It happens and it happens consistently. I have to say, I'm struggling with a number of managers where there is no succession plan.

31:37They're well into, this is not like funds two or three. So I think, you know, succession plans are incredibly important, especially for long enduring, you know, kind of funds that we hope to invest with into the future. How many years ahead of time would you want the succession plan to be communicated as an LP? Just depends on the cycle where the manager is in their life, you know, kind of life where the leadership is. I think it just depends on the situation, whether it's a near term exit, or it's an exit that's going to happen in the following fund. You know, it just depends, I guess. I was curious, Tom, when you were talking about the strategy and the tactics, one thing that has changed radically is the competitive nature of getting in at your Goldilocks zone, that, you know product market fit and definitely they're got the ipo possibility doesn't seem like you're the only fund that's going after that uh seems like there's a lot of funds now that maybe didn't even exist 20 years ago how do you deal with competition and valuations given that that's a goldilocks zone that a number of people have identified or just follow what it is crib copied from you frankly i think it's a natural thing and a good thing because if the market were so small there were two investors at this stage, we'd be swimming in a very small pond.

33:02But the interesting thing is from like a day-to-day operating procedure for our firm, the market's not as big as it appears mostly because people tend to specialize pretty quickly. You have a bunch of firms that ran some experiments and doing high volumes of, you know, pre-IPO type investments with no governance, you know, and trying to add little value outside of the money. And that experiment kind of ran its course. Um, you have folks who are very high touch, but if you're high touch and you're actually taking board seats, you can't make that many investments. It's just, there's hours in a day and you can't scale your team infinitely.

33:39And so if you like zoom into the different strategies and different stages, and you think about just the U S and Europe and people who want to do B's and C's, but take board seats and the senior people take board seats, they don't pass it off to a more junior person and their reputable fund who's had, you know, been in a lot of IPOs and a lot of been associated with a lot of successful companies, that field starts narrowing. And then you say, okay, well, this happens to be an enterprise infrastructure company that does open source software. And we want to take on a board member who's done that before.

34:14Then all of a sudden you're actually down to like relatively few competitors. So, you know, there's five, six firms that kind of end up in the same conversations, But that five or six will differ between a digital health company and an enterprise company and a consumer company and based on where they're located and the exact parameters of the round. So I would say, Jason, like you asked me that question in January of 21, I give you a very different answer that I wouldn't have given in January of 2018 or today, which is like, yeah, the market's like, you know, pretty predictable. In 21, all bets were off and, you know, everything was crazy.

34:52came in and just took over the island and then they all went home after how did you avoid the temptation at ivp you had your peers making hundreds of millions sometimes in management fees and you guys were sticking to your knitting did you ever did you ever get tempted to try to replicate the strategy listen we always have conversations about what's going on in the market if you're not that's kind of irresponsible in my point of view but we've always had a dictum that our strategy dictates the fund size and fund size does not dictate strategy. And every single GP will repeat those exact words.