E77: IVP's Somesh Dash on Growth Stage Investing and Strategic Discipline

26:36They can have those open dialogues. One of the companies I'm really proud to be involved in is a company called Lyra Health. And they're in the mental health space. And one of the things that I've discovered is many founders have really struggled through the pandemic and through just the pressures of a startup world with mental health. So one of the things we offer our founders is the ability to get access to help for them, their executive team, their families through Lyra or other providers. And it's really made a difference. Like actually when you're pitching, you might be surprised. You know, I'll give one other small trade secret away.

27:13When we do Zooms, you know, one of the things that one of our founders came up with that one of our partners came up with that was funny was we all take the company logo and actually put it as our backgrounds. And one of the founders that we recently worked with, Arvind Shrinivas from Perplexity, he actually said to me when I asked him, hey, what was it that I think got you excited about IVP? He said, you know, the fact that like I signed on to a Zoom and like everybody had the Perplexity logo on their Zoom background, it just kind of meant a lot to me. It felt like I'd officially grown up. That's high praise from a great founder.

27:45I'm also lucky to be an investor in Perplexity, although much smaller than yourself. I want to transition into a couple areas from here. So one is, can you go a bit deeper on how your fund is constructed and how you think about fund size and portfolio construction and all that math? Well, it's a great question. We believe fund size is an output, not an input. I think sometimes in our business, the media and people get carried away with the headline number of sort of how big a fund is and is it always getting bigger? Our orientation is different. It's to have a conversation. we've always had a goal at IVP to have a single digit number of general partners.

28:26And, you know, the history of the firm going back to 1980, there was a time where we deviated from that in the late 90s. And we had a double digit number of general partners ranging from seed, all the way to public investing, tech and healthcare. And actually, that's when the firm split off into different entities. Red Point Ventures was actually created at that time with alumni of IVP, Versa Ventures and Life Sciences was the life sciences team. And then our group, that was kind of the new origin of the modern IVP focus on growth. And so a lot of what we talk about, you know, is what's the capacity like to do this version of growth investing?

29:04Well, you know, you can only take on a few new board roles and you can only take on, because we're talking to our founders on, you know, typically a weekly biweekly basis. we're interviewing candidates, we're very hands-on. You can't do the seed model. You can't do a deal a month, right? And be that engaged and be available. And also, as you know, Eric, you know, when founders decide to do a financing decision, you know, we have an old phrase called, you got to nuke the calendar. You actually have to free up the capacity to do diligence and spend time with those founders. If you're on too many boards, you know, or you have too many outside commitments, you don't have the time to engage with the founder.

29:42And what we learned in COVID is that's so important for conviction, for the founder to have conviction by working with you and for you to have conviction to work with the founder. So we typically, like we've actually found our scale. You know, we've actually stayed at the same fund size for the last decade, sort of between 1.4 and 1.8 billion. It can go up or a little down based on the number of active GPs and the capacity of it. But it's actually, I think, really simplified a lot of things by just keeping the strategy and fund size consistent. The team and the sectors is evolving. Obviously, in venture, you're going to bring in people with different skill sets, new generational talent, other people start electing to become in our world a title we have called advisory partners, which is continue to be managing directors of older funds, but not take on new portfolio companies or new LP relationships.

30:32And, you know, when you have a slowdown in the public markets, you know, also things accumulate. And so I think we're all hopeful that in the next 18 to 24 months, we'll start seeing a resumption of IPOs. That'll help, I think, our industry a lot in terms of liquidity. But I actually think you can do really well with different strategies. Your podcast illustrates that you could be a UnionScore Ventures or Benchmark Capital and have an exceptional franchise that endures the test of time. You can also be an A16Z or general catalyst and have a different charter and do really well for your stakeholders in that.

31:05I think my hope is that over time, people realize that people have to do the strategy that they think they can be excellent in and they have to execute successfully on that. Playing someone else's game is never usually a good idea. You have to play the game that you're passionate about playing. Let's make it more concrete in talking about LP fund fit. Is it too crude to say that for certain fund sizes, there are LPs that say, hey, this is right for me because I want to deploy this amount of capital and expect this type of return, this multiple, this IRR, whereas there are other entities that will say, hey, I want to deploy way more capital.

31:45And as a result, I'll expect a more lax multiple or return profile. And so funds sort of segment across the LP return profiles that are right for them. Is that too crude or too simplistic? Talk a little bit about that. Yeah, I wish it was the case that we had a more efficient market where people sort of self-selected on the LP side and on the GP side around, this is the lane I'm staying in. these are going to be with high precision or returns. Unfortunately, Eric, I think that's not the case because venture is so dynamic. Nobody predicted in 2021 the boom that happened with the Zerp era. No one predicted how dramatic, well, maybe Bill did, but everyone else didn't, but how dramatic the fall off would be in 2022.

32:40No one saw, I think, the rise and quick correction in crypto, but also the rise in LLMs post-ChatGPT. So venture is so much more dynamic than most asset classes and inherently volatile that I think it's difficult for people to sort of do that. I think superseding a lot of your perspective is returns. Fundamentally, LPs want liquidity. They want to use that liquidity for their constituencies, right? So if you're an endowment, there are research projects, dormitories, charitable things that you'd like to do with the proceeds from a firm. And, you know, whether it's sometimes I always joke like liquidity is liquidity, whether it's a 1x or a 3x, like at some point, you need to begin the DPI chart.

33:25So I think there was a lesson learned for a lot of firms that when you have the opportunity, you have to take that liquidity and send it back. One of the things I feel proud of is that we have a multi-generational partnership. And the benefit of that is in 2021, when we had the opportunity with a few direct listings and IPOs to send capital back, we really did take advantage of that. And I think that was really appreciated by a lot of our limited partners. The other thing I would say is, I think, back to the early point, a lot of strategies can work, Eric, and venture, right? Like you can actually be a Series A firm and be really coveted.

34:02Your point is accurate, though, in that if you're a very large sovereign wealth fund or a very large U.S. state pension fund, the actual allocation you will get in the top venture managers is very small. So just like we have portfolios where there are some things that, you know, we have a small starting position in, there are other things that we have conviction in doubling down on. They also have the portfolio where many of them would love to get a small allocation in one of the best venture managers. But the reality is, if you're running 10 billion of year in sort of venture exposure and you're getting a$5 million allocation in a venture fund, even if that is a 10x, it doesn't move the needle.

34:41And that is why you're seeing, I think, a lot of firms start bringing on opportunity and growth vehicles. A lot of firms move into different markets. The challenge, though, with doing that is fundamentally at some point when people benchmark you against your peers, you do have to show returns and you have to show relative performance that's better than your peers from the same cohort, the same vintage year. And the benefit of being at a 44-year-old firm is we have lots of lessons learned. And one of them from sort of 2002 was, you know, take early liquidity and be judicious about waiting on when the market's correct.

35:18A lot of firms said, oh my God, the market's corrected. It's done. Like things are so cheap because it's 10 % cheaper than it was in April, 2021. Well, actually, like if you look at comps, public companies and private companies over 10 to 20 year time period, most companies over a longer time period, the best ones are trading three to five times revenue. Now, obviously, things have changed. I think that there's going to be a lot of companies that are more efficient and highly predictable and profitable. But I think people get carried away when they see a 10 percent public or private market discount and think the markets are fully corrected.

35:51As we know, the markets took a long time to fully correct from the highs of 2021. Why are you so bullish on the IPO window opening up? Or what are you seeing? Yeah, so I think the window actually is always open, even in the lowest of low markets for the best companies. I think the question is just, what are the trading dynamics in multiples? And so if you're a company today, Morgan Stanley had a good research report recently on this to start the year. So the best companies are doing meetings with the best IPO buyers all through this crisis. And there's a lot of appetite to have new names enter.

36:31I think when interest rates were at zero, obviously valuations got too inflated and multiples became unsustainable. But then if you look at now, some of the companies that have corrected, there's a lot of demand for new names. Take security, for example. you have now some amazing publicly traded companies like Palo Alto Networks and CrowdStrike and Zscale and others. But I think there are 5 to 10 companies that are still growing 20 % to 30 % at or beyond profitability, predictable in their models, all of which are in markets that are really big and really growing. And I think a lot of the public market investors are saying, well, we're going to continue being holders of Palo Alto and CrowdStrike, but we also want to play these new themes in security that are starting to come out.

37:19And the only way to do that for them is to actually have new public issuances. So I actually don't see the window at all being completely shut. I actually think companies have used the last 18 months to regroup and actually do a lot of things from managing through hybrid work, thinking through a little bit about this new world of AI, which is so exciting to a lot of public investors. Today, if you want to imagine you're a public market investor, Eric, and you want to actually trade on AI, you buy Google stock, you short maybe, you know, another stock, right, in a company that you don't believe is going to harness it.

37:53So I think the window is, we have companies on file that have been kind of ready to go when the market opens up. I think the bigger structural thing, though, that we have to think about is, are there, is there going to be continued innovation, you know, that's going to be sustained by the US government and others around these fields like AI? I think it's totally fair that we want to make sure that the United States doesn't have any bad actors utilize, you know, AI to basically hurt our citizens, our people, interfere with our elections that are coming up. But on the other hand of it, you don't want to overregulate the U.S.

38:30markets at a point where companies are really afraid of sort of innovating and taking risk. And it's a global marketplace more than ever today. You could be an entrepreneur in Bengaluru, you could be an entrepreneur in Eastern Europe. and ultimately harness the same customer sets, the digital infrastructure, and build a massive $10 billion plus public company today. I really believe that. So I just hope that as we're going through a transition in our leadership in the United States in the next 12 to 18 months, we will sort of not forget that innovation is the lifeblood of the American economy.

39:04And the venture business, if you think about the most valuable companies on the S &P 500, so many of them started here in Silicon Valley with venture firms that you have on your show, Right. And so that's, I think, what's remarkable and different. Totally. Well said. Earlier, you were talking about how you add value to your portfolio companies. Can you talk about how you've thought about constructing the team at IVP and maybe how it differentiates from how other firms think about team construction, both on the partnership level, but also outside of the partnership? Yeah, it's a great question.

39:38I think, you know, for us, what's really important is we've really believed in the idea of the multi-generational partnership. And I think we wanted to sustain that. Those are one of the things that like we've seen when having, you know, and to us, like having a partnership that has seen different cycles combined with younger GPs that are building their career here at IVP is just really remarkable. I joined as an associate. I've been with the firm now for 19 years. Truly for me, Eric, the joy of seeing our next generation compete and win competitive deals, serve on boards, partner deeply with these soon-to-be iconic founders, that's really, really special.

40:27it's interesting what we have found is not to be too prescriptive or academic about people's backgrounds in the early years if you look at ivp's history the early early era of venture capital in the 70s and 80s most the folks who came into the industry then when it wasn't really an industry yet were financiers many of them were sort of east coast trained financiers at mbas had worked for large insurance companies or financial service institution like that's kind of the world that venture came from, you know, in the eighties and nineties, it started transitioning to people that were deep engineers.

40:59Cause at that time the companies were so we're semiconductor companies or optical networker companies. Um, now I think what we found in our team is we really like people who, um, are just curious and passionate about technology. Like that's the horizontal layer. You've got to be a curious person and you really got to enjoy, um, the dialogue with entrepreneurs. If you're somebody who doesn't enjoy getting that call late at night and dealing with the complexity of the startup journey, it's not going to be a fun job. It's just fundamentally not. I think if you do enjoy the deep partnership and complexity, there's almost no better industry than venture capital.

41:38And we think our firm provides a lot of joy in that. The team today, if you look at it, is a combination of people like me who have come into the venture business at a young age and grown up in our firm or firms similar to us. Eric Liao was at TCV for many years before he came here at IVP. Steve Herrick and Dennis Phelps were both at the Internet Capital Group and came here about 22 years ago and helped pioneered this new model. But then our next generation, it's interesting, many of them have, some have come from early stage firms. My partner, Kak Wong, was at Accomplice and Scale and actually has go-to-market experience, which is so coveted by a lot of Series B and C stage companies.

42:24She started her career in the sales team of Cloudera and Oracle. My partner, Ajay Vashi, was at Dropbox and actually pioneered the strategic finance team, was CFO there before he came here. And so if you think about the needs of scaling, they fall into a few functional areas, building a finance team and having strong financial expertise, building a go to market team and understanding how to sell the product, thinking about operations, people. Our goal at IVP is to provide some of the best in class resources around that. Many of those people work for us full time. Davey Nichols, who runs people for us, literally read, you know, he was on the senior people team at Robinhood and Google before that.

43:05Blair Shane ran marketing at Stanford Business School in Sequoia. And so we have these people's resources. And so both the GPs and also, to your point, others, that's the operating cadence we're looking for is deep functional expertise at scale stage companies, not just startups, so they can tell you kind of what's worked and what hasn't. We have also, of course, advisors do that. In the next generation, the thing I would just add is we want to have majors and minors. I think I heard someone use that in one of your shows. The major is everybody loves technology, but the specialization, not just in broadly AI, but specifically around, for example, like large, you know, horizontal models.

43:43We have folks that have worked on some of that when they did research in universities. You know, I do a lot in digital health and health sciences. We have folks that are even more specialized in that than I am. So ultimately though, I think what's really important, it's less about even focus and background, and it's more about trust with each other. Because of our equal partnership model and our heritage, there isn't any, you know, turf wars. Like for us, the question we always ask is who is the best person to help this company? And if the entrepreneur feels that, hey, Somesh, you're the best person to help, great.

44:16If he feels like Ajay's background is actually more relevant, we're actually quite flexible about who's the board member, who's the point, whose services as your interface to the firm. And how about in terms of platform team, in terms of what roles you've chosen to have or to not have, et cetera? Yeah, I think for us, the big areas we've invested in are marketing. The reality is it's important now to tell the story. So to your point, I think for many years, the growth industry was really not one that had to really build a distinguished brand. I think it was much more of a referral business when I started.

44:48The early stage firms referred the growth firms to the companies. Now we've, you know, 90 % of what we do is proactive sourcing. And it's been that case for over a decade now. And in which case you do have to tell the story back to your question about differentiation. I have a version of that every week with founders who think about working with us. So part of that is just, it's not about, you know, the portfolio and the dollars you put in and what the returns are. That's good for the LPs. But for the founders, what's more relevant is the value add, the engagement, the partnership and the specificity with that, with helping similar companies when they're at the same stage is why we have invested heavily in marketing.

45:25Talent and recruiting, if you get really deep into it, recruiting actually is more multi-pronged than people think. It's not just, hey, can you help me find a VP of product? It's, hey, do we kick off an executive search and what's the right benchmarking and analysis for compensation? How do we think about basically cash versus equity? When's the right time to bring in RSUs? How do we think about the right parameters with which to set off the search? How do we do back channeling? So to get hiring right in this very competitive market, it actually takes a talent team to really sort of work alongside the management team and company.

45:57So we've invested a lot in that. We also are going to continue investing in these other functional areas. We typically start with an individual. We have folks that were former CFOs or CHROs, and then we build a team around them to sort of help around that. I think, but the most important thing to us is at the scale stage, what we really want to focus on is more executive searches and the desire of the management team and the board of directors to move in certain directions. Well, since we don't do pre-seed seed in series A, what we're not doing is doing ever searches for individual developers or, you know, kind of a PMM or something like that.

46:32We occasionally will send folks that come through our network, but that's a harder thing for our model to scale. If, you know, we have a thousand person company and we're basically running all the searches. That's not our model. Other firms do that, I think, and that's great. But we actually believe when you hit a certain scale, most companies do need to actually figure most of that stuff out themselves. Yeah, that makes sense. I want to zoom out and get your predictions for the asset class at large. How do you think it's going to change? Is it going to shrink? Is it going to evolve? Why don't you unpack your thoughts there?

47:04I've always felt that venture looks a lot. It's always five to 10 years behind private equity. So I think if you look at private equity in 2008, it was very similar to where venture is in 2024. At that point in time, a very large private equity firm was$10 billion. And we're talking about 15, 16 years ago. When the financial crisis hit, a lot of private equity firms decided, hey, it's time for us to build a global LP base. So that's when you started seeing KKR and Blackstone and others, I think really developing their IR functionality, developing new products, and actually going global with brands.

47:46And you also saw then, I think the onset of a few of the companies deciding to go public. You saw that happen in private equity in the last decade. Similarly, I think what we're going to see in the next decade is, and we're already starting to see it. Venture firms institutionalizing fundraising. I think this is causing firms to start investing in investor relations and building teams. We no longer, if you look at IVP1, it was basically insurance companies, early kind of risk-taking pension funds, endowments, and foundations that were all US local that were RLPs. Fast forward to today, you know, 30 % of our capital base is now inside the United States.

48:25And I expect that to stay the same or grow, actually, even if we stay at the same size. So I think that's already a change we're seeing if you look at a lot of the firms that you have on. You know, a lot of those firms and the managing partners spend a lot of their time on developing LP relationships, not just when they raise a fund, but also in interfacing with them, co-investing with them, getting to know them. I do think we're going to see probably a few firms decide to go public. I guess you can never say never, but I'm quite certain I could say IVP will not be one of them. So I think that'll be an interesting journey and evolution for industry.

49:01You know, I've been thinking about this, Eric, though, with AI. What I'm excited by is I think AI is going to create finally a bit more efficiency to your earlier question on venture capital's core business, which is investing. You know, a lot of the business today is similar to what it was two decades ago, which is, you know, you kind of hear of a company, you know, a bunch of companies are showing up in the whole vetting process. that entrepreneur and the venture firm are figuring out, really, are we both in the right place? I think with AI, as companies become more digitized and automated, it becomes much easier to figure out, hey, I'm an entrepreneur.

49:38I want to go raise$30 million. Who are the individuals at the firms that are relevant that can solve these problems? You could essentially see a chat GPT-like interface for a lot of entrepreneurs just in the next few years to enable them to triage in the way that today we basically do at the board meeting. Oh yeah, you should talk to him or her. Oh yeah, you should. So I actually am excited about that because I think what it'll mean is more time for all of us to spend with our founders and helping them unlock the aspirations and dreams of their companies and less time on the inefficient part of the job, which is both LP fundraising sometimes or figuring out how to do, you know, the right, the right parties at bay for, for fundraising for companies.

50:19So you talked about where the industry is going, where does IVP go? You know, So a couple of decades, you yourself, where do you see you and IVP going in the future? To be candid, Eric, for me, a lot of people viewed 2021 as this bonanza year for venture capital with the valuations. That was the year I probably enjoyed the least. One was just a personal reason. I think the pandemic just took away the ability to be in person with my partners, to be in person with founders, to travel without fear of health risks. And I think that had really... Some people are just... They don't mind that. For me, I really enjoy meeting people in person.

51:00And I think that was hard for me. I also... Venture is about trust and partnership. And I think what the market had evolved to at every stage of the venture model then was... You get a Zoom in the morning. The entrepreneur says to you, Hey, I need a term sheet before I give you data. You have 48 hours to finish your work. We're never going to meet in person. you know, you're going to need to do this at 200X ARR. And I think it became more of a game of sort of how do you find the highest price in the fastest amount of time possible? And I would try to tell entrepreneurs like, this is a journey.

51:39And we're going to be working together for five to 10 years in all likelihood, rushing a process. Nobody wants an inefficient process, but rushing it to two days creates too much strain on the system. It is a much healthier dynamic now. Entrepreneurs really do want to spend the time with venture capitalists. Venture capitalists, I think, want to devote the time to determine if they can be helpful to founders. So this is, I think, the right balance. This is a cyclical business. I've seen it over the last 19 years. I am sure there will be a point where things will, again, get frothy and things will move faster.

52:12Memories are short in venture capital, as you've said before. Um, you know, for me, I, um, as I mentioned earlier, the joy of working with these founders, I'm still like a kid in a candy store when I get a chance to make a new investment. Um, I've actually made two, uh, to end the year that we'll be announcing soon. Uh, and working with these incredible founders, whether it's, you know, Jason at Discord, David Ebersman at Lyra, um, you know, Arvin at Perplexity, it just, it makes you realize you get a canvas about how the world and the industry is evolving. And you have a, I always said, like the most, the most fun thing about our job is you're able to have a voice in companies that can have really large impact, you know, on our industry and in our society more broadly.

52:57That's also responsibility. And as I've evolved, I think, you know, you go from being the eternal advocate in everything to in the right settings, being able to actually, you know, debate with founders and just be a mirror and say, is this what you believe is the right path forward for the company? And most of the founders I work with, if you do it the right way, they actually really appreciate it. And if you do it the wrong way, not a good idea. And so for the firm, I think we really feel like, you know, one of my partners said the other day, we should think about, like, if we were to start IVP over again, what would we retain?

53:34And what would we change? And And the thing that we've come to is we would always retain the partnership model, the apprenticeship model. We really, I sit in the office that our founder Reed Dennis started the firm in. And I take that responsibility of all of us coming together and continuing this firm on very seriously. I think it was Eric Fisher who said, like, we just don't want to mess it up. And I think I really resonate with that. Like, we really owe it to our predecessors to make them proud. I really believe in that. The other thing I'd say is the firm is really, really focused on really having impact at those really crucial moments in a company's lifecycle and doing so in a collaborative way with other independent board members, other venture investors, not just founders, but the management team.

54:21It takes an army, as they say. And so that's what's really exciting. We're in year two, Eric, of AI, as you and I have talked about. And what I think is really exciting for me is I think this is truly a revolution that is going to have so many things that we can't imagine. Even right now, as you and I are talking, like so many ideas are probably popping in your mind, certainly in mine, about just different areas of investment and different areas of collaboration. And I just feel really fortunate that IVP and me as a derivative are going to be able to participate in that. I don't take that lightly.

54:54you know, being on having a franchise that's endured four decades and 17 funds, venture firms, the reality is sometimes strategy is the reason they don't endure. But actually, usually it's because people stop getting along. And people just don't want to work with each other anymore. We invest a lot of time in just spending, you know, cycles with each other, like vetting things out. We never we our founder had a phrase, he had many, I'll share a couple. You want to disagree without being disagreeable. He also had a good one, which is, I've never met a rich pessimist, which I always remind people.

55:30It's easy to be critical, but ultimately, we're all deep optimists about venture capital, technology, and entrepreneurship. So I am excited. I feel like this is going to be a really fun next five to 10 years of venture capital. Yeah. Another derivative of that phrase is, pessimists sound smart, optimists make money. Yes. That's a great note to wrap on. Thank you so much for coming on the podcast, sharing your wisdom and reeling behind the curtains of how you guys operate at IVP. Well, thank you, Eric, for having me. And I look forward to hearing more of your amazing guests and hopefully learning from them as well.

56:08Turpentine VC is a podcast from Turpentine, the network behind Moment of Zen and Econ 102. If you liked the episode, please leave a review in the Apple Store or rate us on Spotify. Thank you.