Navigating growth stage investing in today's AI driven market with Logan Bartlett of Redpoint

0:09Welcome to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. In today's episode, I sat down with Logan Bartlett, Managing Director of Redpoint Ventures. Logan joined Redpoint in 2020 after spending six years at Battery Ventures. At Redpoint, he focuses on working with companies at the inflection and growth stages, typically at the Series B and Series C. We spent the conversation discussing the growth market through the lens of the aftermath of 2021, the impact of AI when evaluating companies and the challenge of protracting liquidity cycles.

0:42We also spoke about fund portfolio construction and growth and the balance between high growth, high valuation companies in a portfolio and non-consensus companies who have higher risk, but also come with much lower valuations. Also, for those that don't follow Logan, he has a great podcast called The Logan Bartlett Show. So please check it out. Now let's get right into the episode. Samir Kaji is the CEO and co-founder of Allocate. Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third-party investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate.

1:27Allocate or its clients may maintain relationships with or investment positions in guests, third parties or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Logan, it's great seeing you, man. Thanks for having me on. This is fun. All right. So I usually don't do this, but what I want to do, because I think you have such an interesting story, is go through your background of getting into tech, venture, and then kind of what led you to the place right now. Yeah, sure. So I started my career in investment banking.

2:00I was coming out at the middle of the global financial crisis. I had no interest in investment banking on its own merits. I just, someone I looked up to told me that was the path that created a bunch of optionality down the line. And I had made it 22 years of my life without making too many independent decisions. And so that seemed like a very logical path to go down. And coming out of the financial crisis, you sort of saw a lot of people around me, parents, aunts, uncles, friends, parents, all that were sort of in the baby boomer generation and had a bunch of equity tied up in homes and had to deal with a lot of financial uncertainty.

2:39And so investment banking seemed like a safe path that I was told you were going to have a job on the other end and felt financially safe in its own way. And so I did that for 18 months. I absolutely hated it. It was as bad as people kind of make it sound. I'm glad I did it for a bunch of different reasons that I can maybe get into, but I don't think are that interesting. I quit my job at Deutsche Bank 18 months in, went to go work with a buddy who was doing boutique kind of sell side advisory for software companies. So did that with him for two and a half years. And I was kind of thrown into the deep end of working with software businesses and helping them either capital raise or explore different sell side options or whatever it was.

3:25And so that sort of introduced me to tech. I got to know a lot of people in venture and private equity, the Vista Equities, the Tobo Bravos, TA Associates, General Antics, and then Redpoint Battery, Bessemer, Excel, you know, some of those names that were operating in software in 2011, 2012, and then had gotten to know the battery guys decently well. I actually quasi interviewed at Redpoint in 2012 or 13, maybe. Got turned down by Redpoint, got hired by Battery. I was at Battery for six years, a good time of doing software investing. So I did that for six years from 2013, 14 through the beginning of 2020.

4:00And now I've been at Redpoint now for five and a half years. The connection actually came from David George, who runs Andreessen's Growth Fund now. He went to business school with my partner, Elliot Gite. And at the time, David was at General Atlantic. and I had been pitching stuff to General Atlantic, ideas, companies, all that. And David connected me to Elliot and said, hey, this guy seems at least ambitious, if not smart. I don't know if he could actually tell that or not. And so that was the original connection. And six years after working at Battery, Redpoint came calling and I made the jump.

4:37So, okay, so let's go back to 2019. Obviously, that was a time where, you know, we were getting close to the peak of 2021. You know, the term unicorn, which I think Aileen, you know, from Cowboy, currently Cowboy, formerly Kleiner kind of coined. And it became like it seems so many companies were becoming unicorns in 2021. I had Tom, you know, from IVP on and, you know, this is about a year ago. And we're kind of figuring out, like, what happens with all these companies? I was just looking at the numbers. about 75 % of those companies that raised at unicorn valuations have not had an up, round, or an exit since then.

5:17And one of the questions that always comes out is, what happens to all these companies that raised at these massive rounds, raised a lot of cash, still around? And so I would love to get your outlook on what happens with this logjam of, let's say, roughly 1 ,000 unicorns in the U.S. that are still in the private sphere, but unclear in terms of what the kind of future looks. So if we look out through years, what are the main headlines that you think we'll see? Yeah, I mean, I think broad strokes kind of swagging this, but I would guess at least half either get recapped, sold for something far less than their valuation or are just zombies where they're able to operate and continue to exist either with light burn or no burn, but are nowhere near their last round financing.

6:08And for whatever reason, either structural or founder motivations or whatever the case, they just don't want to sell the business. There might not be exit options. And so they're just forced to keep at it for an extended period of time. I think the first two considerations are maybe marginally interesting, right? The recapped, I think people generally know how that works and it can be certainly painful, but at least then you get a new lease on life and getting sold for less than your valuation That happens and happens to companies in every market cycle that situations like that arise. And so I think the most interesting one is kind of the zombie circumstance where you have a decent business.

6:47It's not worth maybe what it was in the heyday, but you don't need to go remarket for any reason other than just employee options or something. And what's going to happen to the founders or CEOs that are running those businesses that probably don't want to do that in perpetuity with no ambiguous end in sight? Maybe they tried to sell the company and there just weren't takers. Private equity probably isn't interested because it's not at a material enough scale for it to be worthwhile for them. I think that might end up either requiring a totally different type of funding provider. you're seeing the who are the folks i think they're in denmark bending spoons or whatever they're called that are buying up like old consumer businesses i think they own evernote now and they're sort of buying them for cheap and trying to upsell people maybe stripping them for parts in some ways trying to operate in a very minimal kind of structural way which is definitely an old school private equity move but not something you had seen at least i had seen done with like consumer subscription products.

7:49And so I think there will be opportunities for things like that. And maybe it's a role that just lower mid-market private equity firms are going to play, but it's this weird sort of quasi situation. And then you're going to need new execs to come in and probably run these businesses because I don't think the founders are ultimately going to be the ones to keep going forward after it's been such a transition of culture and expectations and outcomes. And so I think that's really where the wreckage is going to come from, not because it's actually going to be more carnage, but because it's just more ambiguity about what you actually do and who's going to be the ones to provide the liquidity and who's going to lead the businesses going forward.

8:32Yeah. And we'll touch on, you know, this larger topic in a second, which is the role of artificial intelligence. And, you know, you look at some of these companies, they can implement better sort of workflows, more efficiency maybe through AI. But also you have more competitive forces that are also acting as headwinds for some of these past companies because maybe they were enterprise SaaS and now you have an AI company that is building something quicker, faster, better, cheaper. What is the role of AI in impacting sort of the futures of some of those companies that raise those unicorn valuations?

9:07Yeah, it feels like every day there's a new announcement of like someone is executing on a strategy of buying old service-based businesses and injecting them with AI. And a bunch of my venture peers are diving into that world as well. And so it's definitely something that people are thinking about in every which way. I still think there's some outcome. Either these businesses are going to get disrupted by AI or they're not, kind of this middle zombie ground that we're talking about. and whether or not it's the case. If it is going to happen, then you're starting to move to the other situations we talked about, either the recap or the kind of sold for parts or sold for an outcome less than what the last valuation was, or maybe you go bankrupt and you don't get anything back at all.

9:51And so if AI is going to materially attack what you're doing, then it kind of goes into this normal-ish bucket in some way, shape, or form. I do think it does provide somewhat of an opportunity for businesses to have a new lease on life and trying to reinvent or re-inject some elements of entrepreneurship or excitement into a culture that has otherwise been a little stagnant. Some of the businesses that we've seen absolutely take off over the course of the last couple of years were not ones that had explosive growth in the preceding couple of years, but instead we're in the right place, right time.

10:28I'm thinking of a business case text that ultimately sold to thompson reuters that was doing ai for law firms and they i think the ultimate outcome was like 600 million and the business had been at it for a long time but had this unique data set and were at the right place with their customers and so they were able to actually realize some fantastic outcome with thompson reuters and obviously we've seen harvey and now in our portfolio lagora who are doing fantastically well in that space and so i do think there's going to be elements of that happens as well but i but ultimately my guess is it's going to be few and far between yeah i agree with that.

11:00And, you know, obviously with case tax, that's, you know, they sell above what the preferences are. So it's a good outcome, you know, generally speaking, or at least say an exit outcome that's better than what a lot of people are going to fear, you know, in terms of the backward looking. But, you know, we're talking a little bit about, you know, what's happened in the past. I think what's more interesting is what happens in the future. And so one of the questions I have is just based on what you saw in 21, and of course, 22, 23 and 24 have been really tough to get any liquidity. The IPO bar is sky high.

11:30The average company that's going public is now north of$250 million in annual revenue, great metrics. M &A market might be better with large M &A given the new administration, but it's still tough. The length of time just continues to protract and protract. How does that impact and inform how you guys are looking at growth stage companies? Yeah, it's interesting. The other thing I would say that not a lot of people I've heard talk about with regard to acquisitions is a lot of the strategic acquisitions that are happening are still of a fairly material scale. And so if you look like Moveworks to ServiceNow was roughly a$3 billion acquisition, if I remember correctly, and Windsurf rumored OpenAI, I think they've talked about$3 billion as well.

12:17And then you hear some of these like other businesses that are being explored and they tend to gravitate in the maybe billion dollar, let's take a flyer on something that has high potential and could be a meaningful part of some business unit that we have today. And, you know, the sub billion dollar playbook, I think Paladatta networks and Nikesh has run exceptionally well. And so that's one broad bucket of like, let's take a speculative of early bet, overpay, quote unquote, on an ARR multiple basis. But let's see if we can catch some lightning in a bottle and have this be some future standalone business unit.

12:54Then there's the other side of it, which is where people want to buy these big independent standalone companies that can actually operate as business units themselves, which within large strategic requires, or can take on a bunch of capital and potentially be interesting from a private equity standpoint. And so you end up with this kind of this like barbell or this no man's land that falls in the middle. And so one of the things that we're thinking about is, one, you don't really want to get caught in that no man's land. And so you've seen a lot of people either go early, which is very much the traditional venture capital playbook, or more and more people are going late and trying to get into these winners that who knows exactly if you're going to have a 3 to 5x outcome or a 10x or whatever it's going to be.

13:37But you're pretty sure you're going to get liquidity in some way, shape, or form. And it's not just going to be locked up in some stagnant thing that might never go public. Or if it does go public, it might still be hard to get out from a liquidity standpoint. And so you're seeing these businesses. We're fortunate enough to be involved with ramps, Iera, a bridge in the last couple of months that have raised big rounds in this regard. And certainly companies like Rippling and Andrel and Figma. And we were fortunate to be early in Stripe. And so a bunch of those businesses have kind of been, you know, the canonical players and consuming large amounts of capital in the private markets.

14:11And so it's something that we're thinking about that you really need to cross the chasm and get to a five, six plus billion dollar outcome because the IPO markets aren't particularly receptive to that smaller scale, or at least you're not seeing it today. And M &A, that's that that can be something of a no man's land. And so that's one of the things that we're thinking about. The other thing that I would say is we are just factoring in longer hold periods and lower liquidity velocity. And so it forces us to kind of think a little bit more like private equity firms in some ways where historically you just were along for the ride.

14:55and when the company exited, you exited. And it was typically, I don't know, everything from at the IPO to plus or minus, you know, eight quarters after the IPO, you sort of got on a drip-based distribution. And one of the things we're now having to think about is like, well, you know, we have Stripe in our portfolio that's been an amazing investment, but it's now a$95 billion private company. And, you know, Ramp is on a fantastic trajectory And suddenly it's going to be what historically would have been a medium-sized, a big public business. And it's being valued in private markets. And so one of the things that we don't exactly have the toolkit hardened is how exactly we think about that going forward.

15:40And so it's something that I think a lot of venture firms are going to need to think about. It's been true for seed managers for a while. You hear stories of Fred Wilson taking some amount of his coin-based investment amount along the way so that he could ride all the gains up over time. And I think that's been fairly normalized for early-stage folks. It's definitely not normal for mid - to late-stage investors. And so I think there's a lot of things to think about there, be it what Sequoia's done with their kind of evergreen structure, whatever they call that. some of the continuation funds that folks like NEA and Lightspeed have raised.

16:18There's a whole bunch of different things that I don't know if the industry is really standardized or figured out exactly how it plays. And so something that we're constantly noodling, how and when best to get liquidity for our LPs. Yeah, I don't think it's been figured out. And I think it's moving so quickly and fluidly over the last couple of years. And I think it's going to materially actually change. You mentioned one thing about the normalization for a seed stage manager to sell at the Series B or the Series C, take some money off the table, drive some liquidity back. In the past, that was viewed as a negative signal, or at least viewed as by the GP.

16:52I'm not supporting the company. I don't think that's the case anymore. But when you look at sort of this no man's land, like, yes, at seed, you're paying lower prices, you're willing to take more risk. But the upside for a single company can be huge, where you can get a 50 to 100x if you hit one of the companies like a ramp, for example, at the seed stage. On the other side of the coin, you have really late stage companies that have already broken out. You mentioned a couple of Anduril and ramp, two examples of companies, clear market fit, they're scaling, likely going to be public companies if they continue the growth trajectory.

17:26But a lot of what you're doing, especially on the growth side is maybe kind of in between that series B-ish, where it's not quite obvious that they're going to be this large winner, but they're also not so early where you're not paying sort of like decent Series B type of pricing. Have you guys modified your playbook just kind of given what you've seen over the last four years? The things that we look for, and not to give away all our trade secrets here, but we do have a handful of things that we consistently look for. And I say trade secrets fairly tongue-in-cheekly because I'm not sure that it's actually particularly profound.

18:03The types of things that we look for is we look for world-class teams, products that delight customers, huge potential market opportunities, businesses that solve hard problems. And then we want them to be building attractive business models at scale. We sort of think those are the components of great venture-backed businesses. And so I would say that we're still looking for those at the Series B stage. Now we've changed what we think about in terms of the absolute valuations that we're getting in at. 10 years ago, we talked about all those things and it'd be a two or$3 million error business, whatever it is.

18:38And we'd be getting in at 90 posts or 140 posts or something. Or maybe we'd hold our nose and pay 220 posts. And now more likely than not, we started drifting our average initial check in these businesses to anywhere from 300 to 750. And some of these situations, It's been even, you know, right around a billion post. If we pick well, that's still totally fine. We had some great investments in our vintage of 2012 through 2018, where it really wouldn't have mattered had we gotten in at those same prices I'm talking about, or, you know, the 150 or 200 that we paid way back then. It would have been a turn on the fund or whatever.

19:19We can do the math on the implications of it. But in the grand scheme of things, any individual investment mostly was a good investment or it was a bad investment and it wasn't determinate by that margin of error on the valuation side. Now, I will say it has led us to pushing to try to be as early as we possibly can after product market fit has been established. And so when we say products which delight customers as one of the key considerations, we at times need to think about products which potentially could delight customers or products which seem to be delighting customers or products which we think the world-class teams can execute on being, you know, something that delights customers.

20:05And two businesses I've been fortunate enough to work with, Syra and Ramp, both are examples where it was, you know, sub 5 million in recurring revenue. I mean, Ramp was a run rate thing at the time, but you know, it was smallish single digit revenue recurring or run rate revenue for those guys at the time. And we were definitely taking far more of a team bet than I think would have been a traditional growth stage VC playbook. And one of the reasons it's a bit of an oxymoron, but one of the reasons we call what we do early growth is because we do want to balance both elements of the early stage mindset with maybe more growth stage considerations on the business At a very practical level, what this ends up meaning is within 18 to 24 months, you really know if you weigh underpaid, the business is off to the races, or you've got a long slog ahead of you with the individual company.

21:12and it usually is that time period. Sometimes, I mean, I would say 75 to 90 % of the time, I probably know in the first board meeting which of those two buckets it's going to be. And so it's an interesting thing where if things are off to the races, then you're just doing everything you possibly can to provide jet fuel or try to help the company not make a mistake that could otherwise stop their growth. And on the other end of the spectrum, there's really nothing, you've made the wrong investment. And so you can do everything that you possibly can as a board member investor to try to help out.

21:41But plus or minus, there's not a ton you can do. And so both of those situations, interestingly enough, you're trying to help the company avoid catastrophic things that could destroy value for the founders. But those decisions might only be one to two things over the course of a year that are pretty material. You need to earn the right by showing up time and time again so that you have the context to actually help out when that one situation arises. but there's not a ton stuff that you're doing on a day-to-day basis with these businesses. You're either, you're either cheering till your hands hurt or you're trying to help as much as possible, but there's only so much anyone from the outside can actually do because the, it's either the wrong founder or the wrong market or the wrong time or the wrong team or whatever it is.

22:31And ultimately a VC is not going to help you out of that situation. Yeah. You're touching a lot of things that I think I want to make sure we double click on. First, before I go into some of those questions, maybe just walk us through, how do you think about underwriting a Series B company from the exit that it needs to potentially get to? You think about C and Series A, every single company that you underwrite should have the potential to return the fund. It doesn't mean it's going to, but the potential. What is the rubric for a Series B company at Redpoint? Yeah. So we see 3 to 5x with 10x plus upside.

23:04The plus is an important thing. And I've made mistakes early when I was at Redpoint and not thinking of 3 to 5x, 10x upside. Right. And I wasn't as rooted on the plus. And the important thing with the plus is maybe you're investing in a super frothy market and valuations are going to fall by 50 % or whatever you're paying could actually be in three years time. Maybe that would have gone for one third of what it's gone for today. Ultimately, if you're investing in one of these really enduring businesses, the plus should be what makes up for all that delta or all that noise. If it truly is a special business and you're getting involved in a low-ish, in my world, absolute valuation, which is sub a billion, ideally sub 500 million, you should be okay.

23:56And the company should be able to execute to the other side. Maybe your return will fall from a 25X to an 8X or whatever it is. But like your plus or minus, the determinant of whether or not that individual thing was a good investment will exist on the own merits of its company, of the company itself. And so we really make sure that if we can dream the dream on things going right for an individual business, do we think it's a big independent standalone public company? And big is like north of$5 billion and maybe even north of$10 billion if things really go right. And if we can't see that, it's probably not worth making the investment because you might be having too much false precision about what the moment in time is and the relative attractiveness of this investment versus this other investment you're looking at.

24:45And this feels like a good ARR multiple or a good entry price on it. And who knows, maybe the entire basket of everything you're looking at is actually overpriced by 300%. And so, yes, it's cheaper than the other business you looked at. But both of them are bad decisions to make. And so ultimately, what you want to do is find one of those that are going to grow through any market cycle you're in. And ideally, it's an appreciating market cycle. The valuation gets higher and higher. But even if it's not, you hope that you're okay, that you'll sleep at night, even though you overpaid by some materially high metric.

25:20It's going to grow through that. Now, we want to keep the absolute valuations low because it's a lot easier to see 3 to 5x with 10x plus upside investing at$100,$200,$300,$400 billion than it is at$1 billion,$2 or$3. And so it is something that we try to gravitate into the lower absolutes of everything we're talking about. But at the end of the day, if it's special, we want to be a part of it. And so we deviated. We got in the ramp at$1 billion originally. We got a new company, Abridge, that's doing exceptionally well at$850 million. We got a new company, ChainGuard, which is doing fantastic at a, I think at like 1.1.

25:57We just did an unannounced high profile AI business at a billion dollar valuation. And so, you know, those things, we can deviate from it, but we want to deviate such that the pie or the pot at the end of the rainbow is totally commiserate with taking that absolute valuation risk. Yeah. So one of the things that, as you're speaking, comes to my mind is like, how do you think about building that portfolio? Because on one hand, you might have companies where they haven't really gotten to escape velocity. It's like 5 million, 10 million in AR, maybe even less, depending on sort of the business model, where there's a lot of squinting you have to do, but the valuation might be lower for those companies versus the companies that are clearly, like you mentioned, Chain Guard.

26:42I can also think about companies like Applied Intuition and companies like Anduril and Harvey and all these companies that you can see it's already working. There's customers that love them. They're growing really quickly, but you've got to pay a huge multiple. How do you construct a portfolio where it's not just either side where you're taking too much risk on one hand, where you're squinting on every single company because you want to get in at lower valuations versus these high-fidelity ones where you kind of know, but you're paying up for them? Yeah, it's a great question. So I would say first and foremost, we come back to the three to five X, 10 X plus upside.