SPEAKER_00: the last investment we made out of our fund one which was last fall i want to say was 776 alexis ohanian's fund a lot of respect for you know what he's built there and obviously that goes back to the the first thing we talked about as he was with uh gary at that initialized um so

SPEAKER_02: he was the co-founder of reddit for the right that's also yeah you're right i know i i was

SPEAKER_06: getting there too lest anybody forget getting their tweet at a firm that he co-founded

Chamath Palihapitiya: right you know why it's so contentious right because there's so little at stake it's just it's tween folks people are starting to spill tea and shade over it i mean how do they leave him out

SPEAKER_20: he comes a co-founder this week in startups is brought to you by mantle the ai powered equity management platform designed for modern founders and operators get your first 12 months free at withmantle.com twist hubspot for podcast networks looking to up your marketing game check out the podcast marketing against the grain hosted by hubspot cmo kip bodner and zap your cmo kieran flanagan they bring you the latest in marketing trends growth tactics and innovation available on all your favorite podcast apps and kiro tech are you one of those companies that knows you need to be using ai but you're not even sure where to start well then you need kiro tech they are ai experts and they're offering twist listeners an ai strategy roadmap tailored to your business for five thousand dollars that's 50 off the normal cost just for telling them we sent you check out kiro tech dot com slash twist

SPEAKER_24: and get five thousand dollars off welcome back to this week's liquidity podcast with me today i have dave mcclare from practical vc next we have jordan stein from crescent partners and of course jason calacanis from the launch fund i'm your moderator david weisberg co-founder of 10x capital today we have three topics on the docket another yc company is going public vcs are calling more lp capital we'll end with the latest three investments from our guests let's dive right in reddit's ipo represented yet another yc company that has gone public joining yc alumni airbnb coinbase dropbox instacart and 15 other yc companies that have gone public to date despite the significant success of yc and the hiring of new ceo gary tan some are concerned around current batch sizes and the future of yc dave you founded 500 startups in 2010 and for a long time you were one of yc's top competitors what do you think of where

SPEAKER_25: yc sits today i'm flattered you think i was a competitor yc was always the big gorilla and probably

SPEAKER_27: still is i guess i'd say we were also investing in a lot of ways to companies even though we were competing with them so i think for the first five years of our existence 2010 to 2015 we probably indexed into 10 percent of the yc companies and we actually had several big wins we were in git lab plan grid uh a little bit in stripe and also reddit yc is you know still top of the heap it's they're really well established um they've had you know several very large outcomes and um probably the biggest

SPEAKER_31: community on the planet i think you and yc today were both criticized at some point of a spray and pray strategy uh which is somewhat of a derogatory term uh tell me about at 500 how did your spray and pray uh work and given your portfolio size how are you able to execute on that strategy i won't take

SPEAKER_27: credit for starting that i think it was probably uh sv angel that really started that on conway and to some extent maybe first round capital and a few others but we at one point we were probably doing uh the largest number of investments per year whether that's something to brag about or not

SPEAKER_35: uh i mean hey the name was 500 startups it wasn't 50 startups it wasn't five stars well i mean at the

SPEAKER_38: time dave in fairness people thought it was crazy that a firm would ever hit 500 here we are i think what i see is at like 4 500 or 5 000 over 20 years so you start you know doing the math on that you know it's 250 a year on average and uh they're doing 450 a year so they're doing 500 startups essentially every year so you actually nailed it uh you know and i think spray and pray

SPEAKER_43: is a derogatory way to sort of look at the strategy of can you help let's say five times as many

SPEAKER_44: startups than a seed fund would do and what i see is like a perfect ecosystem now 20 years ago when we

SPEAKER_43: were all trying to figure this out there were no angel investors in fact i started this open angel forum dave was doing 500 startups naval was doing venture hacks and of course paul graham had started

SPEAKER_38: before all of us maybe six or seven or eight years before us doing y-combinator and yeah when you and when you look at that at that time there was like a three million dollar seed round or two or three million dollars series a there really wasn't much going on in the angel space and now fast forward you have angel list uh which venture hacks merged into and you have a ton of accelerators and even pre-accelerators and so spray and pray is a derogatory way to say um i'm going to make five times as many investments

SPEAKER_44: for the same valuation as seed funds are so seed funds are investing at 8 million to 10 million dollar

SPEAKER_38: valuations generally speaking i think we'd all agree if you look at 500 startups launch my accelerator or y combinator uh tech stars you get 125k for seven percent ish is the standard deal which means you get to do four five investments for what a seed fund does what that means is you can take a massive amount of risk so the hit rate is very low for accelerators even a great one like y-combinator um but you don't you you get to get more swings at bat than a seed fund so i i look at it now it's almost like a perfect ecosystem has emerged if you really want to do a lot of work you can run an accelerator it takes 10

SPEAKER_44: times as many people in my estimation to run an accelerator than a seed fund a seed fund can simply

SPEAKER_38: draft off of what comes out of accelerators and place bets at 10 million dollars whereas you know

SPEAKER_44: we're all placing bets at 1.75 we're just rounding up to 2 million we're placing bets at 2 million dollar valuations and then we have to do a ton of work for 15 16 weeks with the founders so it's kind of a perfect ecosystem i see it as like a perfect conveyor belt now it was a little sloppy and messy

SPEAKER_59: and confusing 20 years ago right dave well i'd say it's maybe perfect in silicon valley i don't know about the rest of the us and certainly not the rest of the world it's not quite as competitive but

SPEAKER_27: i i would agree with you you know we were generally getting in uh we were sort of a hybrid because we did both an accelerator and we did a seed fund and so our seed fund valuations were probably in the four to five million dollar range at the time um at least in the us maybe a little less outside uh the accelerator valuations were between one to two million i think that's still the case today so all in blended we were certainly below five probably around three uh or so we were doing about two to four hundred companies per year for those first six seven years i i started uh 500 ran the first four funds and i think we did about 1800 companies in seven eight years uh for those first four uh four funds i think 500 is up to maybe 3 000 companies or more now but the hit rates were generally you know as you're suggesting you know fairly low about 65 to 70 percent of the portfolio would fail completely uh we'd get a small win say two to five x out of maybe 20 to 25 percent of portfolio we get large large wins that were 10 to 20 x maybe from eight to ten percent and then we'd get unicorn you know ipo size outcomes 50 to 100 x or more from maybe two to three percent i think most people would sort of say it's in the single digit percent range low single digits the thing that we didn't necessarily know in the beginning but we'd seen a few of is we would occasionally get these really really big outliers uh talk desk canva you know to some extent a few others uh solana that were thousand x outliers so those would only happen maybe three to five hundred companies one out of every three to five hundred um but they do happen i think if you look at the yc portfolio they've probably had at least five or six

SPEAKER_38: of those really really large outliers coinbase airbnb would be the two that have always decacorns are hard right yeah that's right we talk about unicorns but stripe yes yeah and then dropbox has been always around 10. instacart's been sub 10. so just even getting i think we need to really have a conversation about decacorns versus unicorns right because there's a you could hit one decacorn robin hood's 19 billion today can you think about 19 billion that's you know 19 single digit unicorns like there

SPEAKER_27: is a power law amongst unicorns right yeah but more than decacorn i think the multiple makes a difference right because you might only have a 10x uh for for series b vcs that get into unicorns that might not be that much right exactly uh but we were generally getting in at these one to five million dollar valuations i think probably yc is getting most of their ownership at a sub you know one to two million dollar valuation because i i don't think they actually pay they get a portion of that equity at a much lower price than maybe the rest of the lp buddy that they come in at but it's you know it's a

SPEAKER_70: lot easier to get 100x multiple you can't invest in that fund you can't invest in the accelerator

SPEAKER_27: right they internally own a piece of that but not the lps but i'm just saying it's much easier to get you know a 50 to 100x outcome if your average entry price is a two million dollar valuation

SPEAKER_59: than say a 20 million dollar valuation which you might see some seed rounds these days

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SPEAKER_38: free seed just generally speaking because it is a different beast than five gps investing in you know

SPEAKER_00: 30 or 40 logos very much it's really hard to do successfully and to do really well y combinator i mean dave to your point really stands at the top there and kind of better than the rest and they have developed this incredible community over the last 20 years and i think just like any other ecosystem right it ends up sort of being worth the square of the number of users and so i think that actually generates significant value that's hard for other people to catch and so you know for us us we have a mix in terms of our portfolio being kind of established brand names as well as emerging managers and i absolutely would include y combinator as like one of the best brand names in the world a lot of people can recreate pieces of what they do in terms of providing capital in terms of mentorship product market fit workshops uh you know all the time that they spend with their portfolio companies but to recreate the power of that network and the signal value too right in terms of if you were a yc backed company that means something uh and it still does and a lot of gps look at that for signal a lot of people attend demo day and do all of those different things and so from our perspective i don't think we would compare other accelerators to yc i think we yc just stands alone um but if there is another group out there that perhaps is some other advantage i mean it could be a vertical advantage right there's some interesting kind of ai accelerators or consumer accelerators or people who you know in their own way open the same types of doors that yc does that could also be really really interesting but i don't know that anyone's ever gonna catch yc just given the massive lead that

SPEAKER_84: they've established for themselves jordan how do you play an ecosystem like yc do you do an index style approach or do you look for funds that are stock pickers it's a good question and i don't

SPEAKER_00: know that there is necessarily a right answer to that i think both strategies can work and i also think it depends on your broader portfolio construction right so you know the way that we put a fund together is when we are evaluating a manager not only do we want to understand hey is this strategy going to work and i think frankly if you were to create an index on everything that yc has done you would be very very happy with the results and you'd be happy with 20 of those results versus if you were actually able to repeatedly find alpha within that yc portfolio that could also produce really high quality results i think part of our decision making also depends well what else will we be putting in this portfolio how much overlap is there going to be between strategy x and strategy y and strategy z because there does become a significant amount of club deals and things like that that happen so something we need to look out for that said we've looked at really compelling strategies where people have put 70 of their fund investments into yc companies and i think one of the differentiators i've noticed is some of those people actually bring yc companies right and so that to me identifies a little bit more from that lp from that gp from that individual their ability to kind of do this more consistently it's not just hey we're you know absorbing the value and sort of a derivative approach to yc we're actually also as good at finding those types of opportunities ourselves and so you know that's probably a little bit more interesting to us if i want to just sort of create an index around y combinator it'd be better to find a way to sort of invest in y combinator which though you can't access the early stage the batch fund in a vacuum you know

SPEAKER_90: there are ways to sort of play into that ecosystem one thing about yc is it's great but you also have to be aware of what the entry point of valuation is i think these days if you're investing at yc

SPEAKER_59: demo day prices you're probably investing at 16 to 20 million dollar you know seed round valuations

SPEAKER_92: and and possibly the best of the companies have already been funded so actually yeah that's the

SPEAKER_94: dirty little secret isn't it that they will deny but we all know is not true and well they'll be sharp

SPEAKER_00: elbowed if you bring it up and i think it's funny too you know you look at a group's portfolio and they'll say oh yeah we're they'll have front and center on their website we're investors in stripe as an example and it's like okay well you know when did you get in oh we got in at their 100 billion dollar you know around it's like well then i don't care that you're an investor in stripe right and so i think to your point like yeah entry point absolutely matters uh we've looked at plenty of funds who are like oh we all we invest in these yc companies and look how well yc's track

SPEAKER_99: record is and like well that is that your track record or like what's what's going on there so it

SPEAKER_27: matters i mean i think if you are doing the entire index of yc companies you're going to get a great return because there are occasionally the coin bases the stripes uh that are in that group airbnb but if you're stock picking particularly at demo day you're paying a pretty high premium to select and pick and you may not be picking the best of the companies either because they're not available or because you're not necessarily a great stock picker um that was easier 10 15 years ago you know we were doing 10 of their batches you know the batch size then was only 20 companies it wasn't really that hard to pick two or three companies if you thought they were great and the entry point of valuation at those times was probably only between five to ten million so it was a slight premium to market but it wasn't a three four five x premium uh which is i think kind of what you're playing for today

SPEAKER_00: we've looked at a lot of of track records um i'm pretty confident that if you just take their track record in their batches that it is the best early stage track record probably of all time um it's really really incredible and jason you nailed it which is when you're getting in at a two million dollar valuation for all these companies and you're hitting unicorns and decacorns and and then some

SPEAKER_106: it's just it's non-comparable yeah but i think there are still companies that they're going to miss

SPEAKER_27: and you know when we were getting started we had to pick you know a strategy to compete against them and it was difficult we had already started five years later than them and tech stars and so we went you know one thing was scale we we immediately were trying to do large scale you know hundreds of companies per year um we were trying to do outside the us which was at the time you know yc wasn't doing a lot of stuff outside the us uh and we were betting on underdogs that we thought were overlooked and at the time i think they were indexing a lot into you know mit and stanford grads a lot of cs majors and maybe to put too fine a point on it a lot of white guys and so we were trying to invest in more women in more minorities in more international founders and i think that worked for a while um when sam came in and took over from pg i think he also kind of recognized the value of large large portfolios uh he started scaling a batch size they started doing more international stuff and they also to their credit started investing in more women and minorities we had a differentiated advantage for the first four or five years but i think sam was pretty sharp and sort of looking at where those

SPEAKER_111: advantages were and trying to compete them away there are two things i've heard from you know people

SPEAKER_38: who are series a investors or seed funds um one is when you go to yc a lot of the top companies have been basically don't wind up at demo day they skip demo day so that would be like playing in a poker game and i said hey you know dave you can get aces and kings and queens but the rest of us we can only get jacks 10s 9 so let's see if we can beat dave you know but he gets all the aces kings and queens and you know that's fine no competition you know no no conflict no interest there's a cobble of folks who are on the inside who paul graham's liked for a long time or andreason horowitz or whatever and they sort of share the best of deals quietly and they don't go on stage they'll deny that but everybody knows it's true we know examples of it the second thing i've heard from folks is demo day

SPEAKER_44: is not that's kind of the sucker's bet on demo day because it's overpriced you know towards what dave is saying compared to it's retail traction it's retail so the price is going to be 20 000 you

SPEAKER_49: know let's say 20 million for a company with no traction that's got six weeks of like private

SPEAKER_43: data but a great story and i think that's one of the problems is people go to ic to maximize their valuation okay that's fine but it can go too far and if you have too much demand from dentists like

SPEAKER_46: one time i went there and it was like literally the person sitting next to me at demo day was a son of a dentist and i said oh what are you doing oh i just want to be an angel investor i read your

SPEAKER_38: book can we take a photo i said yeah sure and you know he was just in that high pressure cooker and then they came up with this high pressure tactics oh you know the valuation's 14 million this week it's 18 million next week then it's 24 million if you sign now and you wire and they you know kind of

SPEAKER_43: came up with almost over optimizing to kind of create fomo and i think that's where a lot of the bad feelings about why combinator demo day kind of rooted themselves hey it's a rigged game hey there's

SPEAKER_38: high pressure tactics i think that's come down a bit i know gary you know even sam walton before him they were not encouraging people to kind of do those things but that is the truth so what people have told me is oh it's just best to meet the companies but then wait one year they you know they'll deploy a million or two million and the valuation then has to catch up so let's say you did get that 20 million dollar valuation you did raise the two million as david is nodding we all know you deploy that two million okay you went from uh let's say zero dollars in revenue and a beta now you've got

SPEAKER_43: let's say 500 000 in revenue making 50k a month 40k a month and reoccurring revenue 500 000 for the year okay what's 10 times that what's 30 times that okay 30 times that is 15. so now you're if you based it on 30 times that number or 40 times that number it's the same as the the demo day evaluation and that second uh extension will be the same price as the demo day so that that's and i have actually seen that a lot of folks coming out of demo day they secure the bag 15 20 million they get minimal amounts of dilution fantastic great job founders but then when they come back to market it's basically the same valuation so we will um wait on a lot of valuations and the truth is they only accept one percent we accept just under one percent to our program they get 45 000 applications less they tweeted and we get 20 000 right now so we're kind of right behind them and what i would tell you is neither of us know in the one or two percent of the top companies which ones will break

SPEAKER_124: out and i think dave would confirm that having done this longer than i have that is there any you

SPEAKER_127: feel there's any difference between what you determined is the top one percent of applicants or the top

SPEAKER_106: three could you know what i was going to say is i think you know a lot of times you know the hot

SPEAKER_92: companies supposedly are the ones that already get funded but those aren't always the hot companies five years later and a lot of times you know people may change what those are but i i would say you were

SPEAKER_131: unfundable yeah coinbase too coinbase was not a hot hot company in their cohort i had a chance to

SPEAKER_27: an airbnb when they were doing the cereal boxes and i thought that was kind of crazy but turns out i was stupid but i think you know i would still say the top 10 of yc companies are probably worth it but you just don't know which 10 those are but still to their credit i mean yc's built an incredible enterprise it's very tough to compete with them and i think you have to pick your spots if you're going to do something you know i think the new program neo got a little bit of there was some punching that was going on between neo and yc i think maybe six months ago yeah they were definitely threatened by

SPEAKER_136: him big time did you see how nasty they got they were like we're gonna take this guy down he got in

SPEAKER_43: a lawsuit with the founder he got really sharp elbowed unnecessarily they're they're all that's the other thing is they're a bit sensitive i think like anytime any critique happens they

SPEAKER_141: everybody like they make it into a hole like we're the underdogs and it's like you're not the underdogs yc it's kind of the opposite you're the 800-pound gorilla you're not the underdogs

SPEAKER_94: but smart branding on their part to like attack him but i think if you're going to do an accelerator

SPEAKER_27: these days it's probably difficult to be a broad-based you know global accelerator uh unless you pick a category or geography or something specialty like i think probably antler maybe entrepreneurs

SPEAKER_144: first um a few others you know 500 and maybe seed camp are trying to compete globally and they do

SPEAKER_146: have some advantage i take the other side of it i think it's easy to compete with them the majority

SPEAKER_27: of publicly traded companies if you pick a vertical or a geography or some specialty i think you can

SPEAKER_43: compete but i think it's harder to compete just broad-based now see i disagree i think if only one percent are getting accepted i think the second third fourth and fifth percentile is the exact same i don't think anybody knows the difference between those five the top five percent like maybe you could say hey this is the top 10 versus the top 20 but i think in the low single digits they don't know we don't know antler doesn't know 500 doesn't know which one of those is top one percent two percent

SPEAKER_149: or three percent and that's and that's why we do large portfolios is because you don't generally

SPEAKER_43: know exactly and so i think it's that people don't want to do the work it's really hard to do an accelerator you have to meet with thousands of companies to pick a hundred companies and then you have to deal with let's say there's two and a half founders per you got 250 founders who then want your

SPEAKER_38: support and want your continued investment it is exhausting most vcs and gps are lazy they want to do

SPEAKER_49: one meeting two meetings a day max when you run one of these accelerators how many meetings were you doing at the peak a day because i know my team is doing 70 introductory calls per week we're at 70

SPEAKER_155: per week think about that i mean we had similar numbers i don't know where 500 is at these days but

SPEAKER_27: thousands of applicants hundreds of screenings and and we sort of decided on batch sizes that were around 30 to 50 companies um you know but we we were running them four times a year in two locations

SPEAKER_25: 200 i think yc is now doing north of 200 they came down a little yeah i thought it was 225 or 250 per

SPEAKER_38: cohort i think they hit three and one maybe 300 was the peak which would be 600 a year that's too much

SPEAKER_27: they're also what sharding those into you know categories and vertical so even though there's two or three hundred companies i think there's probably you know x number of companies in you know some sector vertical genetics ai life sciences whatever all right everybody you know i am a podcast addict

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SPEAKER_00: from your perspective uh you know let's say there's 40 000 people who apply to y combinator obviously very very small amount actually end up getting in how much of the remaining group how many of them do you think are going to choose to go to another accelerator um or just say you know what it was

SPEAKER_138: yc or bust for me no no the majority of them will go to another accelerator we know because

SPEAKER_43: we are now moving our dates to the week after yc sends out their um confirmations we don't really need to compete with them if 99 plus percent don't get accepted so um many of them will go to another program and we've had many successful ones come to our program and become unicorns or you know uh sent a million valuation companies already so there's there's plenty of opportunity for those folks to go to other programs and they would i think there could i i think there should be more competition for yc and i think um who was the guy who they attacked again he made the ali part i think he doubled their deal i think he offered 250 for seven percent and once they did that once he did that that really upset them and they really went after him hard so if you could get twice the economics from him he knows a lot of people he's got a smaller size i would actually advise going to his program um and i think a lot of founders did i think that's why they were threatened by it because he just doubled their economics if you

SPEAKER_67: double yc's economics you would peel away a third of the companies i think with a reasonable product

SPEAKER_27: i think yc has a really strong value add for their program and so it's not always just based on the economics and the numbers i think they've built a brand that sort of you know feels like harvard or your brand whatever you want to pick and so you you know you can compete with them but you have to be you know the stanford alternative in your field where you have to find you know your your piece of the ecosystem that is attractive um i think jason one of your points i i would say people have been competing around dollar sizes they haven't really been competing around equity portion i think there's there's probably room for someone to compete by cutting the equity down to like two to three percent um even if they offered a smaller check even if they offered a smaller check you know i think

SPEAKER_33: you could probably have an interesting program if you offered the same amount of money for three percent

SPEAKER_38: um you know yeah yeah we actually realized that in the market i was talking to pioneer.app so this is a really interesting concept and i had the founder on this weekend startups at one point pioneer.app

SPEAKER_43: and um they weren't um originally offering money and i said you know you have all these people doing this like virtual accelerator why don't you just why don't you just give them 10k for you know one percent or something right and see how that goes and uh they're like oh that's interesting and so then i started doing it so we offer people at founder university their first check if they haven't raised money before 25k for 2.5 percent one million dollar valuation and we did it as an experiment and we put it on their weekly check-in form dave and when we did uh 60 of people asked for the 25k check

SPEAKER_38: 60 so i read it like an experiment i was like lean startup hey would you like this we've done i think 80 of those checks so far uh so there is definitely like the first check-in 25k we're not incorporated yet we're just two or three co-founders you know with a business plan or a mock-up uh people will take

SPEAKER_178: that 25k check i've confirmed it in the market i'm glad i'm not in that business anymore it's very good

SPEAKER_124: it's a lot of work i'll tell you that it's exhausting i can tell you because i'm exhausted sometimes

SPEAKER_27: it is exhausting i would agree if you find good people if you have a value proposition that's differentiated you know particularly these days i would say you know competing on a vertical focus or geographic focus um makes a difference um you you need to have a real you know place to add value whether that's on product on growth on people um but if you if you can really deliver on that then

SPEAKER_181: i think you can be still competitive and people who are complaining about why combinator or the terms

SPEAKER_38: they get or the price of companies coming out just create a competitor that's what i did and you know we we we get into deals at the same terms as them or earlier and we have our own proprietary deal flow so do the hard work like dave did like i did there's no need to complain about them you can just compete against them and you will succeed because 99 don't get in

SPEAKER_189: yeah there's a lot of successful people in the country who didn't go to harvard by the way

SPEAKER_27: i know it sounds crazy and again i think just people need to recognize that you know pg did an amazing job with jessica getting it started sam took over did a great job michael siebel did a great job um i think jeff uh sorry forgetting also ran it for a little while and and gary is you know new but he's not really new he was also a yc founder and you know he was running initialized for a bunch of years so they've had a great string of quarterbacks if you will running that program over there for

SPEAKER_190: you know 20 years moving on carta is reporting that capital call requests hit a high in january not seen

SPEAKER_24: since q2 2022 signaling a return of vc bullishness capital calls are a leading indicator in that they represent a vc firm's expectations to invest capital in the near future jordan as an active lp in the market are you seeing more capital call requests in this environment we are seeing some uh look our

SPEAKER_00: sample size isn't huge you know in our first fund uh we invested in 16 managers we just actually launched our next fund uh last week and so uh still getting that geared up but we are seeing a slight increase i you know it's nothing crazy dramatic i think that there's probably a few few reasons for it you know number one i think there's a ton of money going into ai as we all know uh and so i think there's a little bit of a frenzy there and a little bit of a hype there and i don't think that's going to slow down in the near future i think there's a little bit of you know okay we're through a bit of the uncertainty in the market right whether it's gonna be a soft landing a hard landing you're seeing signaling of you know interest rates getting cut and so from my perspective i think investor confidence is getting higher and that's driving some of this i think it's probably also an element of you know companies that fundraised in 2021 that have held off for as long as they can and are coming back and you're gonna have to make some decisions around do you re-up in those companies and double down or do you not and so uh i think it's real i think all of that is uh contributing to what's happening have we seen like a 2x or a 3x in capital calls no but there is a probably statistic statistically meaningful increase that we've observed i'd say over the last you know quarter

SPEAKER_24: dave uh your fund practical is a secondary fund uh where you take advantage of different macroeconomic conditions including the lack of liquidity and the lack of lp capital how are you playing the macro

SPEAKER_155: economic conditions today well i think it's pretty simple the macro condition going on is that nobody's

SPEAKER_27: gotten any liquidity for the last two years and so people need to find an alternate path uh to liquidity that's not you know from ipos or acquisitions although we're starting to see some ipos again um you know i think the secondary market's always been an interesting place for people to look for liquidity it's been around for you know 20 30 years in private equity uh it's even been around a pretty long time in venture um but what we are seeing more of now is funds looking for liquidity not just individual company founders and investors looking for liquidity so you know there's certainly a pretty active marketplace for individual company secondary uh whether that's forge or equity zen which was a 500 startup's portfolio company uh and others but there's not a lot of places to go find uh fund secondary positions or lp and gp positions um and what we've kind of found is at least um you know below a certain ticket size other larger secondary players like industry ventures and uh stepstone which acquired green spring those folks are writing 30 40 50 million dollar checks there's not as many people doing you know sub 10 million certainly sub 5 million dollar tickets at least at the fund level so what we kind of found and this was partially you know myself as a customer i was looking for some partial liquidity in my carry in my first two funds at 500 about four or five years ago um there just weren't very many people who were buyers um at least at that time and i would say still um if you're looking at you know non-institutional investors in funds um every so often those folks need liquidity you're sending kids to college you want to buy a house in silken valley um if you're talking about a family office they might go through death divorce or retirement uh and there might be some restructuring in some of their you know venture assets it's not really a solution that's as needed for institutional players who can be patient and long term um but for you know the smaller lps uh and sometimes for emerging managers who are still in their first 10 years they're probably going to be looking for liquidity particularly after going through you know the last two years one thing

SPEAKER_00: i will say you know we uh incorporate secondaries into our strategy uh in terms of our our fund and and one of the things that we've noticed in terms of why we believe there is a little bit of a sort of lack of participation or if there has been historically is it's often really hard to get information and from my perspective you know if you're a part of that ecosystem and if you know part of that fabric then you can get behind the door uh if you're underwriting you know a portfolio or a single asset if you don't have a relationship with the gp who's the investor in it and you're trying to you know buy a piece from someone else uh sometimes that gp will say well i don't i don't you know if you want to do the transaction sure but i'm not going to spend time to help you understand where this company is or isn't and so you know we've kind of put that as a a a filter from our perspective of like okay we're not gonna we're not gonna engage unless we're already you know have a relationship with the manager and so i think to be successful you really have to have those relationships and a lot of those smaller dollars that you're referencing talking about like there's no way for them unless they're otherwise involved in the vc ecosystem to really get behind that that curtain and that wall and understand it so i think

SPEAKER_83: that also impacts the decision making a lot more than it would in other asset classes

SPEAKER_198: yeah i think even within secondary there's a big difference between what's called direct

SPEAKER_27: or company secondary and the strip sales which are really portfolio secondary you know there's a lot of people who you know both professional and you know i would say the tourist investors who are looking at individual company secondary and because these marketplaces have uh you know interesting names on them people there's lots of people who want to get into let's say you know stripe or spacex or canva or something like that that's very well known um but again like you said you're not really even going to know about portfolio secondary deals unless you're part of the ecosystem and have relationships there you're going to need consent from the general partner of the fund you're buying into if you want to do that so you have to be an acceptable investor to them uh you're evaluating a basket of assets not a single asset and so you have to underrate multiple uh companies and then you also have to think about like what's the exit trajectory for those vehicles um so it's it's a lot more complicated to do portfolio secondary than individual company secondary but that said for folks who are willing to go after it because there's so few people doing it uh you can get some really good

SPEAKER_28: pricing and arbitrage on that as a buyer okay everybody it's your boy jay cal here and i've

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SPEAKER_205: month how generous thanks to the team at curatech jason you're in 24 funds yourself are you seeing more

SPEAKER_44: bullishness with these capital calls no it's pretty consistent i'll have to say um it was a little bit slow last year um i think i saw some funds weren't drawing down but i think it's pretty consistent

SPEAKER_38: and i you know it's not enough that i would notice it when i make a commitment it's typically somewhere from 25k for these five to ten million dollar funds 50 you know k one percent of the fund all the way up to 500k maybe when i do these for my family office and yeah i kind of have that money set aside so i don't even notice this this you know minor spike i do think what it shows more than anything is that uh vcs the general partners at these firms have dealt with a lot of the triage that was going on in their portfolio so just anecdotally speaking to other vcs on a regular basis being on the board of some companies you know there were a lot of companies that needed to do a big riff like two-thirds of the company and instead of doing a two-thirds riff like elon did at twitter they did a 10 riff a 20 riff and then a 30 riff and then a 10 performance riff and you know this occurred over 18 months of finally you know working with the founders to accept the reality but they didn't need 400 people for a 10 million dollar arr company they needed more like 75 people or a hundred people max right and so you know they there was a lot of that going on which i think was

SPEAKER_43: a distraction from putting money into new companies and i think jordan you said like there was just like

SPEAKER_38: some overhang right of and i assume you were talking about valuations and like

SPEAKER_43: re getting reset and coming back to reality so i feel like nine out of ten of my four out of five or nine out of ten of my you know challenged companies the challenge has been resolved either by shutdown an

SPEAKER_44: aqua hire or a right sizing of the company do you think we're done with that because i'm not sure we're

SPEAKER_27: done with it i think that you know the active management of turning the corner has probably been done by many companies but the ultimate shutdown decisions i think that's we're still going to see a lot of that i was talking to a friend over at svb and you know two three years ago that there was an article last year that was written by elad gill about when these companies were gonna run out money and you know he was sort of but he was talking about how a lot of those companies had raised so much cash in 2020 and 21 even though you know burn was high those companies had three four maybe even five years of runway uh once the downturn hit everybody started trying to reduce their burn and they extended even further and so you know i spoke to someone at svb a few months ago they said finally uh the average company was down below 18 months of cash um and so my guess is we're still going to see a lot of blood in the water this year and possibly into 25 where people have to make decisions now like when you have three years of cash even if you're trying to cut like you said you're you're not feeling like oh i have to figure this out tomorrow you know this isn't this isn't by

SPEAKER_84: the way an issue isolated to venture you have this wild wild situation in public biotech companies where some public biotech companies their drug has failed and they're sitting on 100 million dollars and basically public shareholders have to come in and do a hostile takeover and do some kind of negotiated agreement back it's a it's wild times yeah it's a common thing well but see the thing there

SPEAKER_155: is that at least for public companies those valuations get reset based on what people know

SPEAKER_27: about the companies in private markets they're not getting reset and so what's happening is vcs we're all you know we're all sinners we're all liars uh almost every vc that i know is still holding their portfolios at valuations set in 2020 and 21 the first thing that we we say when we talk to people about assessing value in their portfolios is have you done any proactive markdowns after q1 22 and if the answer is no which is pretty much what it is for most of them we're like well your portfolio is

SPEAKER_103: probably overvalued by at least 50 you should be reducing or cutting by 30 40 jordan how do you look

SPEAKER_24: at that you have multiple funds in the same company you see them carrying at different levels how do you

SPEAKER_00: how do you look at that you have a really interesting conversation with uh one of the two managers usually and you say hey uh let's talk about this because this doesn't make sense to me and one of your co-investors uh is holding it at a lower valuation and frankly given what's going on in the environment and then they usually give you some line about how their policy you know extend in six months and so they

SPEAKER_99: haven't proactively done it because they want to maintain a policy which makes them more conservative

SPEAKER_224: and consistent and all of that especially if they're fundraising oh yeah exactly um that's an

SPEAKER_226: interesting point too is honestly the ones who are fundraising are usually the ones who wait the

SPEAKER_00: longest to take the mark down but truthfully it's been a really important tool in our toolkit especially in this environment to try and understand the real value of these underlying portfolios and so you know one of the things we've tried to do is whenever we're speaking with a manager you know we're trying to understand that information and be able to reference it later so that if we're looking at you know fund manager x we're gonna say oh wait a second we've seen these few companies before and in fact they were marked with this and so uh i think like i said sometimes it ends up being an interesting conversation but honestly the vast majority of time it's like yeah it's just our policy and we're being consistent don't you want us to be consistent it's like well no i need to be honest and realistic but that's how i want you to mark to market i want you to

SPEAKER_27: assess a fair market valuation i guess this is the point that i i kind of want to make though is the reason that these companies haven't been marked down is because there's no market pricing activities that are forcing them to do so unless these companies get sold go ipo do a down round or shut down those are not market pricing events and even if they're funding them they're bridging them on notes that are not really setting a price particularly for the folks who are bridging their own companies they don't want to price them to where they really should be because then they'd have to remark their own portfolios and if they're fundraising that might mean bringing a three or four or five x portfolio down to maybe only a two or a 2.5 x portfolio the other thing i would say is we're

SPEAKER_86: pretty actively trying to pay attention to where secondaries are at and that can be an indicator too

SPEAKER_00: right if something is trading actively on a secondary market doesn't force repricing but it does allow

SPEAKER_99: you to ask the question and say well someone's paying this for this asset so yeah and the fact

SPEAKER_38: that people are even paying anything for private market companies like i'll get some lowball offers for some of our companies and i'm like oh well that's great that there's a trade occurring um you know uh at all you know the fact that somebody may not even be a price yeah yeah yeah because in some cases people are like well yeah i'm not going to invest in that company the overhang is too too large i i have been getting a number of some founders have taken it very seriously getting to profitability or break even so i've started to get the infinity sign in months of runway we are infinitely uh our number of months of runway is infinity and i'm like well that's charming and awesome great um and then hope renews and which is what's happening and people say oh well if you're growing you're at infinite and you've got five million in the bank great you're making three million a year great what's the number going to be next year and they're like four million we're like oh okay can we have a conversation about growing faster and losing some money so here we go again you know

SPEAKER_116: the cycle growth over profitability oh my god here we go and i and literally 19 this i think like the

SPEAKER_38: the second half of this year is going to be um growth and uh reasonable investment aka losses reasonable burn in order to hit you know more aggressive growth topics because i think everybody was just like batting down the hatches let's make sure that our ship doesn't crash into the rocks okay the storm's over okay feels like okay it could be choppy water but it feels like the storm's over okay we're

SPEAKER_43: out of the storm okay now let's have let's let's start a plan to grow this thing again and i think that was hard for a lot of people and i'll just make a note to folks and i've experienced it in my own

SPEAKER_38: career man uh moderate success is as bad or more pernicious to break out success and is more of a

SPEAKER_43: blocker than no success because if you have no success you just shut the company down it didn't work failed experiment we all move on you get to three four five million dollars in revenue you get this like tweener company okay great we got to three million but we can't move it up the the revenue is not coming okay great what do we do and you're like well we have a three million dollar business let's try this strategy to grow let's try this strategy to grow and you just may have hit like the natural

SPEAKER_240: audience and you got to really that's a tough one for founders is what do you do with the three million dollar five million dollar ten million dollar success quote unquote but it's not a venture

SPEAKER_84: success you know have you seen any of those break out or they all stay meddling i don't think

SPEAKER_243: it ever yeah they just have to get sold they have to get sold spun out yeah i have a favorite

SPEAKER_90: expression to describe the situation which is usually winners keep winning losers keep losing

SPEAKER_27: and tweeners keep tweening and very hard to move a tweener to a winner i think in a few cases you could pick your battles and try and get some folks you know back onto a growth path but i would agree with jason if they're if they're you know again this really depends like from an investor perspective something might not be a win that from an operator perspective could be a win right if you've got a company doing 10 million in revenue generating one to two million in profits with modest growth that's probably not a win for an investor that could be a great business for the operator um so it really does depend on your perspective there and that's where the difficult conversation

SPEAKER_38: of buying out the investors has to occur so they can at least take the loss or you know wind down uh a fund you know when funds get to 15 years people just my understanding is buy the shares have their shares bought back for one dollar from the failed investments and or just try to sell them in a strip maybe to dave or no do you find yourself that's not where we buy we're generally buyers

SPEAKER_27: around the seven-year mark um you know so our optimization is for when you know we look for funds that are doing well where the losers have been written off and winners have emerged probably you know let's say it's somewhere between series b and d uh 30 to 50 million and up in revenue um but there's a whole other you know business in secondary that's kind of like wrapping up end of life vehicles uh establishing continuity vehicles that probably happens between years 10 to 15. and and generally you know we we sort of bump up against that but those other buyers are buying out the entire position of the fund or really what's happening is they're they're finding out the lps who want liquidity uh they're figuring out which are the core assets that are still growing and then they basically create a continuity vehicle with the high quality assets roll in the lps who are still patient buy out the lps who are not patient and now you've got a great you know high quality portfolio you can run for another five years uh whether that's maintained by the you know the same managers or new managers you're basically sitting on high quality assets that are hopefully heading towards an ipo but you can extend the life of the vehicle three to five years and manage out you know the lps who are patient and pay off the lps who want liquidity i think that's going to be a really big business that's going to start happening in the next couple years the the other one that we are doing that i think is really you know probably on a lot of people's minds right now is buying secondary and strip sales to generate dpi but there's a ton of managers who are sitting on you know paper gains and performance you know maybe i don't always believe that they've got 5x there that's probably based on that 20 20 21 valuation but they might have 2.5 you know to 3x of real value but they have zero dpi or very smaller than dpi and so you know ipo activity and honestly not that much mna activity i think you're going to see a lot of people doing deals to do strip sales to generate dpi and those fund managers want to be able to raise their next fund um so that's another area where we think

SPEAKER_103: we're seeing a lot more interest from managers to do secondary sales are we seeing funds that are

SPEAKER_38: shutting down looking for custodians to wind them down i know of like two funds i was involved in as an lp that are not continuing on they're not doing a next fund and um you know i didn't ask them explicitly like are you going to manage this for the next you know it's your four of the fund who's going

SPEAKER_255: to manage it for the next 12 or 10 or whatever it is 10 years at least right yeah so what happens to

SPEAKER_155: all these fund managers who are a lot of it depends uh depends on whether you know the lps are friendly

SPEAKER_27: or not depends on whether it's an audited fund or not uh depends on whether they have winners in that fund or not um but i think that you know half the audience is probably the default case which is a lot of people jump into venture and don't continue in fact that's the majority case um and and when these are larger funds maybe there's some continuity there they have management fees to live on but for most smaller funds like you you're not you know coasting for five years on the management fees of a five to twenty million dollar fund at least in most cases um so i think those will probably bifurcate into the folks who have winners and or the folks who are committed to a career adventure um but for the majority of those folks who don't have winners or are not committed to a career yeah those those funds are probably going to be uh walking dead to some extent um depends on what kind of you know support is required from the companies to maintain them um the real question is from the investor's perspective you know do they expect anything out of that and are they expecting to get quarterly reports

SPEAKER_03: and who's watching the store have you had it happen jordan to any of yours not yet no we have not i

SPEAKER_00: haven't had it happen hadn't haven't had anyone signal that it's going to happen but you know our first fund the first investment we made from it was 2022 uh right into a net new 2022 fund so we've invested into 2022 2023 2023 2024 funds so i really hope nobody is thinking about shutting down within their

SPEAKER_260: first first or second year that would be problematic i really enjoyed the first year i'm out yeah it's

SPEAKER_27: it's between year four to eight when people decide to check out i mean you're past the investment period and you're probably past when you've had you know sort of the front loaded management fees when you're when you're done writing checks and when management fees you know start to ramp down typically around year five six seven if you don't have winners a lot of people check out

SPEAKER_38: yeah it's a it's a paradoxical career because you don't know if you're good at it until year six

David Friedberg: or seven seven yeah right and so like how often is it like playing the yeah you can play basketball

SPEAKER_156: and we'll tell you when you get to year seven playing basketball or running marathons or being a chef like your seventh year as a chef we'll know if you're any good at it it's like hmm yeah well

SPEAKER_271: it's interesting if you haven't been able to raise a fund every like three to four years

SPEAKER_33: right you're you're gonna check out if you haven't raised a fund in the last four or five years

SPEAKER_00: that makes sense and that's it and that's a really interesting point too where it's like okay when we're for example going to re-underwrite a fund uh right and we're let's say for this this current fund that we we have right now i'd anticipate you know half our managers are going to be re-ups from from fund one and you know what do we have to look at well the investment we made in fund one is not going to have a whole lot of performance and to your points it's not really like you can draw a whole lot of conclusions at from it you can look at you know did they say did they do what they said they were going to do did they improve their team did someone leave is there any drama you can look at their older portfolios and say okay they seem to think this thesis was going to work and by now we actually see more of it working or less of it working but if it's a new fund and all you have to go on is you know one fund or even potentially two sometimes that can be a

SPEAKER_244: little bit more difficult what do you go off of in that case what are some leading indicators that you

SPEAKER_00: look at that help you make that decision so it can be a number of different things and i think it can be case by case basis as well our thesis around venture is centered around the following which is you know is this individual is this fund manager this firm going to see the best opportunities and the best founders uh are they going to be able to win investments into those founders and into those companies and i think that's a really key element uh and then you know how do we kind of prove that those two things are true and that they're able to pick the right ones from the bunch and so in a lot of cases you know from our perspective we're never going to invest in a fund one where that person hasn't invested in a company before and it's like a true first time venture capital investor the three fun ones that we did in our in our first fund were all generally spin outs from institutional firms uh and so you know there you at least know okay well here are some of the companies they invested in prior and so you can continue to follow that story uh you know we'll do new references we'll talk to their founders that they've invested in you know from prior funds as well as the fund we've invested in trying to get to the answer of would you recommend this person to a founder friend of yours have they done the things they said they would get they were going to do right and maintain the type of reputation where they will continue to be able to win deals and continue to be able to support entrepreneurs it's a lot of qualitative work i would say and requires pretty significant resources to be able to get right and then we'll also talk to the rest of the community right we'll talk to other venture firms so and say hey you know entries and horowitz uh you know what's your perspective you've been working with this group here on two boards with them you know how have they delivered over the last couple years how has that reputation maybe changed not changed and so um you know talking to those gps is equally as important and then we'll talk to other lps too right who are generally able to do similar things that we can from those references from their analysis and really benefit from aggregating the information that they've generated along with ours uh within that

SPEAKER_83: community to try and make that assessment but you know beyond that it's not like you can run some model and say yes this checks or no this doesn't yeah i think you know my we we do a fair number of

SPEAKER_27: small checks um as lps primary lps into funds and i've been doing that for probably the last 10 years or so so we've invested small tickets into about 40 or 50 fund managers and when we were doing this at 500 we had started about 20 small funds within 500. um jordan's spot on it's very difficult to do diligence in the first three four years of a vc's career um but i think jason mentioned this on a previous podcast and it's sort of the same math that i look at which is what's the progression from pre-seed or seed to series b and and there's several rounds in between there and and you're not looking at it on an exclusively quantitative basis like everybody can get lucky and get one big winner here and there um but what you're looking at is a proportional progression of the portfolio where you're getting consistently let's say anywhere from 30 to 50 of your bets from pre-seed to seed from seed to series a uh from a to b and and probably somewhere around series b you've got a company that's actually got revenue got product market fit and is progressing right and not necessarily that that's going to be a great investment but as an early if i'm looking at early stage managers i want to find out what's their ability to sort of pick and or help companies from those early stages to some level of sustainable progress which is usually in my opinion three funding rounds um but somewhere between pre-seed seed to series b is that progression and if they can get a minimum of 10 to 15 percent of the companies regardless of the quantitative you know outcome and tvpi that's interesting certainly if they're getting 20 you know from c to b that's a pretty good number yeah that continuation strategy um and

SPEAKER_38: that data is something i was introduced to going out for my fourth fund i had never studied it uh and really focused on it but i did see that some of the larger lps did look at that and we had to uh you know have them not benchmark us versus seed funds i was like oh no no no we bring the inventory to seed

SPEAKER_43: funds so at seed funds our percentage looks really bad but then when you compare it to um other

SPEAKER_38: accelerators and pre-accelerators and pre-seed it looks just fine so each of those jumps if you're doing your job correctly you have a very low batting average if you're an accelerator because you if you're an accelerator you really are trying to work the power law you really need to look for crazy ideas like coinbase and airbnb and uber and robin hood you really need people who are you know trying to attack windmills like you need the crazy lunatic founders to bet on and you can't just be betting on you know all sass you know run-of-the-mill copycat products you need outliers and you need

SPEAKER_44: to bet on crazy things and those have just a very high attrition rate uh at the earliest stage right

SPEAKER_57: 80 90 percent going to zero when you're running an accelerator pre-accelerator but you're getting

SPEAKER_155: it at low prices so i mean i think they always have to balance that you know there's something we

SPEAKER_27: used to look at which i was calling like value weighted progression um and usually it was like what's the round-to-round step up in value what's the follow-up on or survival percentage and what's the dilution and if you multiply those numbers theoretically they should be better than one in other words if you're deploying a dollar you should get better than a dollar's worth of value at the next stage but it's also interesting math to look at for whether you should be doubling down or not um so like we did that analysis at one point even though there's high attrition rate at the accelerator you know the step up in round-to-round valuation you know is usually like 4x sometimes it's even more than that so again if you're getting in between one to two million dollar valuations and these companies are raising at a minimum of eight to ten million or even more you have a really incredibly good step up in round-to-round value and so if you get a significant percentage let's say at least thirty percent forty percent you know you're getting a number that's you know far greater than one and conversely it usually means that that's not such a great uh place to be making a follow-up bet because what we would typically see is that even with the attrition because of a low valuation we would get our best irr check at pre-seed in the accelerator program um that's not always true in less competitive environments in in other places outside the us that step up in round around isn't as you know significant um so it might make sense to have more of a follow-on strategy in those less competitive markets but if you're doing good job as an accelerator manager or as a seed fund manager you should be getting your best ir on your first check in my opinion yeah and just to build on that it's the

SPEAKER_38: conversation i have with our raas we call them researcher people we hire out of school analyst somebody who's done 500 introductory meetings with the founder uh over zoom recorded them and written coverage of them and then a thousand you know uh calls you get to associate level so these are and people can do it in less than a year they can get to 500 a thousand calls in one year each step up so we like them progressing quickly and with that group you know i will ask them to advocate and they write their deal memos they advocate for companies and we have that record for all time right that they were saying yes we want to do this and then i say no here's why and then we have to live with that but the framework i put into it when i'm asking them is okay we did we already own seven percent of this company for 125k call it a two million dollar valuation okay now they're going out of ten in order for us to get another seven percent would be seven hundred thousand so to dave's point do we need to get to fourteen percent right now probably not what have they proven since they've graduated who knows but maybe we want to get to ten percent ownership and then i asked them for that 300k would you rather do three more accelerator companies or two and a half or would you like to do so smart would you like to do 12 more swings at bat at the 25k two and a half percent and inevitably they come

SPEAKER_43: back and they're like i would like to do another 125k bet and i would rather do seven 25k bets or i'll do two 125 bets and two 25k bets i'd rather have more shots on goal for my performance right so this is

SPEAKER_155: a very interesting framing that you do that yeah like i so so many people have that follow-on framework they don't think about you know you have limited amount of resources you have a finite amount

SPEAKER_27: of bets that you want to make is the marginal amount of ownership you're going to get in this company worth it you know because you already have a bet on the table on this company you really need to be buying 50 more relative ownership i would say arguably a hundred percent more relative ownership in order for that to really make sense because like if the company's going to win you've already got whatever ownership you've got you know are you sure you want to add a marginal amount of ownership in that versus like betting on something else or betting on five other something

SPEAKER_38: else's yeah and it really is a function of your deal flow maybe you don't have a better deal in your deal flow or maybe you have too many good deals i find myself having too many good deals wanting to come to our programs and so i tend to lean towards that but i did come up with a framework that has taken me about a year to come up with to train the team on what i think is a likely winner coming out of the stage and what i think is a definitive winner and now that i've codified that we have a much better framework so we do those two frameworks is it a likely or a definitive winner

SPEAKER_111: or would you rather make these more smaller bets in the programs and it's just changed everything

SPEAKER_295: into an ai i would love to see like three four years of that yeah okay great you're already thinking about it i mean that this is the thing that's got to be gold four years later five

SPEAKER_300: well i've also tagged the data so we now you know every week hundreds and hundreds of applications come in and 70 meetings 70 calls 70 call notes you know and the stuff so yeah we are you know like the other day i was just like tell me how many marketplaces we didn't invest in and there were like 397 i was like email them all and ask for an update i love marketplaces i've made all

SPEAKER_38: like a lot of the money i've made in this life has come from uber thumbtack a lot of marketplaces in our portfolio that have done pretty well so i'm like get me the marketplaces from the database we don't have any deals great let's go back to the deals in the database and being able to pick and port my obsession and i've said it before on this show i have two things i'm super obsessed with right now we have the deal flow we have the decision making we don't need to compete to get in deals because it's seed and precede they're passing the hat most times so really the doubling down strategy is really the thing i am most and portfolio construction which is the same thing essentially our doubling down strategy is everything for us now because we know we'll have in fund for 250 names and we just need to add we know there's going to be some breakouts we just need to know which 10

SPEAKER_43: which five percent will break out and that's 12 13 companies out of 250 will break out which ones are those how do we know it's a breakout company or not that's the obsession i have right now

SPEAKER_305: you know i think there's a great article i don't know it's widely distributed but clint

SPEAKER_27: corver at ulu ventures uh wrote a pretty interesting analysis on follow-on strategy i think it was probably written about five or six years ago um and you know really somewhat you know contrarian i

SPEAKER_155: think a lot of lps uh particularly institutional lps look to see you know conviction which i think

SPEAKER_27: probably induces more follow-on behavior than the market should really be exhibiting um you know i i actually think the default case should be you should not follow on in most scenarios you're you're better off making a diversified bet on another company and it's only in the very clear cases of strong growth and significant you know marginal ownership that that follow-on bet really makes sense i mean unless you're doing it out of a separate you know pocket or separate fund i think from the lp perspective they

SPEAKER_84: have exposure to 2025 managers and each of those have 20 to 25 companies so they have 500 underlying companies so they feel like they're capturing the power laws but they want that alpha they want the next airbnb you put in 25 of your capital into that they want that high out performance so there there is

SPEAKER_24: some rationale there but if that follow-on bet is based on it might be a good rationale not for the

SPEAKER_84: emerging manager for the gp it's similar to a vc investing into a company it ends up being an n equals one and if you if you win you win marginally it doesn't really change your life but if you lose you

SPEAKER_244: you don't do another fund so there is a somewhat of a mismatch there i think from the lp side too

SPEAKER_86: it's it's it's very funny i've seen uh people who have shown me presentations that have said you know

SPEAKER_00: if i had just leaned in more to this company which is what we now do look at the returns i would have made and i have seen people say you know if i hadn't followed on as much which we don't do anymore look at the returns i would have made uh you know you can be successful doing it either way i think some of the better returns we've seen have been from doubling down tripling down uh if you get it right i think it works really well and if you're able to leverage the kind of asymmetric informational advantage you may have uh it can work really really well um i'll tell you another concern is you know especially if you're investing across funds or if you're leading multiple rounds in a row you know are you propping this company up are you throwing good money after bad and understanding that dynamic too

SPEAKER_83: i think is something that's important from from the lp side yeah if i could go back i probably made

SPEAKER_206: you know 10 bets in each of the funds first fund second fund third fund maybe 20 where i wouldn't say they were sympathy bets you know but they were founders who really resonated with me as a founder um and who convinced me yeah they were going to figure it out and i placed the bet

SPEAKER_38: but maybe that those bets would have been better into you know another new company and you know that we've now figured out a way to communicate that to folks that we are not the permanent source of capital uh for our companies and that we don't invest in bridge rounds we invest in companies once or twice and get to seven to fifteen percent ownership and then we deploy capital into new

SPEAKER_313: companies and once we explain that to folks they were cool with it they still might ask us but you

SPEAKER_38: know i think a lot of gps get caught up in loyalty to founders which i understand and i've been super loyal to founders and i want to give them that support but you know you have to have a portfolio strategy and now we just say hey the fund you're in is fully deployed that's it and you wouldn't pass the rigor of the new fund because it's not growing right now so we can't bridge you that fund's closed the new funds open you'd have to have 3x growth to compete for those new fund dollars and when you do we're happy to have that conversation but the company sideways you got to go find money in the market i think that discipline is really important it's really important and you only get to that level of discipline i feel when you get to your you know third fourth fifth fund and you have to face the scrutiny of lps or like tell me about these re-ups you know tell me you know somebody like jordan like hey uh i see you did these bets what was your thinking and you know i gotta pull it up and go to the deal memo go to the slack conversation and okay yeah i made a mistake that was that was a poor bet i put bad money i put good money after bad you know i made a bad bet on a startup okay we're all adults but uh then that second or third bet that's where you really have to start questioning you know do you have a good portfolio strategy i don't think i had a great portfolio strategy in the first couple of funds i think i had like the standard one which was better hunt you know bet

SPEAKER_00: on 100 companies hope for the best by the way jay said you hit on something i think is interesting which is the ability you know growth mindset ability to get better and to learn and to evolve your strategy when we talk about going back to you know how do we look at a fund uh evaluate a fund one or a fund two when they're back in market that is a part of it right um hey i want to hear about the bad investments you've made and what did you learn from i want to hear about what you would do differently in your next fund uh and continue to see that growth and so i think that's another element too i don't think anyone would be surprised to hear me say that there is you know sometimes a little bit of ego in venture capital uh and so you know to that to that extent you know when i know right crazy and um when uh when you can see a little bit more sort of humility and growth and ownership and like you know i can always be better and i can always get better i think that is also

SPEAKER_24: something that that we find good calling now on to the lightning round of top three investments from

SPEAKER_155: each guest uh dave go ahead uh well i guess i you know most of the investments we do are at the fund

SPEAKER_27: level and private so i can't really talk about which deals we've done that are great there uh i can talk about the direct uh secondary deals we've done so i guess three of those uh mercury uh which a lot of people probably know is uh startup banking and apis uh for companies uh and credit to zach coelius i'm an lp and he's great tax fund uh zach is really amazing uh i've tried to hire him at least twice in his career my career um but he's running a great fund and mercury was one of his winners uh and he uh helped us get into a private secondary in the company that was great and we'd love to own more uh so that one's doing great uh also great as a customer if you're

SPEAKER_321: a startup looking for banking services yeah mercury has supported my podcast over the years great

SPEAKER_198: company yeah uh really supportive of founders another one that we're investing in is a company out of

SPEAKER_27: germany and austria austria called gropius uh actually working with them on changing the name to greener.com but they do factory automation and robotics for building prefab uh multi-family housing so condos and apartments uh you can kind of think about it as like a tesla factory for building condos uh pretty amazing company the founders have both been involved in other public tech companies uh one of the founders was previously involved in delivery hero the other one led engineering at zilando uh it's about 400 people half of them are software engineers and they basically do programming on these robotic arms to build um you know prefab housing basically walls and siding uh very quickly uh and their customer isn't the end uh owner or renter it's the real estate developer and so they put together those walls and sidings uh deliver them to the construction site and then the real estate developer builds those uh houses a lot faster because they can just assemble them fairly quickly um and i think this is this is an interesting theme that i think we'll see in a lot of physical manufacturing companies is automation and robotics you know sort of improving the economics and productivity of physical manufacturing in the same way everybody's going gonzo about ai making software companies better and more

SPEAKER_266: productive i think robotics automation is going to make a lot of physical bits companies more productive

SPEAKER_198: uh and then last one i'll highlight uh we've been doing a fair number of secondaries in latin america

SPEAKER_27: uh for folks who aren't aware of it you know brazil and mexico are really you know big drivers for the latin american market but it's a pretty large overall market that's larger than california gdp and half the size of china gdp uh a company we invested there is called ricarga pay uh that's out of brazil and basically uh i don't know if many people know about this but about two years ago brazil adopted a payment system it's really driven by you know the central banks in the government over there called pix uh it's highlighted right there pix uh in less than two years about eighty percent of the population is now using it broadly it's kind of amazing how quickly the adoption has happened um so ricarga pay is basically a payments platform kind of like a super app uh similar to maybe we pay in china that does a lot of things or uh like grab in singapore um and the i guess i want to say dirty little secret but not so dirty latin american companies are very reasonably priced um there's just not a lot of uh not a lot of vc capital in latin america at least not on the scale that you see in the us or or even you know maybe in europe or india um and so valuations are quite reasonable um i think softbank had a big portfolio that was investing in latin america uh many years back it was about a five billion dollar portfolio uh for whatever reason i won't get into softbank uh changed their mind pulled pulled out of that um and the guy who was running softbank's portfolio in latin america marcel clare uh raised a fund called bicycle capital that was 500 million dollars um and is still investing in latin america um so i think there's really great opportunities not just this company we've made three or four investments uh down there brazil and mexico in particular are really taking off but the overall market for spanish-speaking uh latin america and brazil uh which speaks portuguese is tremendous

SPEAKER_255: amazing i'll go super fast i have a little bit of a theme today about websites uh and people building

SPEAKER_38: uh websites so this first one is called motive um this company reached out to us it was like one of these seemingly boring businesses it was a website builder um but this was a website builder for uh people who own dealers and dealerships and it turns out you know these dealerships need websites they're incredibly complex to build and a lot of commerce goes through them and the entire world is moving to buying online uh and we invested in this company that helps these dealerships build uh websites and man is it doing really well so there's squarespace we love squarespace for general and you know building anything but there are some websites that are super complex long tail of websites and we've found a number of companies that are working on that test rigger went through found university nr accelerator we made two bets on them i believe and it's a generative ai based test automation solution people should be writing tests when they write code they don't and they're just taking that little narrow spot and trying to solve this problem and then finally krepling is uh building a drag and drop whizzy wig style editor uh ai powered editor for building uh modern e-commerce websites and so you can go into this as you can see here and build workflows uh about registered users coming and then have them send an email then offer a discount so it's kind of pulling together offers and publishing and app building really amazing um how this company has done we made a small investment and then we watched them raise their prices uh one of the great pieces of advice we generally have for companies is raise your prices um same number of customers triple your price lose 10 of your customers net net you're now at 270 let's say you're at 100 and you had 10 customers paying 10 each raise it to 30 you'll lose one that's just fine you're gonna still do okay and you'll lose your worst customer too and you tend to lose the worst one but i really like your uh sustainable living uh company here we had an investment in a company um that was doing modular housing and it was incredibly hard and seems like almost everybody who's gone up this hill has failed but i do think somebody will figure it out

SPEAKER_124: and it's going to be a great investment so i really would love to meet them at some point well done

SPEAKER_59: i'll uh i'll connect you they've got a pipeline of business in germany that's huge and we're trying

SPEAKER_38: to bring them to the u.s really really hard uh business but um and developers are really hard

SPEAKER_43: customers that's one of the things we learned is the developers selling into developers is really hard because they want to pay the lowest price possible and then have the highest mark and sell at the highest margin so their incentive um is you know super you know to deliver the cheapest product and have the highest margin what's the price per door what they don't realize is like running of an apartment is the most the cost of running the apartment is equally important for the person who builds or

SPEAKER_313: owns the thing so your hvac your efficiency and energy um resistance to flooding and fire which are

SPEAKER_43: the two biggest disasters in apartments and the biggest cost centers is floods and fires even if

SPEAKER_313: they're contained and so you should be incented to use better materials better hvac better insulation but they're the construction people are like oh screw that just give us cheaper cheaper cheaper cheaper we want to buy this for 50 a square foot and sell it for 400 a square foot you know we want to open each door for the lowest price possible it's like well the ongoing uh you know maintenance of these

SPEAKER_155: things also should come into play well you hit on the part two of their business because they build

SPEAKER_27: digital building sensors into all those materials so once they deliver them there's actually a building operating system that the developers can run to measure all that as well which is super important

SPEAKER_313: yeah to know that this unit's got a flood or this one's on fire pretty important information that

SPEAKER_24: they generally don't have jordan real quick last three fun investments yeah super quick uh so the first

SPEAKER_00: two investments out of our recent fund uh the one we literally just launched like five minutes ago uh our andreason horwitz who was a fund one investment that we made as well you know long relationship there love what they do i think they're absolutely fantastic and in that sort of upper echelon of top tier firms uh i'll say founders fund kind of by default in the sense that we invested in their prior fund which they ended up uh cutting in half given the the macro and i applaud them for it uh they're one of the very few managers i know who has sort of taken money out of their own pocket in a sense uh to to become what they view as in line with the macro and so some of that initial exposure got pushed to their next fund which uh we are investors in out of our uh fund that we just launched as well uh so those are the first two and then the last investment we made out of our uh fund one which was last fall i want to say was seven seven six uh so you know alexis ohanian's fund a lot of respect for you know what he's built there and uh you know obviously that goes back to the the first thing we talked about as he was with uh gary at that initialized um and he was the co-founder of

SPEAKER_04: reddit or the right that's also yeah you're right i know i i was getting there too lest anybody forget

SPEAKER_06: getting their tweet at a firm that he co-founded

Chamath Palihapitiya: you know why it's so contentious right because there's so little at stake it's just it's tween

SPEAKER_15: folks people are starting to spill tea and shade over a tweet i mean how do they leave him out

SPEAKER_163: think of the co-founder he's uh he is incredible and going back to the comment i made earlier about

SPEAKER_00: like being humble and gracious um i would put him him in that camp for sure uh he is just such a really really good human being and so those are those are our our most recent three amazing awesome uh well

SPEAKER_350: it's been an amazing episode david thanks for hosting again well am i going to see you at the uh

SPEAKER_244: liquidity summit david you will you will see me um and i'm excited about it i saw some of the guests coming there pretty impressive so i'm excited pretty impressive i need more lps to come it's

SPEAKER_38: going to be june 2nd 3rd 4th and 5th but the main days are second and third i'm sorry the third and fourth are like the content and activities days the second is just a welcome dinner and poker and then

SPEAKER_300: the wednesday is going to be uh like a closing brunch but i'm kind of making it it used to be called

SPEAKER_38: angel summit now i just called it liquidity because it stopped being about angels it started being about the lps and the gps and we had i just emailed all the gps in our world and i think 70 of them signed up and so now i'm in the process of inviting the lps what do you want you want it you want foundations you want endowments i think a couple of each would be great and then i you know i'm trying to figure out what to do with this event i want to do it twice a year i want it to be super constructive so one day of full content poker every night second day some content and then

SPEAKER_44: uh the afternoon events but i'm wondering if i should do what i connections doesn't have speed dating but i kind of find speed dating i don't know i i don't how do you feel about it jordan if i was like hey here's five fund managers do you want to sit with them or would you rather just

SPEAKER_00: meet them casually i have always found that at those types of events when you try and do speed dating you suffer from massive adverse selection from my perspective i'd so much rather just identify who it is ahead of time and try and find a way to connect with them yeah um yeah i did like eye

SPEAKER_37: connections i went to eye connections twice and it was nice to set up meetings they weren't all

SPEAKER_155: they were double opt-in what did you say uh dave i think you should facilitate that process before they go and then have have the meetings that everybody opted into double opted into there but like usually what i would say is the speed dating is a mismatch for like 80 of the dates but there's no reason why

SPEAKER_44: you couldn't figure that out ahead of time in my opinion yeah so maybe have the gps have tables and let the g the lps come to meet them if they want to one morning yeah i think if you've got like the

SPEAKER_27: gps to give you like a one pager on their fund maybe a 30 60 second video if they want or or a

SPEAKER_368: short deck oh that's a good way to do it send it ahead of time oh yeah let me here's a presentation

SPEAKER_300: on my fund in the deal memo and then you could if you want to meet you meet that's a good way to

SPEAKER_226: do it yeah so i don't yeah there's a lot of gps if i was an lp if i got you know a list of the like one pagers on all these firms i think i would start by prioritizing the ones that i'm familiar

SPEAKER_00: with right and say okay this is actually someone i've wanted to talk to or someone i haven't talked to in a while or whatever and i'd go through the rest and say this is actually really interesting or really compelling or whatever and i i love that idea actually that would be from my perspective

SPEAKER_372: fantastic what do you think of the video you like the idea of a video you just want to deal memo

SPEAKER_260: i think videos are always helpful i would watch it after i if i like the memo um i would not watch it

SPEAKER_373: unless i like to know all right dave do i get to come now sure i mean you're here so of course where

SPEAKER_300: where is it happening i do it in napa um this is the sixth year i've done it i remember the seventh

SPEAKER_43: i just did it because my book angel came out and a lot of angel investors like hey i want to hang out and so we would just do this angel summit and it was originally i thought maybe we'll get 50 people together and then it's always been 125 which is the maximum most restaurants in napa will take uh so i've tried to keep it to 125 i got 70 gps already so i'm going to cut off gps coming and then i'm just going to have the other 50 slots be for lps and founders can't come to it and then service providers we let them come if they buy dinner so if they do a 25 or 50k sponsorship we give them one or two tickets and they just pay for the dinner whatever and so it defers a little bit of our cost

SPEAKER_44: if they want to do that so typically banks or law firms or accounting firms or whatever will you know they'll want to buy lunch for everybody and so it's quite nice um but i'm trying to figure out a way to do it that doesn't become overbearing because i don't want it to become like a bizarre and haggling and hard selling so i like the idea of like more activities hey we go on a wine tasting

SPEAKER_43: we go to cooking class you meet some people you meet some people at poker you know or some board games will be set up so you kind of more casually meet people is my goal you know what's interesting mark

SPEAKER_84: schuster did this for a while and it became so successfully stopped doing it he would publish the list of all the lps and gps that are going and people self-aggregate um that could be another

SPEAKER_00: potential solution yeah that's i will say i have found the less you can make it like a conference the better in my perspective i think the more you can just have people organically converse and get to know one another um i i think it's far more more valuable all right got it all right jordan you're

SPEAKER_44: in uh you're a fund of fun so you should come anyway yeah it'd be great to have you we're going

SPEAKER_388: to do a fund of fun panel so you should be on that panel like that panel so we're going to have three

SPEAKER_43: fund of funds give like a five to ten minute like hey here's how we think about the world and then have a roundtable discussion with the audience so i'm trying to have it be just five minutes ten minutes

SPEAKER_313: of like here's what i think is happening in the world so it's like low pressure presentation like it could be one chart here's what we believe and then the next person here's what i believe next person here's what i believe right now and then group discussion and then audience microphones

SPEAKER_94: passing it really worked out really well in the last time all right close this up david we went long

SPEAKER_24: well it's been another great episode of the liquidity podcast uh for dave mcclure jordan stein jason calacanis this is your host david weisford thanks for listening