SPEAKER_00: the amount of cash being invested in pre-seed and seed is now at a 13 quarter low and the number

SPEAKER_03: of deals also has come crashing back down i think last 10 years everybody just went crazy lps went crazy they forgot that there's a j-curve managers deployed so quickly companies raised very quickly spent too much money too fast without any new information new milestones looks like we're back

SPEAKER_07: to sort of normal way of doing venture and this is i think the the danger of how attractive venture capital can be we never seem to learn our lesson or we forget it after 10 years people get too

SPEAKER_09: excited they put too much money in and it breaks everything this week in startups is brought to you by

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SPEAKER_00: in startups today we're thrilled to have raja dodala on the program he runs venture and growth at churchill asset management we'll hear a little bit about churchill in a moment but we want to talk about the vc world and exits and how capital is being deployed raja welcome to the program thanks shake

SPEAKER_21: out thanks for having me back yeah let's get right into it a bunch of data that will just level set with the audience let's start with the deal value uh in 2023 this is the national venture capital association and pitch books data that we're showcasing here and look at the number of deals that

SPEAKER_03: occurred in 23 versus previous years and this is a quarterly chart what we see here is that the deal count is sort of down from the craziness of 21 and and 22 it's down but it's sort of back to what

SPEAKER_05: what i think is sort of a normal pace and normal amount of financings i think we're reverting back to

SPEAKER_24: our average 3 000 deals a year occurring whereas at the peak we we broke five thousand you know four

SPEAKER_26: or five thousand deals going on per quarter yeah for a quarter that's a lot of deals uh and the deal

SPEAKER_16: values are what we see in the blue bars so the value of those deals rocketed up to looks like a almost a hundred billion deployed 80 billion at you know the peak there and now we're back down to you

SPEAKER_21: know the 40 billion every quarter being deployed in something around 3 000 deals so the madness is over

SPEAKER_07: we're back to what is normal let's go to the next chart here this will just show the yearly and so

SPEAKER_21: we abstract this on a year it becomes even more pronounced what do you see here in the yearly chart

SPEAKER_03: of deals and the volume of deals in terms of dollars just back to pre you know pandemic levels it's still

SPEAKER_34: a little bit elevated if you you compare it to 2015 2016 but just generally back to revert back to

SPEAKER_35: the main i think yeah we're we had 170 billion in deals in 2023 obviously even though the number of deals has come back down uh looks like 15 000 deals for the year and we were averaging in that

SPEAKER_00: 2014 like 12 11 12 000 deals so it still elevated the number of deals and it should be growing venture grows uh capitalism grows so there should be some growth typically yeah yeah i mean definitely this is

SPEAKER_34: probably you know ai you know round sizes the valuations and round sizes are quite elevated and that

SPEAKER_35: probably explains the deal value so this is where where you can start to get a little bit more granular pre-seed and seed deals here uh this is q4 pre-seed and c deal value slumps to 13 quarter low so the

SPEAKER_21: amount of cash being invested in pre-seed and seed is now at a 13 quarter low as of q4 this is q4

SPEAKER_00: 2023 data that's come in and the number of deals also has come crashing back down so when you look

SPEAKER_43: at this overall raja a healthy thing right very much so too hot yeah yeah very much so i think last

SPEAKER_03: 10 years you know maybe seven you know it's just everybody just went crazy lps went crazy they forgot we as i said they we forgot that there's a j curve managers deployed you know to quickly companies raised very quickly you know spent too too much money too fast without any new information new

SPEAKER_05: milestones looks like we're back to sort of normal way of doing venture and this is i think the the

SPEAKER_07: danger of how attractive venture capital can be when venture capital is a boutique industry when we're doing a small number of deals when things are concentrated and we don't have venture tourists coming in yeah people plowing money into venture because they get excited about it when we don't have entrepreneurial tourists people starting companies who you know hey they might have been a great cmo a great cto a great vp of sales but then they get the ceo slot maybe they're not cut out for it right and the talent gets spread a little bit thin you know you get a little spreading the peanut butter too thin and then you don't have this you know talent so on both sides it gets a little too loosey-goosey and it feels like this keeps happening in venture every couple of decades whether it's

SPEAKER_35: dot com web 2.0 now with this you know 14-year run-up we had i guess what we're going to call

SPEAKER_07: the zerp era all three of these we never seem to learn our lesson or we forget it after 10 years

SPEAKER_09: people get too excited they put too much money in and it breaks everything yeah no it's true i think

SPEAKER_03: you know even though there's a lot of data that suggests that work at least some of the industry is back to sort of normal art you know sort of boutique way of doing things but if you look at ai jcal i think there's probably still some of that behavior still sort of people using ai sort of as a there's a cover to still do that brian singerman i think was on your podcast he was at a conference that i

SPEAKER_40: was uh at up front a couple weeks ago he basically said ai is uninvestable and his thesis is why

SPEAKER_03: because evaluations are too high no i think his thesis is a little different i think the way they do it at founders fund they're you know they like to be non-consensus they think there are it's a completely consensus investing in ai so he he feels like for him it's completely uninvestable but from from where what we see i think some of the reasons why even though the deal count is down the valuations are still record high for seed and pre-seed even higher than 2021 and 2022 or round sizes are also

SPEAKER_44: having budged i think that's probably a a function of ai and let's pull that up here so this is where

SPEAKER_35: we can start to get super granular we can actually look because we have some good data here now pitch book data is not perfect and the nvca's data nobody's data is perfect in this regard but it does show a decent trend carta also releases some good data crunch base releases some good data and the fine folks at tech crunch so you can kind of triangulate this data and it all kind of will bring you to the same place here this chart we're looking at here these two charts median pre-seed deal size

SPEAKER_07: remains the same as 2022 so somewhere around 2019 we started to see the valuations of these um the deal size rather how big pre-seed deals were started to climb in other words more cash was given to pre-seed companies so pre-seed company to level set here it's typically a two three person company two or three founders building a product yeah we would agree yeah i think so i think you know uh

SPEAKER_03: use 600 000 is what uh looks like pre-seed you know that used to be you know just a couple hundred

SPEAKER_02: thousand um back in 2013 and that's a 3x um increase and that hasn't budged and so when you look at this

SPEAKER_07: this means founders at the pre-seed select founders are getting a larger dollar amount and

SPEAKER_35: um i am still seeing founders raising 500k so it is quite normal to see a 500k around i suspect because

SPEAKER_34: these are averages i mean if you look at the 75th percentile it's like a million and a half um you know at the top end it's like a million and a half are you are you seeing that uh million and a half

SPEAKER_07: see a ground i guess once in a while we will see somebody break out in a pre-seed and do a million and a a half what to me is shocking is then we have seed deal sizes which is the second chart on the right

SPEAKER_35: and again those four lines we're looking at are 25th average median 75th percentile and when you look at that 75th percentile i mean you're talking about raising 5 million which to me is a series a

SPEAKER_72: no i think you talked about this in other episodes i think the seed is the new series a

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SPEAKER_28: conditions do apply what should a startup have demonstrated in other words what risk has been

SPEAKER_07: taken out of the investment at pre-seed when there's let's say three founders versus seed we know when maybe there's three founders a couple of employees and maybe a products in market how would

SPEAKER_35: you define these two because this is yeah kind of a sticky issue right so there's some of the best you

SPEAKER_03: know see you know precede seed managers that you know we have in our portfolio when i ask them this question and and they say the difference is used to be especially 21 and 22 just a powerpoint deck and you know the founder an idea uh if it's especially a a second time founder you know no questions asked you can get a half a million bucks now you gotta have a product and even maybe uh a pilot you know if it's enterprise maybe a early pilot or two for seed um a real contract like a real customer or two um

SPEAKER_44: with some real traction and revenue uh is what they're looking at yeah so precede just so we're

SPEAKER_07: clear here the definition would be a couple of co-founders they've got a proof of concept a demo

SPEAKER_85: and maybe somebody you know beta testing the product they may not be paying they could be on a pilot but

SPEAKER_07: there's somebody giving some feedback whereas previously precede would have been the friends and family round i would have defined preceding friends and family as the same angel yeah angel we're just

SPEAKER_85: passing the hat a couple of folks and an idea a business plan a mock-up but because it's easy enough

SPEAKER_07: to build products now people kind of get the prototype done then at the seed stage definition is you got

SPEAKER_35: paying customers uh somebody took out their credit card and paid for it and maybe you can even start to talk about growth maybe they got 12 weeks maybe they got 24 weeks of people using the product you can actually maybe dig into the engagement stats and see who uses a product every day who uses it every week who signed up but stopped using it and so maybe everything just has moved over to the left one

SPEAKER_26: you know we're looking at here is actually uh seed and series age seed and series a deals going on here

SPEAKER_07: is another part of this the attractiveness historically of the seed round and the pre-seed rounds has drawn investors down gps are saying you know what series a is too competitive i'm up against

SPEAKER_26: sequoia craft whoever uh light speed you know pick a firm and kleiner they're all you know battling it out for the series a maybe i don't want to get in that mix the seed stage and the pre-seed certainly

SPEAKER_21: there's five to twenty people in the round i just need to secure an allocation i don't have to be the

SPEAKER_03: lead i don't have to join the board yeah you know it is i think you also said another sort of key word there is the lead so where we we we see is two places that are super competitive one the lead position at seed stage you're a seed firm um then you're trying to sort of you know you started out as

SPEAKER_44: a 20 million dollar sort of firm and you sort of graduated you raised you know raised fund three

SPEAKER_02: now you have 125 and a million dollar seed fund and now your portfolio math requires you to get some ownership and a lot of times lead and they're super you know some of the multis the platform you know funds are now sort of wanting to lead seed stage deals and they want 12 14 15 and that that's

SPEAKER_03: getting very competitive and then series a obviously is you know as competitive competitive as ever and in terms of metrics um used to be you know yeah some early product market fit you know a couple of customers that are real now they're looking at customer cohorts are there similar customers you know more than three four you know contracts that are sort of similar meaning that the product sort of is that you know hit you know sort of popularity with a segment of customers so a little more predictability

SPEAKER_97: might be a way to say it yeah so you got your third customer and they look like the second who

SPEAKER_35: looks like the first and now if you got those three you can just extrapolate from there the next 300

SPEAKER_101: and then on to the next 3 000 and 30 000. if you have a sas business that gets a 30 000 customers

SPEAKER_07: you know at a thousand to 25 000 per year you got a real business on your hands so that really is what i've learned investing is about the price goes up the valuation of the company and your ownership goes

SPEAKER_85: down as the founders figure more things out and risk is taken out of the business yeah you get more

SPEAKER_07: cards to build definitely yeah and so if you're pre-seed you have no customers valuation is going to be low single digits now you got three customers all of a sudden your valuation starts to get towards

SPEAKER_35: high single digits that's right now you start getting predictable now you've got an eight figure your valuation and then if it's year over year predictable you know you're in year three and you went from 100 in year one to 500 to 1.5 right guess what now you get to have that 50 million dollar valuation and qualify for the series a right and so this is where founders i think i don't know this

SPEAKER_21: is your experience if you're a founder and you're aggressive you always want to get credit for the next level of work maybe work you haven't done yet yeah because you're aggressive and you want to be recognized right and this is a hard i just had this come across my desk desk king slack had a company we liked at a founder university our pre-accelerator we offered them to come to the accelerator 125k for seven percent just like everybody else my combinator 500 global tech stars launch all the same terms basically and they said you know what we got some angels to put in at let's call it seven eight nine million and so would you put the 125k in at that level and we would say you know what maybe we'll wait for you to get to 10 customers 20 customers yeah because you don't have paying customers yet so you know and that just takes discipline we might like the company but you know they're that's your

SPEAKER_03: typical entry point is it not jason you know your accelerator is kind of kind of where you you try to

SPEAKER_118: get in and sort of build a portfolio and then sort of double down and the sort of the winners that that's

SPEAKER_26: yeah so this is like i think a great pivot point for us which is portfolio construction and so maybe

SPEAKER_121: just to level set with the audience because we kind of got right into it how do you invest who do you invest in and then what are your expectations and then i want to jump into the exits chart and then go

SPEAKER_03: into portfolio strategy yeah so the way we think about it is i mean you had a couple of really interesting contrasting lps on your on your podcast you had michael kim a sort of you know early stage pre-seed and seed um sort of fund funds yeah fund funds concentrated you know they take a a big chunk of the of the funds and then you had david from vencap um sort of very concentrated 12 um sort of platform funds just terrific 12. that's terrific you i know you kept trying to get him to tell you that which which 12 and he wouldn't you know the way we're probably somewhere in the middle um the way we think about venture is it really like three products in there uh three asset classes if you will pre-seed and seed is sort of a different risk profile difference you know stage of the company um really company creation uh stage and then you have sort of series a through d that sort of really used to be sort of what used to be called venture uh that's why i think pitch book still calls it early stage series a and then sort of post series d through ipo sort of growth stuff we play in the first two uh pre-seed and seed is sort of one cohort and then a through d and the way we think about our own portfolio construction is series a through d we think you know on a risk adjusted basis a is probably the best point of entry for lps so because of that we you know 55 to 60 percent of our total committed dollars going into so that they go into series a through d and the way we select managers there is very much like david um we're sort of concentrated eight to eight you know say 10 uh approaching 10 now and we'll probably stop there and so those 10 managers you know as long as they're doing well according to the way we think about you know investing they'll be our sort of more key sort of names in the portfolio then seed and pre-seed you know according to the historical data returns are higher in precedency and so you know there's alpha there but also it's risky and it's volatile because of that we we sort

SPEAKER_44: of have a long tail of 20 to you know now approaching 25 smaller managers um smaller for us is anywhere from 25 to sort of the top end maybe you know top out at 100 110. total fund size right

SPEAKER_131: yeah total funds that means you like to put three to ten million dollars into each of those three to

SPEAKER_132: ten we like you know anywhere from five to fifteen percent of the fund perfect so 25 if it's a 25

SPEAKER_09: million dollar fund you might put in two two and a half you know two and a half you know and we're

SPEAKER_03: willing to do that and a lot of the sort of institutional investors of our size don't like to we see a couple hundred to three hundred funds a year it it takes a lot of work sort of sifting through you know what is that person's comparative advantage why are they going to get three four five seven percent ownership but you know seed and pre-seed are they going to be able to help and graduate etc so we we think some of them won't make it some of them won't graduate to fund three and four but we think it's important to play in that space because that dollars wise about 35 to 40 percent of our dollars kind of go into that space but it's a long the seed and the pre-seed long you know and then we like to you know just like you know you like to to sort of layer in additional capital in sort of outliers yeah we we sort of have close relationship religion you know with with our managers and we like to do co-investments you know sort of post product market fit you know reduce the duration of the holding period potentially lower fees a little lower risk these are companies that we you know technically will know beforehand and where you might see this company in a seed stage

SPEAKER_35: and you watch one of your series a funds invest in them and now they're at series c or d they're you know maybe projected to be two to five years off from an ipo yeah and you can put in an

SPEAKER_03: extra 10 million or 20 million into that one deal we'd even do smaller uh what we like to do is you know we want to make sure that it's easy to make room for us um some of these rounds you may not there there may not be enough room for 10 million but we're willing to do in a three-year period we'll

SPEAKER_05: probably do 25 to 30 of these project some of them would be one to two one to five million range and more often than not more than one firm in our portfolio will be part of that right you know at

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SPEAKER_35: switching to mantle right now yeah and so you then get to have that inside information you've got comfortable with the founder you've reduced massive amounts of risk you maybe nothing's guaranteed of course but no no you may have reduced 60 70 80 percent of the risk they've now gotten to 25 million 50 million in revenue and it's a straight shot to 100 or 250 million in revenue which is when ipos i

SPEAKER_00: think can be considered now 250 million something in that range would be uh the floor for an ipo i

SPEAKER_93: think in today's market in the us obviously in other markets you can you can go out with 10 million

SPEAKER_03: in japan or yeah it's even it's interesting the you know we can go into it uh you know exit values are

Chamath Palihapitiya: really super interesting everything we do in venture is predicated on the money coming back at some

SPEAKER_35: point yeah and you can have great periods where founders and lps and gps want to hold their position because things are growing and they have long-term greed airbnb is growing coinbase is growing uber's growing doordash is growing you know they would just stay private longer right stay private longer

SPEAKER_153: was the move but then we saw airbnb uber coinbase doordash uh you know get out and eventually great ipos that were a little bit sticky and it was a little choppy at the beginning uh maybe they were just overpriced relative to where they were at but here we go maybe you could describe what you see

SPEAKER_03: in this chart this quarterly chart of exits just to put it into perspective i think the narrative is that exit about you know exit environment is really tough which it was but if you look back you know some of us have been around a while the exit value was low in total 2023 exit value is about 70 you know 68 you know 70 billion something like that down from 800 billion almost in 2021 and that 2021 exit value

SPEAKER_44: is completely bonkers it just never that that never happened before yeah um that's a complete anomaly

SPEAKER_35: and that's probably never going to happen again i mean you know we did have that dot-com era you know a bunch of people got out so you did have a spike there as i like to tell people fortunes are made in the down market they're collected in the up market right a lot of what we saw in this crazy 2021 era were companies that 10 years earlier 2011 were invested in by folks whether it was robin hood uber doordash coinbase you know the companies who went public and then i guess m a being turned off in the eu the uk and the u.s on and everybody just sort of putting the kibosh on m a that means ipos is

Chamath Palihapitiya: the only way to go right uh and we see something like the adobe figma deal get you know that was 20 billion that should have been consummated some here maybe in 2023 somewhere and so that 20 billion would have popped up one of these quarters right that's right significantly quarters it would have come back in

SPEAKER_137: terms of lp dollars back in you know in the system but what's interesting though jcal is that as bad

SPEAKER_03: as 2023 was the total exit value about 70 billion that's not completely too far off you know if you look at 20 you know 2013 2014 15 it's typically around there you know it's just 21 you know 22 or complete anomalies and also the 87 of all exits this is last 10 years worth of data starting in 2013.

SPEAKER_168: 87 of all exits are less than 100 million dollars right it really is the power law at work

SPEAKER_170: correct most of the exits you're just getting cash back or yeah there's a huge page the preferred

SPEAKER_35: stack right gets paid back but nobody's really popping champagne corks here except maybe pre-seed

SPEAKER_153: people who invested at 5 million it exited at 100 million 50 million yeah maybe they got a 10x 5x

SPEAKER_164: it's okay yeah but it's not a 50x or 100x which is really you know we need to be hitting 50 and 100x

SPEAKER_03: hits uh you know in our portfolio and this is one of the reasons why i think we have 20 you know 20 odd firms that are 25 to really 50 to you know 110 million range i just did some quick math if you're a billion dollar fund and if you want to do 3x dpi net in 10 years that means you have to create about 4 billion dollars worth of exit value in 10 years um and that's about 14 15 percent irr um

SPEAKER_168: that you know that's not easy to do it's double the stock market so if you parked your money in

SPEAKER_35: qqq or right whatever s p vanguard fund you you would hit seven or eight historically and so when you put that four billion there you got a four billion in exit value because a billion is going to be management fees and carry correct then you got three billion left net to your lps to hit that

SPEAKER_07: if the billion dollar fund had 50 bets of 20 million and that 20 million bought 15 got diluted down to 10 that means you have 50 companies you own 10 in that's right that means to hit the four

SPEAKER_45: million dollar number one of them has to hit 40 billion dollars so in the last 10 years uh jacal

SPEAKER_03: the number of exits above a billion are 300 that's it so now do the number of exits above 10 billion you

SPEAKER_182: can you can you can almost count them on one hand you got snowflake you got uber doordash yeah about

SPEAKER_72: 5 billion is like 55 in the last 10 years so i mean they're incredibly rare very rare and that's why

SPEAKER_03: it's really interesting you know venture sort of market um there is you know smaller firms that are still somewhat doing tradition you know if you're a hundred you know again math on 100 million you know 100 million dollar fund to do 3x net you'll have to create total exit value roughly 400 million i mean

SPEAKER_34: that's you know i can see a number of paths to doing that you don't have to you know you don't have to

SPEAKER_35: hit a billion dollar exit at all well we could do the same math here let's say you own on average five percent at exit not as much as the other firms five percent at exit if it's a billion dollars that's 50 million and so here if you were trying to you know if you hit a company that hit five billion and you have five percent of it okay you know now we're starting to talk about a you know a decent

SPEAKER_03: return there uh well the median exit is like 87 million yeah um even if you had a few i mean you know if you even if you had a few of those i could see a you know a hundred million dollar

SPEAKER_44: fund getting to a 3x net without even a billion dollar exit at all whether you've got an idea or

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SPEAKER_35: is the math i have learned and studied um and so let's just pull up also the yearly chart here and then you had a question for me about portfolio construction i have an update on that and i can get your feedback as an lp and a gp which is you know one of the reasons i do this show is to for me to get smarter and you know having these conversations will make you smarter there's that crazy peak 2021 you got almost two trillion dollars in exits uh it's 800 billion two thousand yeah it was two thousand exits and what's the dollar amount there where's it 800 billion almost 800 billion it's incredible

SPEAKER_85: when you think about 800 billion like whoa yeah now it's important for people to understand this is not the total value of the companies this is the value of the equity owned by the venture firms

SPEAKER_35: correct the majority of the equity you would think 50 40 actually maybe it's you know a large chunk is

SPEAKER_199: owned by the founders in the team that's right that's right so if lest anybody think oh there's

SPEAKER_85: a hundred billion dollar ipo for airbnb or uber oh the hundred billion goes directly to these numbers

SPEAKER_21: no about half of it goes to these numbers in all likelihood um and then it just plummets which is just incredible to show you what happens we went down 90 percent in terms of the exit value the number of

SPEAKER_00: exits went down 25 percent right 2 000 to 1400 so the 30 or so and then it's going to exit values yeah

SPEAKER_203: i think the exit values are down but i think you're right the reason that number looks high like higher

SPEAKER_207: than 2017 there's a lot of seed and pre-seed you know stage exits they didn't really return a whole lot of money acquires in some cases and this is what people don't understand maybe you could explain

SPEAKER_164: and in aqua higher the dirty little secret of those transactions yeah definitely you know a team you

SPEAKER_34: know you quickly decide that they you know there's no viable path and a a a facebook or you know meta

SPEAKER_02: google or you know you know something you know apple you know someone acquires them just for the talent

David Friedberg: and then if there was 20 million put into that company let's say the company gets bought typically for 17 maybe if you're lucky or it might get bought for five million you know and you know that

SPEAKER_07: five million might get carved out two million to the employees three million to the pref staff which

SPEAKER_35: means whoever the latest investor was who put in five million gets their three million gets all of

SPEAKER_153: it everybody else gets washed out that's right and these are incredibly frustrating um sometimes but you it's part of like understanding what happens in ventures you got to just keep it classy let the aqua

SPEAKER_35: hires happen nobody's really getting rich although i do get a little perturbed sometimes i don't know if you've seen this and zuckerberg was the master of this um he said at one point to chris sacca one of his startups he told the founders like screw your investors we'll give you guys like five million dollars in equity over the next four years and we'll give nothing to your you know investors we'll

SPEAKER_00: give you 500k just five million into the company they get 10 of their dollars back but we'll just give

SPEAKER_21: you all the equity which if you were the acquirer you do you want to give money to the vcs or do you

SPEAKER_151: want to give money to the to the people you know yeah they motivate yeah motivate them to work for

SPEAKER_21: them yeah so i have a simple standard when these aqua hires happen i just say give us the total value

SPEAKER_26: of the employee the the founder buyouts and the you know preferred stack just keep it like 50 50. i don't know something like in that range and you know it's like sometimes we'll see you know four

SPEAKER_85: million and one million i just say maybe three and two three million to the founders two million to the investors can we just keep it somewhere in the 50 50 range not that it matters but i just think it's

SPEAKER_35: better hygiene i agree this is where i think having republicans in office not to make this political um but when republicans come back in office which seems like it's a decent possibility for anybody who's terrified by the concept of a another trump presidency i might be one of them uh like how chaotic it's going to be the one silver lining for venture investors is m a might open up again and they might tell lena khan to hit the road and hey m a needs to come back because this anti-capitalistic approach is really frozen the market we need to get billion dollar to 20 billion dollar exits with the big companies medium-sized companies buying them what's your thoughts on keeping the market

SPEAKER_231: competitive while allowing m a is there any solution here no i think you're right you know so i think there's

SPEAKER_03: got to be some i think the pendulum looks like you know swung too far uh like amazon buying a robot you know vacuum cleaner i don't really i don't know what interests uh consumer interests are protected by that you're right i think one of the you know speaking about you know comparative advantage you know our country is is innovation and that cycle of people starting business and businesses and then getting you know liquidity off of that and then doing it again and again and again that's that flywheel no one does it better than us i think in the long run if we lose that that asset class i mean we just talked about how difficult it is to start a company to invest in a startup and underwrite that and you know seeing that through all the way to the exit it's really difficult and that's a you know sort of a key driver of our growth and if we disrupt that you know i don't know that that's a that's in the long-term best interest of our country but i'm not you know uh i'm not saying there's there there aren't legitimate competitive issues but it looks like the pendulum has swung like the competitive

SPEAKER_35: issues were probably both manifested by a series of three acquisitions youtube by google instagram and whatsapp by meta aka facebook if you look at all three of those none of those would have occurred under lena khan right hard they would have been stopped now if you double click on those i think youtube probably would have failed i think they would have gone out of business they were unfundable they had a multi-billion dollar lesser significant chance youtube would not exist if it had not been bought

SPEAKER_175: instagram and whatsapp instagram bought for a billion whatsapp for 19 billion i believe for the two

SPEAKER_35: no yeah so if you look at those two i think there's a good chance that instagram would have been worth 25 billion at ipo and today would be sitting at 500 billion 250 to 500 i think the distribution proved

SPEAKER_02: to be the really more valuable in that case both google and you know facebook's case you know than

SPEAKER_03: the product and you were absolutely right to to argue sort of the other side of that i think as a result of that i think we have three four five sort of you know i think the five largest companies in the world are american um you know they're tech companies and do we want that as a nation i think we do so yeah uh you do do we want the you know chinese uh companies to to have to to have that or american companies that you know i work for american companies i think there has to be some balance it

SPEAKER_35: it seems to me that the balance um is not quite there yeah i mean if you look at the top 25 companies the companies that are not american on that list by market cap lvmh french aramco uh saudi obviously uh and then you got a handful of the alibaba's uh and taiwan semiconductor which would be chinese or taiwanese you know and i guess by dance is still claiming they're claiming they're singaporean maybe

SPEAKER_07: i don't know where they're down where they claim to be domicile i think we all know right so in one way the instagram founder the instagram founders and the instagram investors would have been better

SPEAKER_26: served if lena khan had blocked it and i know because ruloff did that deal at uh sequoia man

SPEAKER_247: that would have been incredible so let's start at the top here oh for sure i heard i forgot about

SPEAKER_35: yeah so microsoft apple nvidia saudi aramco two trillion yeah that's the so number four oh eli lily has raced up the charts because of uh zap one yeah so number four number nine and number ten yeah

SPEAKER_164: those two raced up um yeah visa tesla jp morgan yeah it really is um a challenge actually when you

SPEAKER_07: think about it because it would have been really nice to see instagram beating facebook in the market now

SPEAKER_35: um and that would have been stopped by lenicon so you know it goes both ways i think for lps and vcs if uber had been bought or airbnb had been bought you know you'd be sitting here with probably a 10

SPEAKER_21: billion dollar 20 billion dollar exit as opposed to whatever they're trading at now 100 150 billion

SPEAKER_63: this is the thing about being being patient i made more money on uber even after i had sold a bunch of

SPEAKER_64: my shares early in you know secondary transactions at 30 or 40 a share and that took 10 20 10 11 years i

SPEAKER_85: think from seed to eggs to public and then if you look at the public four years i made much more money

SPEAKER_26: off of the last couple of years as a public company going from you know 20 to eight dollars a share than i did in the first one so those last doublings can be very very material i'm hoping that's the

SPEAKER_121: same for robin hood which i've held on to my 100 of my robin hood shares i'm hoping that works out let's talk about portfolio architecture and how you what have you seen that works really well and when you're evaluating this portfolio construction what are you looking for at the seed stage series a and late stage what is and explain portfolio construction generally because i think it is a

SPEAKER_85: evolving science slash art maybe a bit of alchemy i think it's a bit of both yeah yeah so let's call

SPEAKER_26: it this alchemy of portfolio construction everybody's got their own views on it what are your views yeah

SPEAKER_03: so from where we sit um so let me first sort of address sort of the fund of funds you know people that invest in funds primarily i think what's been one thing that's sort of different you know it feels different this time around um sort of overhang from zerp is fund sizes have gotten bigger i mean some of them have come down a little bit but not really um there is you it it occurs to me that there's two different products um in the market today there is the mega funds and there's sort of the smaller funds i'd put the smaller anything under like a billion i mean even under a billion there's a seed that are smaller but it occurs to me that they're really at this point they're um really created for different kind of lps um these mega funds really are for people that are to your point earlier as long as you're getting 500 600 basis points on top of you know what an s p 500 you know you know a seven percent return it gives them a different kind of exposure different stage you know different you know class of companies and they're not really you know nobody has said this to me directly but my inference is that they're not really trying to do the multiples game they're not trying to do a 3x net it's more of an absolute dollar return as long as you know they're not going to lose money and they're probably not going to underperform the smp they're going to be you

SPEAKER_28: know you know so they literally might be going for that you know seven eight nine ten percent and then

SPEAKER_175: hoping hey well maybe i get a lottery ticket on top of it and i do 15. there may be you know a data

SPEAKER_03: you know you or or you know an uber you know once in a while and that might put them to 15 ir but it's really you know if i have to guess uh on a 12 you know now that j curve is back it's going to take 10 to 12 years for the funds to resolve themselves it's a 12 to 14 ir game and that may be okay for a certain class of lps but you know this i think lps are trying to figure this out and if you're you know like us we're uh we care about multiples um you know we try to you know hit at least three to five x net not all of them will do um so we'll cash in cash out i put a dollar in i want three four or five

SPEAKER_35: back after all the fees after all the carry expenses i give you one i got to get three back would be

SPEAKER_258: amazing to get four or five in 10 years 12 years whatever it wants to be let's say 10 years 5x is

SPEAKER_03: 18 ir yeah and that's hard to do just with funds so you have to do a little bit of direct investing sort of like i was describing earlier you gotta put some additional money into some winners then you can target 18 you know reasonable into to get 18 and that's what you know i think you know a certain class of lps you're trying to do and and because of that i think we're focused on finding smaller managers seed and pre-seed where we can figure out a way to underwrite them which is not easy when we

SPEAKER_272: think about portfolio construction let's let's go to the seed uh most seed when i got into the business

SPEAKER_35: you know 10 million dollar fund 100k yeah 100 investments yeah hope you hit a unicorn luckily in my first one i did 109 names hit four unicorns worked out well 5x on paper yeah one point x already dpi i think you know somewhere between those two numbers is where we wind up or maybe things grow maybe it becomes six or seven who knows right we still got time so let's talk about then the critique

SPEAKER_153: of seed funds is hey they don't have reserves etc we did a little analysis on my first fund four unicorns in that fund robin hood superhuman density and calm yeah we looked back on it we knew

SPEAKER_277: three of them were unicorns it was just what did you know like when did you know series a series b

David Friedberg: it was obvious that they were the winners in the big outcome you you don't know how big but you know

Chamath Palihapitiya: that they that they're going to be large companies exactly it was very clear based upon certain signals mainly growth of the business you know actual fundamental growth of revenue and users

SPEAKER_35: um with density it wasn't as clear because they were in the product it was like the hardware product so they were deep in product discovery mode but you know it's pretty clear with those three we didn't

Chamath Palihapitiya: place a second bet if we had placed a second bet on any one of them we'd be a 15x fund 10 15x fund if

SPEAKER_21: we had done two it would have been a 20 25x fund that's informed everything i do now same thing with my sequoia scouts i did about 650k deployed returned 120 million hit three unicorns in about 18 investments

SPEAKER_35: one every six never going to happen again but you know uh got lucky and so i guess how do you think

SPEAKER_21: about how much should a gp how much should a fund keep in reserves to make those second and third bets

SPEAKER_123: at the seed state yeah so you i've talked a lot about this with our managers um one thing that i've

SPEAKER_03: sort of learned to appreciate in venture you know see preceding this doesn't matter where is there's number of ways to get to there's a number of paths to to get to three to five x but it's hard for me to see how you can do that if you didn't put in more money into your winners i mean you know we we can debate whether uh you're going to be consistently be able to identify those you know those winners or not um that's more probably art than science um i think i don't know who said this probably adam fisher at bessemer most of the value in a company is created in the last like 18 months before exit yep and you know some people are confident that they you know like in your case you kind of use you know you don't know how big but you knew they were big and you knew enough to put more money into those companies we intuitively think that makes sense but there are some that are adamant that there

SPEAKER_258: shouldn't be any reserves at all you know big mistake so uh i i think now based on being uh you

SPEAKER_35: know i'm deploying out of our fourth fund right now i have architected it now and obviously this is subject

SPEAKER_21: to change based on what happens in the fund 50 in reserves is is my best estimate now it could be 30

SPEAKER_35: or 40. yeah i can see more than 50 but i think i want to have the flexibility for 50. and so you asked

SPEAKER_00: like how we're doing it's actually interesting now based on portfolio construction i have the investment team aware of the portfolio construction on the front lines you know running the programs found university pre-seed accelerator and then our actual accelerator i have explained to them hey we need to

Chamath Palihapitiya: hit 10 ownership in you know like at least two dozen likely winners and then we want to get to 15 ownership in five definitive winners so i've really focused on this language likely definitively mentality

SPEAKER_03: i think you got to have that mentality in you know in we agree and as you've heard me say we like to do the same thing we like to layer an additional capital in the winners where we're able to do that

SPEAKER_164: yeah and so i had them give me the numbers yeah so i'll just share them with your broad strokes here

SPEAKER_00: it's kind of interesting um because every i mean we're deploying about a million a month right and we've already put about 11 million into 102 investments so on average it's 110 35 accelerator those are the 125 38 found university those are 25k checks 18 and about yeah looks like about uh

SPEAKER_110: another 20 direct investments so you know it's it's kind of where i thought it would be but the more

SPEAKER_00: interesting thing i've been asking them is how many of these did we make a second investment in and then how many of these are getting up rounds from investors who aren't us and i don't have that last piece of data but i do have a number of these companies where we have ownership i'm just looking at one two three four five six seven eight yeah nine ten so it looks like about ten percent of the

SPEAKER_21: companies wow very interesting in ten percent of the companies we made a second investment already and then this is ten percent and so we did and in those companies just ballpark looking at them

SPEAKER_00: our ownership percentages are uh 11 12 8.5 8.5 8.5 8.5 8.5 uh 11 14 and 14 percent and then

SPEAKER_21: five percent and seven percent so you know we've really done a great job of getting to that 8.5 to 12 percent number in what i think are the likely winners and then we would get diluted down if we

SPEAKER_00: don't take another pro rata to six or seven percent six or seven percent on exit 100 million dollar exit six or seven million 50 million dollar fund hey we start returning 10 of the fund with those

SPEAKER_80: what we would call singles and doubles yeah no i think that you got to have those you know you know base hits you know whatever you want to call it otherwise i don't know that you can get to you

SPEAKER_03: maybe you may be able to get to 2x without it um but i don't think you can get three to five you know four or five x you know without you know what you're doing you may discover that it maybe you

SPEAKER_34: need 50 percent maybe it's 40 maybe it's 30. um and but you know i absolutely agree with you uh unless

SPEAKER_54: i see something different evidence to the contrary i think that's a good strategy what i like about

SPEAKER_21: this doubling down strategy is it makes you a better full life cycle investor i started doing this j trading if you go to j trading.com i started publicly trading some equities i had a couple of million dollars in a like an account that was just uh like an um an index fund and i just started to actively trade just like one and a half two million and and shared the trades i might think of it on this very podcast because i wanted to be better at understanding the public market comps because i'm frequently faced now with exits where i personally have to make a decision do i sell or keep my shares in square or newbank or doordash or uber robin hood so i got to make a decision personally do you have to

SPEAKER_85: become a public markets investor whether you like whether you like it or not you have to start making and also you have to make that decision for your lps do we hold rumble we have shares in rumble do we

SPEAKER_164: hold them do we distribute the cash what do we do boom and so this is you know it's not a perfect science

SPEAKER_60: what do you think we yeah we should do in our case uh you know we want uh we're paying you to be

SPEAKER_03: a private markets investor so the j-curve expectations uh as well as sort of what we're hiring you for is to be private market investors we prefer we tell our managers we prefer that as soon as your lockups um over um distribute you know the shares and we we usually do not hold it either um because my mandate is not a public you know mark i don't have the skills to be a public market

SPEAKER_177: investor so we we immediately liquidate yeah so that's i think the key is understanding your lp base

SPEAKER_35: and what they want we're yeah i think we're in the distribute the equities if we can it turns out distributing equities to a large number of lps is super complicated it's not it's not easy and in a lot of cases you just have to sell the shares especially if there's like people are getting three shares of something the cost of sending the three shares it's more more more yeah it is uh more than the

SPEAKER_153: cost of the or the value of the share so it's challenging uh there's no easy solutions this to

SPEAKER_35: me seems like the setup for what i think will be the best vintage of our lifetime perhaps or maybe second

SPEAKER_21: only to the the beginning of the zerp era boom when uber airbnb coinbase and that cohort got funded

SPEAKER_00: what do you think the next couple of years is going to look like and how do you think about it

SPEAKER_02: from an lp perspective yeah i think the reason i think you know so this vintage and next and maybe

SPEAKER_03: next two to three four years is interesting is um ai seems to be real uh the technology seems you know the advance seems to be real you know venture industry is back to sort of normal you know you know the right way of doing ventures more more boutique you know way of investing and there's pent up demand um for you know ipos and mna the dam's got a break at some point uh so there's definitely going to be liquidity you know coming our way i think the only thing that i can't figure out yet is there's going to be with ai there's going to be a period of disillusionment because people you know are overestimating the impact of ai in the short term one of the things that we do um that people told me that that's still different as an lp is you know i used to write software i grew up you know you know in a corporate you know setting um and i talked to a lot of cios and they can you know see so and they you know they have a lot of top-down pressure to do something with ai but um it's not clear what should they be doing like what should they be doing you know can they measure when the cfo comes calling can they can they show roi those questions are going to be asked um do the tools

SPEAKER_35: work are they proof of concept or are they ready for prime time like if you look at like writing blog posts or creating video creating images like maybe get you 50 of the way there 60 70 of the way

Chamath Palihapitiya: there but it's not 100 now in some pursuits like writing a blog post yeah maybe 60 is really great

SPEAKER_38: because you know yeah maybe yeah yeah but you know if you're making an image it's it's either it's done

SPEAKER_153: or it's not done right you can't take the image of the video 60 70 of the way there in my experience

SPEAKER_23: you might as well just start from scratch so i think that's part of the challenge here and it also

SPEAKER_03: seems to be that it's helping incumbents with distribution and making their products better um in the short term and there's going to be you know use cases where there's not any clear incumbents and we're going to find those but the sense that i get is that we're probably two three you know maybe four years away from sort of critical mass of you know new value being created

SPEAKER_02: so that tells me that you know uh maybe there's next three four or five vintages that you know might

SPEAKER_35: might be good so we're oh that's actually a really interesting way to look at it is yeah hey we're in this 23 24 25 vintage but then there'll be a 25 26 27 vintage maybe that's the one that actually

SPEAKER_03: hits your microsoft and nvidia you know you know you you or even snowflakes of the world you know you might be better position in the next two to three years where incumbents products are a little better

SPEAKER_177: uh well you know it's interesting you say that there was a this expression somebody told me early

SPEAKER_35: uh in my career in the dot-com era the first first guy up the hill takes the arrows you know and the next guy kind of like walks over their back there's no arrows left to be shot at you and that actually i watched that happen with web too you know there was a cohort of delicious my company weblogs ing friendster myspace they all kind of ran up the hill 30 million 100 million 600 million dollar exits but facebook and air b and b and uber you know they ran over all those carcasses and they built the truly

SPEAKER_21: lasting 100 billion trillion dollar companies in the space yeah yeah if you're a fund that you know

SPEAKER_03: you know you know a seed fund and your 100 million dollar seed fund and you have i don't know 10 companies that on your portfolio and the median entry price is 25 million at seed um we'll see if those are too early um and they'll be lapped by new technology maybe by open ai maybe a new class of companies maybe it's time before you know post the the the valley of disappointment before we come back

SPEAKER_243: um so the dip but it's definitely an interesting time to be an investor and to be deploying capital

SPEAKER_177: this is where time dispersion uh is super important maybe you could explain this concept and what lps

SPEAKER_00: expect from gps and why gps sometimes go too fast and they should probably pace themselves yeah yeah no

SPEAKER_03: that's important so especially for seed and precede uh you know it's a it's a key point of underwriting for us you know how have you deployed you know in you know 20 21 22 you know for uh for listeners i think time diversification is when you deploy a fund typically venture capital funds you deploy you know you raise the money and you deploy it in about three to four year time frame you know that's been that's been typical in 21 and 22 that changed some of them you know deployed 12 months and you know 18 months and 24 months when you do that what you're missing is you're going to miss economic cycles you're you're going to miss technology maturation cycles and um you're going to miss incumbents you know either failing or advancing so you're going to miss a lot of these variables that get you exposure to different class of companies and that's really important um in venture for especially uh early stage funds and you know the way we underwrite you know c stage ones is tell me what you've been doing in 21 and 22. what was your entry prices what were questions you were asking when they raise the next round um you're doing your prorata why did you write that check on what new information did you get new cards revealed to you or were you just piling on because everybody else is and those are really important questions that we're definitely asking that makes a lot of sense for me i'm just

SPEAKER_00: taking a note from my team uh for to look at uh how many deals we're doing per month i have the you know investment dollar and you know that can range from 500k in one month it looks like 1.2 um but on average it looks like we're doing about yeah just over a million a month no just under a million a month 750 or so and so i think this is really important um to when you when you have a fund yeah

SPEAKER_121: you should look at your monthly numbers quarterly and yearly now you may happen to see this month

SPEAKER_85: twice as many great companies and it's you know there's just some randomness there and you got to make you know 10 investments this month and then next month you make two you can't kind of control

SPEAKER_21: these things no so you have to be super thoughtful about it and you really have to be looking over your three-year strategy i think three years is a good number 36 months for the primary investments if you're doing in our case you know five or six a month you know over 36 months you get to 150 names

SPEAKER_33: in the portfolio doing seven or eight you get into 200 names in the portfolio i think for seed stage

SPEAKER_121: funds if you have an accelerator if you can get to 200 names and then invest you know meaningfully in

SPEAKER_21: the top 20 of that you know it feels like one in ten is a really good way to do it and then it's just

SPEAKER_03: really a matter of communicating right to that's the math you'll get better and better at picking those 10 or 20 you know as you you know as you go you know through vintages in our portfolio on the one extreme we have you know we're we're a large lp and khosla um they've done sort of quite well and they sort of stuck to what they said they'll do you know uh in terms of sectors and pacing and sort of getting the markets you know technology cycles right and then the other you know uh we have a a fund that nobody ever heard of uh here in dallas uh called dallas venture capital uh small 80 million dollar fund and they did the same thing they sort of go in at a million dollars in arr and and they work their ass off and they they help them get contracts with fortune 500 companies and they get them to 10 million and they hand it off to you know growth and they move on and they've done that very disciplined entry prices um discipline on technology sectors and you know you know deal uh sizes and and kind of what they do on the board and you know they both have credible paths to you know a top you know quartile uh returns and that's kind of what we uh try to look at i think it's really wise

SPEAKER_153: and how do you think about secondary sales and clearing your positions i have my own thoughts uh

SPEAKER_35: hard hard learned lessons here but we've seen companies go to zero that were worth billions um and just disappear overnight right ftx comes to mind other ones come to mind and then you know

SPEAKER_153: sometimes you have something like airbnb where if you sold too early man if you sold your whole

SPEAKER_21: position you'd feel really terrible so how do you think about secondary and working with your gps yeah

SPEAKER_03: yeah i've heard different lps sort of have different opinions on this and i have some that are adamant that they want their gps to write it all the way um they don't want them you know they don't want i i have sort of a different opinion on that it's hard to time the market and all that i'll grant you know people that it's really hard to know when when the top is but when you have um your liquidity i think this podcast i think is the series is liquidity podcast so liquidity is what you know the flywheel that you know what turns to fly you know we'll venture on that you know let's lps you know plow the money back into the ecosystem so we encourage our gps um we don't dictate how they do it but we encourage our gps to think about liquidity you know this is very common in private equity right so they think about sort of the return experience and liquidity from day one you know that may not be appropriate for a seed stage investment but they have to think about liquidity and set expectations with the founders if you're sitting on a few companies in your portfolio you think they're winners but it's okay to sell 10 15 20 percent you know take some chips off the table create liquidity for your lps and maybe for yourself and that's a great way to get to you know shorten the you know the j-curve a little bit i like it i like that exact strategy i always tell people 10 percent two or

SPEAKER_153: three times is a great way then if you go public and you own 70 80 or 90 percent of your original

Chamath Palihapitiya: holdings but you've paired it 10 20 or 30 percent you know you could have an lp who's like oh you know this 30 percent you would have been at a 18x instead of a 14 x for fun and you'd be like yeah or

SPEAKER_26: if it had gone to zero at least we locked in the first 2x for everybody i call it idiot insurance you

SPEAKER_21: know and like yeah just selling 10 20 percent if you are at we had you know we we locked in like maybe with palm where you know we we didn't have to sell but yeah still 10 twice i mean we locked in i think a 12 or 14 x for those investors you know who are in that specific spv and then you

SPEAKER_00: know for the fund you know some some nice returns maybe it was half the fun got returned i can't remember i think it was maybe half the fun got returned well we try not to be dogmatic just i think

SPEAKER_03: we try not to tell our gps how to do their jobs i mean as long as they're doing what you know what they're what they said they'll do yeah and their returns sort of back up you know you know the

SPEAKER_44: promises um then we try not to to be activists we're active but we're not activists i think it's smart

SPEAKER_35: you want to have a dialogue you want to trust them you're paying them for their ability to deploy capital and to understand those companies better than you do and return that's right the only thing that happens i do think is sometimes people don't want to you know send uh make the founders feel

SPEAKER_07: bad that you're selling shares yeah yeah the good news now is it's almost always a situation where the founders are coming to us saying hey is it okay if we sell 10 of our positions and we're like sure

SPEAKER_363: we're probably partially with you we'll send 10 as long as that's not to buy an airplane or you know

SPEAKER_97: whatever yeah you don't want to buy a house yeah they want to buy a house people 10 million or less no problem in the bay area because you pay your taxes you got seven million family yeah it's really

SPEAKER_35: you're not buying a second home or a plane uh you're not even getting a jet card so let's be realistic

SPEAKER_00: about it right it takes the edge off but it as crazy as it sounds to people who maybe are listening to this who don't have the ability to sell 10 million dollars in shares in something or you know have six or seven million in proceeds from sale after taxes it's still like it's it's not a giant number here in the bay area or new york or la it's it's a nice number it takes the edge off i like taking the edge off for founders agree after six seven eight years i think it's great because then they go long and they have any insurance and they come back and they start new companies exactly exactly i mean it's one of the great things bye rajah this has been amazing and we'll see you all next time bye bye