SPEAKER_02: In most cases, a smart person on your board who has real skin in the game and lots of experience and really cares about your success is like a huge asset.My board at Lattice was like amazing.They were like a part of the team.And in some ways, actually, they are... a longer through line than any execs you have.Even a long-tenured exec, I might have for five years or something like that.But Miles Grimshaw has been on my board for almost eight years or seven years.It's a long time.And there's a lot to be said for the consistency that you get there, for the outside-in perspective that you get for somebody who invested in your company, but also knows a lot about other companies versus the founders and execs are all in your own little bubble.And so...
I think founders should see boards.Hopefully, you know, if you can, it's like ideally it's like a secret weapon.It should be a positive, like a great board is a big positive for a company.
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SPEAKER_04: Welcome back to this week's Liquidity Podcast.With me today, I have Aparva Mehta from Summit Peak.We have Jack Altman from Alt Capital.And of course, we have Jason Calacanis from The Launch Fund.I'm your moderator, David Weisberg, co-founder of 10X Capital. Today, we have three exciting topics on the docket.Sam Altman gets another win.Calipers is leaning heavily into venture.And premium liquidation preferences are returning back onto cap tables.What does this mean for the startup ecosystem?
We'll end with the latest three investments from each of our guests. Let's dive right in.PitchBook is reporting that Reddit's IPO had a familiar winner, Sam Altman, whose entities hold roughly 413 million at the IPO price, which today is worth even more.Surprisingly, or perhaps not to those who know him, this is one of Sam's biggest wins as an angel, but not his biggest. Jack, outside of being a prolific founder and VC, you're also Sam's brother.What makes Sam such a good investor alongside being a great operator?
SPEAKER_02: There's a very similar skill that happens on the operations side and the investing side that I think obviously Sam is very good at, which is thinking very independently about where the world is going to go and then really betting behind that hard and being able to identify non-obvious talent and get people sort of assembled behind it.You know, I think that's like a lot of what both sides are about is having an idea that's like sort of non-consensus, at least for a moment in time and like getting a lot of momentum.I think that's like common to a lot of builders who do good jobs.And then I think on the investing side, if you're able to have, you know, big conviction in cases where the rest of the world doesn't share that same conviction, I think that's where you can do really well.
SPEAKER_04: And Jack, you're on your third fund, and you raised $150 million.Congrats.And while you're doing that, you're also growing Lattice at a $3 billion valuation.What about being an investor makes you a good operator and vice versa?
SPEAKER_02: Well, I think there's a lot that's different about the two.I think they are in some ways very different things.And so there's an overlapping Venn diagram with a lot that's different.But... One of the things that I think my Lattice journey helped me understand that I think hopefully I can apply on the investing side is it's unbelievably hard to build a big company.And I'm not even calling Lattice a humongous company.But to have even gotten to there, I'm like, man, there's so many hard decisions and intense sprints.There are so many execs that need to be hired and... replaced and there's so many hard competitive battles and it's such a long, challenging slog where an unbelievable amount happens each day.And I think you pair that learning from doing it with just you look at the math of venture and it's all driven by the huge companies.
And to me, what those two together say is it's so hard to... build these big companies and it really takes unusual talent and commitment and fortitude for people to get to the outcomes that drive the whole venture ecosystem.And to me, when you look at the great companies, you look at the really big companies of the last decade, but also just ever, those founders always seem to have some really special spike or multiple special spikes. And so when I think back to the early days of a company and investing in it, you don't necessarily need that founder to be one of the greats from the beginning.That's not reasonable, but you hope that you can see some dimension on which they might turn into that over time.
SPEAKER_04: Apoorva, you're an investor in AltCapital and other operator VCs.What makes you comfortable to invest into somebody that's operating a company full time and also a venture fund?
SPEAKER_05: We specifically seek out operators that are either running a company and investing on the side or just they once were an operator.And the pros, as Jack kind of alluded to, are pros. pretty easy for us to identify, you know, you have this skill set of a founder that can help, you know, where they're, where they're investing in a company, and they can help a founder with any number of areas, you know, that can be operational expertise that can be, you know, opening the doors to the next funding round that can, you know, be technical expertise.So, you know, the pros of that are very easy to identify of what, you know, an operator turned investor can can the value that they can bring to a company.What gives us the comfortability, I think, when we backed Jack's first fund, Jack was still sitting as the founder of Lattice, and his fund size was appropriate to his strategy, which was he could... dedicate 30 hours a week to alt capital back then, but still be the founder of his fund.And his fund size at the time was not necessarily leading rounds.It didn't mean to say that he wasn't helping founders.Of course he was, but it was a different strategy.
Today with Jack's third fund, which we're also in, it's a slightly different strategy.It expands on the network he's built over his tenure of investing.And his fund strategy now and his fund size allows him to lead rounds, but he's no longer the sitting founder of a company.We're really assessing a general partner's ability to source, pick, and win deals.And how repeatable is that?And a lot of what we're trying to assess is, does somebody's fund size match what the portfolio strategy is.So if, you know, Jack was the founder of a company, but leading rounds, but you know, we didn't, we wouldn't necessarily think he would have had the ability to do both very well.
SPEAKER_04: Jason, you're in 24 funds, how many of your funds are operators?And what are your thoughts on this?
SPEAKER_03: Yeah, it's a great question.When you're an operator, you need to have singular focus.And a lot of operators, CEOs don't have that ability to stick with an idea for 20 years.And they're better off doing a little bit more of an ADHD strategy, having their hands in many pies.I think this is why when you get a little bit older, and you start, you're in your 30s or 40s, being an investor is kind of like a cool thing to do, because you can, you know, talk to three or four founders a day and get the action without having to have all your eggs in one basket, you know, and not be able to sleep at night and grind it, grind your teeth to the bone.And so I'm not sure exactly how many are operators versus professional fund managers in, you know, for my family office, but I do want to point out just what an amazing story Reddit is, like to the founders, Steve and Alexis, and people don't know Aaron Schwartz, who tragically, if you don't know the story, you can look it up.But he was like the third sort of unknown founder because he was acquired into it.It didn't change in 20 years.
The site is just such a great place. lesson in when you have product market fit, to just lean into that and not screw it up.And if you remember back in the day, because, you know, Sam and I came up and same sort of the same cohort, we were both at Sequoia, both Sequoia founders at that time period.And Then we both were in the first class of Sequoia Scouts.He did Stripe.I did Uber and that same thing.And then we both did SPVs, which I think he did this.This was an SPV.And the ability to focus and not screw up Reddit is something like Dig.
Kevin Rose's company was considered like the more successful of the two. But they kept trying to change it.They kept trying to chase Facebook, make it better in some way.They just didn't accept slow and steady compounding growth.Reddit's 20 years old.Like how many websites, Craigslist, Amazon, Google, like it's a very small cohort that can exist and stay true to the original founding.So I think that's the first piece that I think is really important lesson for founders and also for investors. because you do need to be patient.And then just shout out to Sam and Jack, sorry that we have to ask you questions about your brother doing something that's kind of never happens, right?Never happens.
But, you know, having known Sam for a long time, like I said, he had looped, I had Mahalo, we were both part of that Sequoia fund, then we both became Sequoia Scouts, then he ran Y Combinator, I did Launch Accelerator.And then we both started doing SPVs.I did it with AngelList and then the syndicate and I think he just did his on his own with lawyers. This is a big lesson too, that when you have large ownership percentage, you know, it can become quite material.Back in the day when we did the Sequoia Scouts program, I think, you know, we owned fractions or percentage point basis points in Stripe or Uber. But then as you keep going, when you start earning 10% of a company, 5% of a company, whatever it is, and especially in an SPV, that is incredibly, incredibly powerful because that SPV doesn't have to make up for any other losses.So in Jack's fund or my fund, if you had a $100 million return or $150 million return, guess what?Now you've returned the fund, still no carry.Here, the carry is just deal by deal. And so this is not this is a very huge win.
I think for Sam, if he got a 20% carry on this, and it was none of his money.That's a nice payday.It's a great return.And he deserves it because man, the whole story of the extraction of Reddit is incredible.The fact that they were able to get this out of Condé Nast where they sold it too early.So all around, I give Sam a lot of credit and I give Steve a lot of credit for coming back and Alexis coming back and just shepherding this over the finish line.Because in 2005, 2006, if you told me Reddit would be a five or $10 billion publicly traded company, I don't think many people would have believed that.So it's pretty awesome.I mean, I can't say enough amazing things about what they did with that company.
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Visit devsquad.com slash twist.They're going to give you 10% off your engagement.Again, they're big fans of the pod.I know people who've worked with them.They've given them great reviews.devsquad.com slash twist.Go ahead, meet the team over there and get your project on track so that you can hit all these important milestones and change the world. I'm curious your thoughts on SPVs.And like these kind of deals, not being part of the venture ecosystem, and or the proper venture fund ecosystem, this could have been a venture investment, but instead, it was an SPV.Do you participate in those?
And how do you think about SPVs?
SPEAKER_05: I mean, we like them as part of our own business.We invest in companies, 30% of our portfolio is direct into companies or through an SPV, but then we also offer investors the ability to participate alongside of us.Not to put the spotlight on Jack again, but we have an investment in Lattice and then we have an SPV with investor capital.And like you said, it'll take a long time for us to be in the carry for our funds, but When you have, we've raised 15 SPVs with 150 million of capital, including Lattice, SpaceX, a number of other companies, Airtable, we can be in the carry sooner.So for us, it's alignment.We want to be aligned with the GP.So if a GP is raising an SPV, we want to see their alignment, that they're in the deal, in the fund, they're participating. It's not just spillover deal flow.Like, hey, I've got pro rata.
You can take that pro rata.And, you know, that's not alignment for us.We want to see a GP aligned in the company, you know, participating in that deal.And then all day long, you know, we'll invest in their SPV.We'll raise an SPV of our own.So the pandemic era of investing had the SPV market blow up, balloon.You know, everyone was doing, you know, tons and tons of deals. we've seen it slow down, you know, incredibly, I mean, both indicative of the market in terms of financing rounds happen, but even GP's willingness to, you know, it's an administrative burden, all of these, all of these different reasons, we've seen it slow down, but, you know, over, you know, 22 and 23, it dramatically slowed down, but
SPEAKER_03: That is the key issue is the administrative overhead.It costs about $50,000 to run these over 10 years.If you're like doing it properly.I think some people were charging 1525 K to do it.But when you look at the all in cost of doing this, you really need to set aside a decent amount per deal.And then you have to get everybody K ones.We've done 300 of these SPVs over time.And it is a lot of work to have 300 of them because you got to some people might do 20 deals. And now they've got to get 20k ones.And then is the company shut down or not?
Did they officially shut down?Did they say they shut down?And man, all of this stuff becomes massive administrative burden.So I do not recommend it is not for the faint of heart.But you do them too, right, David?
SPEAKER_04: Yeah.And quarterly updates become a pain.You know, you have a company that's giving you updates for three, four years, and then suddenly they go into no man's land.And then you have LPs asking you about every single quarter, it becomes becomes an administrative headache.Jack, you've grown your fund size over time to 150 million.How has Co-Invest progressed as a strategy for AltCapital?
SPEAKER_02: I've not been focused on them for a few reasons.One was like sort of a pervert mentioned, I've only been doing this full time for a short amount of time.And so When I was running Lattice, I was mostly kind of like an angel on steroids.I agree with everything from that discussion.And I think there's a great place in the world for SPVs.But one of the other tricks with them is it can be really hard for the founder to navigate them because... When a fund commits, when the partner commits, you know the fund is committed.And if a founder's fund says, we're investing in your company, they're for sure investing in your company.Versus there's a little bit of a dance that has to happen where when somebody says, I want to invest in your company through...
an SPV, they need to get interested.They need to have the LP backing behind them.And so you're kind of triangulating three parties at once.And so I actually have had that experience as a founder in these later stage deals where that dance is a little hard too.So there's a lot around it, but there's a good place for SPVs because there's certain moments when there's a special relationship between the founder and one of their maybe existing investors or just somebody they know who doesn't typically invest in that stage.And I think that's a special purpose that makes a lot of sense.I just think they should be used either few and far between, or by GPs who have extremely strong LP bases who can manage that whole relationship at some amount of scale.
SPEAKER_03: That is such a good point, Jack.What people don't realize when you do an SPV is you're writing a deal memo, you're sending it to these LPs, and then you find out how much money you've raised.And so you asked for an allocation.And so having done so many of these, we were like, we'll take 500k.They're like, what if it goes over?I'm like, then it's up to you.If you want to take more, and we have a pretty orderly process.And it's somewhat predictable.Now we have 11,000 members at the syndicate.com.
We left AngelList after a while, we're just a little bit too big to do it through there.And, you know, giving them a percentage of the carry makes no sense. But when you think about it, you're also then you might have 100 people on your cap table, 200 people on your cap table under that one SPV, which can also be a burden for the founder that, you know, you might have somebody in there who's a jerk, you might have somebody in there, who's, you know, wants a friend, and then they're calling some Founder like jack up and being like, Hey, can we hang?I'm in San Francisco.I don't know who this person is.I'm your investor.Yeah, I own shares.And so you know, we had to bounce in the history of 300 deals.I think I've probably uninvited 25 people from the syndicate.
I or I did not invite them to continue with us.Because I was like, this person is like annoying the founder, you know, oh, the update didn't come in.And I'm like, well, this is not Netflix.If you want Netflix, go buy Netflix, right?
SPEAKER_04: How do you deal with the sense it take out?And will you only do deals with information rights?And how do you navigate that?
SPEAKER_03: We asked for 10 updates a year when they're seed stage companies, mainly because we want to help them and also because we expect we're gonna get four. So if we get four, that's plenty.And then people are also worried about leakage.Oh, maybe people will share information and get to a competitor or whatever.So don't put any information in there that you, you don't have to tell them like your next seven features.It just, hey, here's how we're doing.As I wrote in my book, if you're not getting updates, it's one of two reasons.It's either Uber or it's out of business. Like if you haven't got an update in a year, basically the company's out of business or it's going to be a huge success.And so you just have to be a big boy or a big girl.
You got to be a grownup if you want to play in this space.And that's how I talk to people who want to be angel investors or syndicate members or LPs now.You got to be classy.You got to be a big person.You got to be... like very gotta be okay with failure and you have to be okay with weird stuff happening.Like weird stuff happens in startup land.Sometimes people abscond with the money, you know, or like, you know, founders quit, whatever, all kinds of weird stuff happens.And I think this is like an asset class for a rugged, adventurous gambler, not for people who want to buy mutual funds.And it's really just about that.
SPEAKER_04: And Apoorva, you're in hundreds of these vehicles, SPVs, funds, underlying companies.As someone who has their own LPs, how do you navigate information on a company level?
SPEAKER_05: So it goes back to alignment.I mean, you know, there's no guarantee that we're going to get an update from a GP, but we build strong relationships with our GPs.We're generally investing in companies at the Series B. And the funds that we're invested in, they're either, you know, on the board or they have a board observer seat.So they're getting the regular updates.And, you know, there's nothing written down where we have to receive those updates, but we have great relationships with our GPs. which keeps us informed, you know, doesn't have to be on a quarterly basis, but at least semi annual of how a company is doing.But generally speaking, most of our GPS, they'll come out of a board meeting and the call us and they'll give us kind of like the high level update of, you know, here's what's going on.And we try to then disseminate that not, you know, not in paper, but just with our 10 largest LPS, which make up 90% of our capital base, we try to walk them through how the companies in our portfolio are doing.And then we, you know, we kind of monitor all of this stuff internally to just see and track progress of companies but it's a it's a balance i mean you know there is no guarantee for information um we don't have information information rights with gps or anything like that so it's just it's being respectful of a gp's time um you know adding value where we can and them you know providing us with you know with information when they can
SPEAKER_03: In some ways, it's amazing how well this system works, even though much of it is based on trust and people being good people and not trying to screw each other.Yeah. It's kind of like Trump being president.They were like, oh, we don't have a law for that.Yeah, actually, we don't know.Maybe he can just declassify stuff.He just took a bunch of boxes.Like, yeah, maybe I unclassified them.And they're like, yeah, I don't know.The founding fathers never wrote down exactly how we're supposed to make a decision on this.
And a lot of times that's what happens in startups.Like, you'll see weird stuff happen.Like, a company gets bought in Aquahire.And Zuckerberg used to do this, actually.Chris Saka called him out on it publicly. on my other podcast, This Week in Startups, he would buy a company like an acquihire and give 90% of the value in the employment packages and then give the investors 10%.And then people were like, wait a second, we see what you're doing here.Like, that doesn't make any sense.Like, it makes sense to Zuckerberg, all he cares about is the company he's acquiring, right?
And so you, you have to have like some norms.And then for the investor, venture investors, what are you supposed to do?You know, take Jack, he's a founder, I'd be like, Oh, you know, Jack, your company got bought, congratulations.But you took this 90% of the deal in the acquihire and the investors get 10%.And so, you know, now that I'm on the other side of the table, I see both sides.And it just weird little edge cases like that you have to be vigilant about and thoughtful about.
SPEAKER_02: I actually think it's like a good generalizable point, though, that like trust is... This is actually true inside the operations of a startup too, that like trust is by far the most efficient of all of the kind of plans you can have for relationships.Like you can have like perfectly detailed... rules of engagement and here's what's in the contract and here's what we laid out and if you have that perfectly done with like a low trust relationship it's a bad result and you can have nothing laid out with a high trust relationship and it's a good result like i noticed this throughout the course of lattice over the many years of the company like product and engineering as an example is just like a constant tension that like every it's like a healthy good constant tension And when the product and engine leaders trust each other, they don't need a lot of rules laid out.They don't need to have like, here's exactly how we operate.But when there's low trust, you end up seeing them creating documents that's like, here's where product ends and where engineering starts.And here's what we're allowed to do.And here's what you're allowed to do.And my experience years into the journey was by the time I'm seeing that document, Yeah, well said.
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SPEAKER_04: Moving on, the Venture Capital Journal is reporting that CalPERS committed $580 million out of a $2.1 billion allocation last quarter to venture, roughly 32% of their private equity allocation.That comes on the heels of CalPERS last week increasing their private equity allocation from 13% to 17%. Apoorva, you deal with a lot of institutional investors like pension funds.What do you see in CalPERS and other pension funds increasing their exposure to venture capital and private equity?
SPEAKER_05: It's not exactly a new phenomenon, but I think 2022 and 2023, a lot of people were sitting on cash.They were digesting the denominator effect, their public market portfolio being down through 2021 and pairing back allocations.And after sitting on a lot of cash and weaning their roster, I think people are now looking ahead and saying, okay, where... where are returns going to be generated over the next decade to two decades?And with interest rates where they are, private equity has become more challenging.There's a lot of dry powder.Deals are expensive.Leverage costs, it's not as easy to buy into a business, add some leverage and turn a multiple the same way.So I think venture is coming back in vogue as people stepped back over the last two years.There's plenty of data to suggest it.
The dispersion in returns is the widest in venture. It all it all predicates on access, but you're not going to necessarily find, you know, a meaningful amount of alpha in large cap equities or, you know, or fixed income or even private equity.But, you know, if you have access to the top quartile or even, you know, the top decile. the dispersion between that and the median is the widest of any asset class.Jack, is now a good time to invest in venture?
SPEAKER_02: Well, what I can sort of see from my seat is that the landscape on startup funding has changed dramatically in the last... quarter two quarters three quarters from where it had been it's a bit of like have have not with ai and the rest but you know you look at the last yc batch for example where like more than half the companies you could describe as ai and so the result is that a large percentage of you know new company formation is in that sort of hot sector.And now you're seeing all these funds deploying again.The truth is I don't know whether or not this will turn out to be a miraculously good time to be investing, which I think is totally possible or whether we have, you know, we're reentering, uh, another frothy period that's going to be expensive prices and, um, you know, harder to return, uh, funds as a result, I tend to believe that what's going on right now is very good.I think a lot of just the underlying companies are growing faster than certainly I've ever seen companies grow in a lot of categories.I think Brad from Altimeter, who obviously Jason knows well, has talked about experimental revenue as a new term.And I think that's a very real concept where you're seeing a lot of companies get to a million or two or even five extremely quickly out of these budgets that a lot of people want to deploy quickly.
It's definitely a moment in time where the freeze of the last couple of years post SERP is thawed in at least some segments of the market. And so it depends what you believe.If you believe that we're at the beginning of this crazy exponential where we haven't seen anything yet, which I think is very possible, this could be an unbelievable time to be investing in venture.Or if you think this is a head fake, then it's going to be bad.I tend to be in the former camp.I'm optimistic about what's happening, but I do think there's reason for caution, certainly.
SPEAKER_03: In terms of what Jack's saying, having... you know, started a little bit before you in this adventure, in terms of investing.And, you know, if you if you really go back to that 2008 910 period, the benchmark for and the bar for raising capital was very high.And there were a small number of companies.Now there's a large number of companies, and the benchmark has gotten really high to get a seed round or get into Y Combinator or our accelerator found university tech stars, whatever.That's not that difficult.You got a one in 100 chance. To get like a $3 or $4 million seed round, now you're at like a 1 in 1,000 chance.To get a Series A, you're at a 1 in 10,000 chance.I'm just saying from people who incorporate and maybe that funnel down, people who aspire to be part of the venture machine.
And VCs are just so much more discerning.Combined with founders not wanting dilution and then governance coming back, And then LPs are raising the bar and cutting some managers.This is like the setup of all setups in my mind, everybody getting disciplined at the same time.And we've now become, I would say, I don't want to say I'm like become cutthroat.But I have really looked back at the leaks in my career, we talked about this thing on the last episode. Because LPs are demanding more of us, the GP class, we have to be really thoughtful.You can't just make continuation bets in your startups and then not think your LPs are going to ask, hey, tell me about this extra 250 or extra 100K you gave this seed stage company.What was your thinking there?They're going to ask those questions.
And so everybody's thinking about portfolio management, returns, how do I get DPI?Because a whole class of investors who live through this cycle, they've never lived through a down cycle. and the venture tourists are leaving, and the entrepreneur tourists are leaving.I think this is going to be the best vintage since that 2006 to call it 2010-11.That was incredible.Airbnb, Uber, just so many great companies were formed in that post-Web 2.0 era, and this feels very much like that to me.The game on the field, that is.And then AI, it's not just AI technology. as feature sets to companies.Of course, that's incredible.
But AI running your company where one developer is all of a sudden like an average developer became like a nine or 10 X developer where you don't need, you can outsource, you know, to Lattice, you can outsource to, you know, any number of companies, your legal, your accounting, your cap table, whatever.The whole stack is there to... run a five-person company, a 10-person company, and get to a couple of million per employee.So I think this is going to be the vintage of all vintages, 23, 24, 25.
SPEAKER_02: One thing I would add to that, and I feel similarly that the potential is very good.One thing I would add that's really nice is versus in 2020 and 2021, when... It seemed like there was so little time between when company would go out and when they would get done.And it was like these prominent firms were seemingly doing close to no diligence or very little at least.Now they're... Even in the competitive hot deals, everybody, I think, is... slowed down a little bit where the founders want to pick the right partner.The VCs want to take their time.The founder is not on a call saying, I'm going to decide by tomorrow.They're like, I know a lot of people are interested.I'm going to do my meetings over the next two weeks and then I'll make my decision then.
So at least there's time to call the customers and tease it out and really do the work, which... to Jason's point, means even if things are going to be more expensive because everybody sees what's going on and there's just differences in dilution tolerance and whatever, at least you can keep the bar high when you get real time to go do the work on the company and understand how it stacks up compared to competition, how early customers feel about it.So I think that's very different too.So maybe it'll just be if things are expensive, but the bar is high.I mean, this is what YC says.It's like, it's still worth investing at high prices as long as you're in the good stuff. you know, if that's the dynamic, I think things can still be very good.
SPEAKER_04: That's been Ron Conway's mantra for several decades, and he's done quite well.Aparva, you see the industry at a wider aperture.What are your thoughts on this?
SPEAKER_05: I mean, we've been saying this for a while.I mean, we started investing in solo GPs back in 2011.So we've seen kind of the industry grow to what it is today, back to when there was, you know, a couple hundred only back in 2011 and 12.And now, you know, thousands of them back to Jack's point.I mean, we hear it through the lens of a GP, but we also are direct investors and companies.And, So we're just seeing discipline all around, you know, GPs being thoughtful around portfolio construction, which, you know, Jason mentioned, and those, you know, those pro rata dollars really, you know, really mattering founders being thoughtful around, you know, how quickly they're raising dilution, you know, making the dollars count from seed to series A, you know, the time between rounds is dramatically expanding, as well as the step up, you know, you're seeing it, you know, from a valuation perspective, you know, and more prudent kind of look towards the future on, you know, the future multiple you're going to pay for a business today so that you don't have to massively have to grow into it.So we're seeing that we, you know, we've said this could be one of the best vintages, you know, for our fund.
And we, you know, David, if you don't mind, I'll share my screen.We kind of, we looked at data just recently, you know, just to understand kind of like what a post-correction vintage looks like.And, you know, this is, you know, if you kind of go back to 2008. So, you know, this is, let's go with top quartile, you know, you have TVPI of anywhere from, you know, three and a half to four for the top quartile venture, and then DPI, you know, even a 2014 vintage venture. of, you know, you're, you're 10 years in, you've got two times your money, you know, but DPI of anywhere from two to three and a half.And then, if you're lucky enough to be in the top five percentile, I mean, the numbers are obviously, you know, ridiculous.So we've been, you know, we've, we've been pounding our chest that this could be one of the best vintages that, you know, we're investing in, whether funds or companies.
SPEAKER_03: Very interesting is when there's a lot of noise and people are going too fast to Jack's point, like I left that out and that's like such a critical point Jack brings up.Like if people are not doing diligence and I mentioned no governance and like governance isn't cool and like don't have a board and you know, all this nonsense and do a party around, like some of this was really bad advice.I think given to founders, you actually want somebody like Sequoia on your board or, somebody really thoughtful on your board, helping you, you know, navigate some of the challenges you're going to have.And it creates a level of discipline in companies that when they have quarterly board meetings is awesome.So when we realized that was a strategic advantage, we told our founders, hey, if we own over 5%, 10%, like we'll take a board seat, either board observer or a full board seat, depending on the situation.I realized people didn't even know what to do in a board meeting.So I said, hey, I got an idea. we'll do four board meetings a year, one hour each.And I had three different founders agree that they would sit in on each other's board meetings.
And the board meeting was their lawyer and me.And I said, I'll just train you guys on what I see in my boards.And when I had when I was a founder, with Sequoia on my board and rule off in my board and other important people, And I'll just train you on board meetings.And we did this like board meeting training and it really helped a lot of companies.And now I'm thinking about it.I've got to bring it back because those companies, I'm just thinking about a couple of them, PitBot, LeadIQ, Grin, these companies have become worth hundreds of millions each.And yeah, there's something about discipline and like being part of the grownup startup ecosystem where there's like people ahead of you who've done it.This is why you're going to be really good as an investor, Jack, is because you've, You've been to those board meetings, right?
You've done stock option plans.You've done the legal work, 409As, just stupid detail chores that can really be very important in the future of a company.
SPEAKER_02: Yeah.And to your point, I think this is like one of the things that like got, you know, most twisted up in, you know, 2021 was this idea that boards are this big negative for founders.And obviously there's cases where like, yes, when they're bad, they're like an absolute disaster.That is totally true.And so like a lot of that, this is why, you know, the, to the point of the, you know, the fundraising process ideally takes time, both sides should be vetting each other to make sure that, you know, you kind of know what you're getting. But in most cases, a smart person on your board who has real skin in the game and lots of experience and really cares about your success is a huge asset.My board at Lattice was amazing.They were a part of the team.And in some ways, actually, they are... a longer through line than any execs you have.
You know, like I would have, you know, even like a long tenured exec I might have for five years or something like that.But like, you know, Miles Grimshaw has been on my board for like, you know, almost eight years or seven years.You know, it's like a long time and there's a lot to be said for... the consistency that you get there for the outside-in perspective that you get for somebody who, yes, is invested in your company, but also knows a lot about other companies versus the founders and execs are all in your own little bubble.And so... I think founders should see boards, hopefully, you know, if you can, it's like, ideally, it's like a secret weapon.It should be a positive, like a great board is a big positive for a company.
SPEAKER_03: Totally.And you know, it's that through line is such an important, important point as well.One of my first board gigs was a company called Dine in New Hampshire.It's a DNS routing company.It's like super wonky, but they wanted somebody who was like, you know, you know, rabid, sharp elbowed, lunatic, entrepreneur, angel investor on their board.So I joined Dine. when they first joined, you know, when they first raised their money and they were like, hey, can you be on the audit committee?I'm like, I'm not a CFO, whatever.Like, yeah, the CFO is going to be on it.You're going to be on it.
And then, you know, Ernst & Young, whoever it was, PricewaterhouseCoopers, and they went through two CFOs and three heads of sales while I was there.So to your point about through lines, I got to see this whole process of the CEO saying, I found the great... I got the perfect CFO.I got the perfect... This is the salesperson.This guy's going to crush it.And then that guy was gone in six months.
SPEAKER_01: Yeah.
SPEAKER_03: Because he was at that point in his career where he was just trying to get a huge payday and he wasn't actually working hard.Then we get like, oh, we... I'm going to... take the number two salesperson, uh, you know, and have them take over.I'm going to give them a shot at it.And that person crushes it and see all these lessons.And to Jack's point, you know, your board might be there for 10 years, five years.And I've been on boards for 10 years.And you, you have that, um, you know, historical knowledge.
SPEAKER_02: It's also a good thing.You know, it's like, you know, when that board member's on year seven with the company, their ability to sell, let's say, like a new exec who's joining with all that history and context they have, but also to help you as the CEO evaluate that exec because they remember the journey you've been through and they've seen it all versus, you know, if you just have the rest of your execs be that, you know, sounding board, which of course they should be part of the panel.You know, it's just, there's not all that context.And so anyway, yeah, I think it's, I think it's important.
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SPEAKER_04: And Jack, you raised the last round at $3 billion.So you've raised at essentially every stage of startup.How has that changed in terms of what you look for from your cap table and how you choose the new investors in each round?
SPEAKER_02: In the early days, my view is what matters the very most is the partners.So I think if I had to stack rank at seed A, B, number one, I would put the particular human, like who's the partner.Number two, like what's the firm.And then three is like deal terms.I think later in the company's journey, in my opinion, I think it becomes a bit more fungible on who it is.And so deal terms.
SPEAKER_03: Is there the sixth or seventh or eighth board member in all likelihood?
SPEAKER_02: If a board member at all, maybe they're a board observer.Even if they are a board member, they're likely... By the time you're in series D, E land, you're probably more talking to crossover firms a lot of the times anyway. One of the things that I think is an important consideration that is just different is you are still... I do still think the firms involved matters later on.But the calculus for what you want to be concerned with when you're worth a billion or two or $5 billion is a little bit different.So let's say you're imagining an IPO in 3 years. In those later few rounds, one of the things that you want to do as a founder is rotate your cap table to people who are going to be long-term holders.So your seed investors, your A investors are much more likely going to have their LPs trying to get their money and sell in the case of an IPO, for example. Versus if you're the founder of the company, you don't want all this sell pressure on the beginning of your IPO.You actually are looking to find holders of equity who can hold a billion dollars on their balance sheet and sit with it or buy more into your IPO.And so you just start to think of a different set of...
things and considerations that matter into these later rounds that are not relevant early.But this is why you'll even see cleanup rounds happen as a company is getting closer towards an IPO to sort of relieve a lot of that sell pressure and get more equity into the hands of long-term buyers, for example. And then also the people who are a signal early, so somebody who has a great relationship with like, let's say Sequoia, you're doing your seed, that's a positive for your A or your B. But when you're later, you don't care if Sequoia is amazing.But if you're doing your final pre-IPO round, you're not interested in Sequoia following.You're interested in Fidelity following.You're interested in Goldman being around the hoop and on your IP.
SPEAKER_04: You want to build that relationship with the long only.
SPEAKER_02: You're just going into a different world.You just start to think about a different world.
SPEAKER_04: Moving on.Speaking of terms, Carta is reporting that liquidation preferences over 1X increased substantially in 2023 after making a comeback in 2022 following the long bull market.While liquidation preferences over 1X were still uncommon in the very early stage, premium liquidation preferences grew 50% 5-0 from 6-9% for Series B and Series C companies and over 40% in the late stage. jason as an early investor you're more aligned with the founder than later stage investors what do you think of this trend
SPEAKER_03: It makes sense.You know, a lot of times founders want to get a very high valuation.And maybe during Zerp, they did have a very high valuation.Now they have to raise again, they don't want to lower the valuation.And so the investor rightfully says, Well, listen, we got to make two times our money.And so, you know, at least and if they're that crossover investor, late stage investors say, Hey, listen, as long as I get a minimum of two x in the preference stack, which is Technically, if you don't understand what this means, if I put in 50 million in some late stage round, I'm going to get a minimum of two times that back, not just the 50 million, but 100 million before anybody else gets paid their money.And then there's another piece of this, which is participating preferred versus regular shares and preferred shares and the participating you would get that 50 million back. And then you would get double, you know, then you get like 100 million back.So that gets particularly gnarly.
And you're going to see all these weird terms when when if people didn't get to break even, or within spitting distance, and they're forced to raise in a down environment, and it's not competitive.And that's, I think, what you're seeing is it's probably These companies are trying to save their valuation.They don't want the valuation to go down.And maybe the other investors who are on the board don't want the valuation to go down because then they've got to market.And then Summit Peak sees it on their report.Oh, the valuation came down.I mean, Summit knows what's going on.We're all in it together, but... Maybe there's a little bit of like everybody's in cahoots to keep that billion dollar valuation or whatever it is.
And so you see weird stuff like liquidation preferences.They can wipe out in a short sale, the management team.And that's where when you get into this debt spiral, it's gnarly.What I tend to do when there's issues like this is I just say, hey, can we just get a 20% carve out for management? So let's say it's like a small company, even if they sell for 100 million or 50 million, the management team is going to chop up 20%, 10% off the top, even though we've got $100 million reference stack or something, just to keep them in the game.And, you know, they're going to get some sort of payday.So that's what's happening here.These things will go away.I mean, at the dotcom era, there were three x liquidation preferences, and people would
SPEAKER_04: you know, participating preferred, right?
SPEAKER_03: So yeah, and then I also own 50% of the company.It was Yeah, this is nothing.I don't think these are particularly gnarly seeing one or two x liquidation preferences given what just happened to the market. Consider yourself lucky.What happened after the dot-com bust and what happened in the financial crisis was two, three, four X liquidation preferences, not uncommon.And on the East Coast, East Coast investors are very downside.I'm speaking generally like Fred Wilson, there's exceptions, but they tend to be very downside protection. uh and then people on the west coast because we've hit absurd power law home runs that have only typically happened on the west coast they're happening more on the east coast they tend to be like who cares like if this company goes to zero you know stripe will hit reddit will hit uber will hit lattice will hit i'll be fine you know i'll just i'm playing for the big power law and so it would be very interesting to see this data east coast versus west coast Where, you know, San Francisco versus the rest of the world.Because in San Francisco, I don't know how often I see these like 2x liquidation preferences.
Uncommon.
SPEAKER_04: Porvo, we chatted offline about the power laws in your portfolio, the 500 plus companies.Break that down.
SPEAKER_05: Yeah, so our fun one, which is a 2018 vintage today has about 534 companies, you know, 100 of them are driving 90% of our fair market value, which is, you know, top quartile, you know, for Cambridge Associates, 25 are driving, you know, probably 70% of the results.So, you know, our fun kind of We've got 15 managers in the portfolio, that many companies, a bunch of co-investments, but it kind of exhibits the power law to a T. Less than 5% are driving 75% of the returns.
SPEAKER_04: Yeah. Jason brought it up.Are you concerned that these liquidation preference are masking true marks in the class?
SPEAKER_03: I mean, I think we've gotten through these two years of chaos.And I think the marks are going to kind of catch up for the good companies.And so I think this whole issue around marks, people have kicked the can down the road quite successfully.And now when we see the stock market hitting all time highs, economy strong, companies have any company that survived this chaos for the last few years, I think is going to be around. And now is it are they going to be worth what they're worth?You know, time will tell.But it's pretty nice to see Reddit go out and get public and get a pretty generous valuation.I know the float's small and yada yada, but they did well in their IPO.I think that's going to inspire other folks.And, you know, maybe we'll see Stripe come out and some other
I think AdGen is also private still.So there's a whole line of people.And once the exits start happening, and I'm terrified of a second and third and fourth Trump presidency, like what that will do to democracy, especially the third and the fourth one when he expands his powers.But it's going to be really good for M&A because I think he might unlock M&A again and just be like, yeah, buy and sell whatever the hell you want.And then this Figma stuff getting blocked because... some regulator in the UK, which is like 0.01% of their base can block the Figma sale.Like, what are we talking about here?Like, we're gonna kill capitalism.If people the companies can't buy each other, like, that's, that's a really important part of this process is the acquisitions.And, man, if we kill acquisitions, that's really gonna put the kibosh
on our industry.So yeah, when Trump wins, it seems like it's going to win.It's going to be really great for our business.You know, I think because I think M&A will come back.
SPEAKER_04: Porvo, what do you think about valuations right now?Are you are you concerned about these liquidation preference masking through value?
SPEAKER_05: I think, you know, to Jason's point, I think GPs have done a good job.I mean, the underlying LPs of a venture fund have an ability to kind of influence some of that decision making. um endowments and foundations get paid you know performance-based comp and so at some point it's like no leave your marks the same you know don't don't don't don't change anything and then because venture was overweight as an asset class in your portfolio and you don't have dollars to give you know because everything else is underperforming then it's like oh you should be more proven about marketing so it's it's this little you know round and round circle of You know, LPs having an ability to dictate it.But I think over the last two years, GPs have done a good job of just being prudent around, you know, the true value of companies.And we've seen it across all of our portfolios.I think the biggest challenge, though, is there's no consistency.We're SEC registered, which means we have to kind of, you know, follow by a certain rulebook.But the asset class as a whole is not regulated properly. which means, you know, across 30 GPs or funds and, you know, in three portfolio of ours, everybody has a different rationale of how they're marking.
Um, and, that, that can be a little bit challenging, but you know, so long as they're using some methodology, we're okay with it.
SPEAKER_04: Jack, how do you look at the ecosystem?You look, see at these liquidation preferences, are they healthy?How will that affect startup valuations?
SPEAKER_02: Yeah.I mean, I don't know.I mostly agree with everything Jason approves.I think one of the things I would, you know, maybe add to it that I think about sometimes and, you know, probably a lot of, A lot of people in tech probably share the following view because we're all sort of free market capitalists by nature.I am all for two parties who understand all of the dynamics at play in a transaction, making any deal they want to if necessary. If there was one person and an investor and they wanted to do a 10x liquidation preference and they both completely understood the deal terms, have at it.I don't have any moralizing about it.The thing where I do have... Strong feelings, though, is I think that this is one of the places like employees can get screwed.
And you have this principal agent situation where you've got the founders, the investors, and then the employees and the employees are not in the room on that conversation.And they don't have all the context that the founders and the investors have. And they're not on the board.And when there's an acquisition, you know, they're not going to be part of the story in the same way and all that other stuff where like, you know, even if there is a big pref overhang founders can, there's still ways to get the founders paid. I just feel like the key in these situations is that there's good clarity for employees because I think that we as an industry spend all this time talking about how the equity of these companies is a huge part of the compensation for employees, and it is. On expectation, there's a lot of value to be had there.But this is one of the easy ways for that value to get just buried under a mountain of snow, which is still fine.Employees can still join a company that has a $2 billion pref stack if they want to.And that might still be a great result.I just think that it's important for there to be good transparency for the employee contingent here.
That's all I'd add.
SPEAKER_03: This is a super important point.Employees don't know what's going on and what the stack is, right?And they're the ones most impacted by it.
SPEAKER_04: Well, now let's go to the lightning part of the program.We have the last three investments from all of our guests.Jack, we'll start with you.
SPEAKER_02: I'm going to lightning round.I'm going to do a fourth just for fun because these all came close together.So one in this current most recent YC batch is called Retail AI.It's a super cool company that basically allows for companies to build on top of their platform using an API with the goal that I could have a conversation with like an AI voice in a believable way.So you could imagine talking to a customer support person, but who was really like an AI and having that back and forth conversation be very believable, but there's like a million of these examples.And so the hope here is that they build really good infrastructure rails for any company to build on top of.So this is something I'm really excited about.It seems like, you know, there's like a, you know, infinite number of use cases for something like this.I think it could be really valuable for a ton of companies.
So this was, this was, this was a cool idea.
SPEAKER_01: Yeah.
SPEAKER_02: Yeah. There's a second one called HeyGen, kind of related.In fact, these two can play together really well.HeyGen is an awesome company where you basically can give it a video clip.So you could give it me talking like this with a video for a few minutes or whatever, and then it can make an avatar of me.And from there, you could then feed a script and they would basically be able to play that as you. And it comes out really nicely.This is something like Lattice could use.We might even end up using it.But you could use it inside your product, for example, to have... Your CEO could be onboarding and welcoming your employees.
You could be doing marketing with this kind of product.There's just another example where there's infinite use cases of something like this.Obviously, if you combine these last two company ideas, you could have something where you ended up having a whole conversation with an intelligent pretend avatar of me or something like that.So anyway, I think this company is super cool too.Next one is called Owner.This is a company I've invested in many times since the seed.This is basically a suite of tools that restaurant owners can use to run their business. And they basically built a modern set of products to create a great website, to manage your orders, to contact your customers, to do all of the stuff around growing and running your business as a restaurant.Incredible founders and team growing super quickly and just really...
targeted on this niche of helping restaurant owners, you know, run their, run their company.And I think, you know, obviously there's tons of ways to, you know, get your food, but I think like we're, you know, the, the idea that you can put a lot of power back in the hands of owners has, has really resonated and they've done an awesome job. Great domain name.Great domain name.I'm a sucker for a great domain name.It's an incredible domain name.And then the last one, bonus one, fourth is Foundation Health.And the idea here is basically to provide at sort of like an API level, the ability for any sort of like online digital health. company to do pharmacy operations, which is otherwise this challenging thing to go and run.This makes it so that if I want to have pharmacy and telehealth products, I can do that on the back of Foundation Health.
This is actually... The founder was the creator of TruePill before, which did this.And now he's basically come back with... you know, an iterated business model to sort of do the same type of solution in what I think will be a really scalable way.And if somebody's got deep, deep experience in the industry.So those are my four.
SPEAKER_03: Awesome.Well, let me go next because I got to drop off.I got to get to this five o'clock meeting.But here we go.So back to the, you know, all AI all the time.This is Marvel.And they are using AI to help salespeople get trained up, prepare for their next call.And it uses the data that's already in your CRM and your sales book.And they've got some nice early traction. Props.
Very simple, you know, help you monitor all of your open AI and other LLM usage so you can manage it.If you can measure it, you can manage it and then control your spending.We saw a lot of these in the AWS days and some of them did pretty well. And then finally, ArchiTask, which helps developers and product managers and CEOs who like to get in the muck, you know, compose and write stories using AI for their products, right?Like for their Trello boards, et cetera.And so, yeah, really, again, everything, all AI, all the time coming out of our accelerator as well.And it's just great.It reminds me of the mobile days where some new, or cloud or SaaS, some new platform comes out and everybody's like, ah, let me just take every category and reinvent it.And of course, like the people who are the incumbents are trying to reinvent it, but small companies can go faster and just change the entire modality.
And there's an opportunity if you go fast enough and hard enough that you can displace, you know, some people who maybe have the old paradigm of ways of doing things.So yeah, very excited.
SPEAKER_05: Thank you, Jason.Parva?So last two funds that we did, we invested in AltCap Fund 3, proud to be early backers and continuing to partner with Jack.Basecase Fund 2, which is run by Alana Goyle.She was, I guess, recently featured as Forbes 30 Under 30 for 2024 class for venture capital.The recent company we invested in is called Peregrine, which is an enterprise software platform that's helping municipal and government agencies share data basically operationally improving what is a very archaic you know archaic system and um the the founders are ex-palantir um and business we did a series b but you know business has been growing like wildfire so uh and then i'll add a bonus um and it was thanks to an introduction from jack um we are you know in diligence on um another fund hf0 which is an ai incubator you know accelerator and residency program, kind of like YC for AI.So we've been spending a lot of time with them.And that was an introduction that Jack made to us.
SPEAKER_03: Y Combinator accepts 1% of companies.And I can tell you, we accept just under 1% as well.And nobody knows the difference between the first percentage point and maybe the fifth or sixth.The top 5%, it's all like one little group.You can probably tell the top 5% from the next 10 or 20%. But you know, 99% of people don't get into YC and 98% don't get into YC or launch.And there's a need for many, many more YCs, tech stars, etc.And so yeah, I think it's, it's awesome to see so much activity.Well done, David. Absolutely.
SPEAKER_04: Well, it's been another great episode.Episode 10, Jason, of the Liquidity Podcast.
SPEAKER_03: We did it.We survived.Super fun.Interesting.It's very niche, but people in our industry are watching, so that's good.
SPEAKER_04: Once a week, new show.
SPEAKER_03: Yeah, exactly.
SPEAKER_04: For Jack Altman, Apoorva Mehta, Jason Calacanis, this is your host, David Weisberg.Thanks for listening.
