SPEAKER_01: The last investment we made out of our fund one, which was last fall, I want to say, was 776.Alexis Ohanian's fund, a lot of respect for what he's built there.And obviously, that goes back to the first thing we talked about as he was with Gary at Initialized.And he was the co-founder of Reddit.
SPEAKER_04: That's also... Yeah, you're right.
SPEAKER_01: I know.
SPEAKER_03: I was getting there too.
SPEAKER_08: Lest anybody forget in their tweet at a firm that he co-founded... You know why it's so contentious, right?Because there's so little at stake.It's just a tweet, folks.People are starting to spill tea and shade over a tweet.
SPEAKER_07: I mean, how do they leave him out?He's a co-founder.
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SPEAKER_04: Welcome back to this week's Liquidity Podcast.With me today, I have Dave McClure from Practical VC.Next, we have Jordan Stein from Crescent Partners.And of course, Jason Calacanis from The Launch Fund.I'm your moderator, David Weisberg, co-founder of 10X Capital. Today, we have three topics on the docket.Another YC company is going public.VCs are calling more LP capital.We'll end with the latest three investments from our guests.Let's dive right in.
Reddit's IPO represented yet another YC company that has gone public, joining YC alumni Airbnb, Coinbase, Dropbox, Instacart, and 15 other YC companies that have gone public to date. Despite the significant success of YC and the hiring of new CEO Gary Tan, some are concerned around current batch sizes and the future of YC.Dave, you founded 500 Startups in 2010.And for a long time, you were one of YC's top competitors.What do you think of where YC sits today?
SPEAKER_02: I'm flattered.You think I was a competitor.YC was always the big gorilla and probably still is.I guess I'd say we were also investing in a lot of YC companies, even though we were competing with them.So I think for the first five years of our existence, 2010 to 2015, we probably indexed into 10% of the YC companies and We actually had several big wins.We were in GitLab, PlanGrid, a little bit in Stripe, and also Reddit.YC is still top of the heap.They're really well-established.They've had several very large outcomes and probably the biggest community on the planet, I think.
SPEAKER_04: You and YC today were both criticized at some point of a spray and pray strategy, which is somewhat of a derogatory term.Tell me about at 500, how did your spray and pray work?And given your portfolio size, how were you able to execute on that strategy?
SPEAKER_02: I won't take credit for starting that.I think it was probably SV Angel that really started that, Ron Conway, and to some extent, maybe First Round Capital and a few others.But at one point, we were probably doing the largest number of investments per year, whether that's something to brag about or not.I mean... Hey, the name was 500 startups.It wasn't 50 startups.It wasn't five startups.
SPEAKER_06: Well, I mean, at the time, Dave, in fairness, people thought it was crazy that a firm would ever hit 500.Here we are.I think YC is at like 4,500 or 5,000 over 20 years.So you start doing the math on that. It's 250 a year on average, and they're doing 450 a year.So they're doing 500 startups essentially every year.So you actually nailed it.And I think spray and pray is a derogatory way to sort of look at the strategy of, Can you help, let's say, five times as many startups than a seed fund would do?And what I see is like a perfect ecosystem now.
20 years ago, when we were all trying to figure this out, there were no angel investors.In fact, I started this open angel forum.Dave was doing 500 startups.Naval was doing venture hacks.And of course, Paul Graham had started before all of us, maybe six or seven or eight years before us.
SPEAKER_05: doing Y Combinator.
SPEAKER_06: And yeah, when you look at that, at that time, there was like a $3 million seed round or a two or $3 million Series A, there really wasn't much going on in the angel space.And now, fast forward, you have AngelList, which VentureHacks merged into, and you have a ton of accelerators and even pre accelerators And so spray and pray is a derogatory way to say, I'm going to make five times as many investments for the same valuation as seed funds are.So seed funds are investing at $8 million to $10 million valuations.Generally speaking, I think we'd all agree. If you look at 500 startups, Launch, My Accelerator, or Y Combinator, Techstars, you get 125K for 7%-ish is the standard deal, which means you get to do four, five investments for what a seed fund does.What that means is you can take a massive amount of risk.So the hit rate is very low for accelerators, even a great one like Y Combinator. But you don't you get to get more swings at bat than a seed fund.So I look at it now.
It's almost like a perfect ecosystem has emerged.If you really want to do a lot of work, you can run an accelerator.It takes 10 times as many people in my estimation to run an accelerator than a seed fund. A seed fund can simply draft off of what comes out of accelerators and place bets at $10 million.Whereas, you know, we're all placing bets at 1.75.We're just rounding up to 2 million.We're placing bets at $2 million valuations.And then we have to do a ton of work for 15, 16 weeks with the founders.So it's kind of a perfect ecosystem.I see it as like a perfect conveyor belt now.
It was a little sloppy and messy and confusing 20 years ago, right, Dave?
SPEAKER_02: Well, I'd say it's maybe perfect in Silicon Valley.I don't know about the rest of the US and certainly not the rest of the world.It's not quite as competitive, but I would agree with you.We were generally getting in... We were sort of a hybrid because we did both an accelerator and we did a seed fund.And so our seed fund valuations were probably... In the $4 million to $5 million range at the time, at least in the US, maybe a little less outside, the accelerator valuations were between $1 million to $2 million.I think that's still the case today.So all in blended, we were certainly below $5 million, probably around $3 million. or so.We were doing about two to 400 companies per year for those first six, seven years.
I started 500, ran the first four funds.And I think we did about 1800 companies in seven, eight years for those first four funds.I think 500 is up to maybe 3000 companies or more now. But the hit rates were generally, as you were suggesting, fairly low.About 65% to 70% of the portfolio would fail completely.We'd get a small win, say 2% to 5% out of maybe 20% to 25% of portfolio.We'd get large wins that were 10% to 20% maybe from 8% to 10%.And then we'd get unicorn IPO size outcomes, 50% to 100% or more from maybe 2% to 3%. I think most people would sort of say it's in the single digit percent range, low single digits.The thing that we didn't necessarily know in the beginning, but we'd seen a few of is we would occasionally get these really, really big outliers, TalkDesk, Canva, to some extent, a few others, Solana, that were thousand X outliers.
So those would only happen maybe three to 500 companies. one out of every three to 500.But they do happen.I think if you look at the YC portfolio, they've probably had at least five or six of those really, really large outliers.
SPEAKER_06: Coinbase, Airbnb would be the two that have, you know, these dacocorns are hard, right?
SPEAKER_02: Yeah.
SPEAKER_06: We talk about unicorns, but... Stripe.Yeah.And then Dropbox has been always around 10.Instacart's been sub 10.So just even getting, I think we need to really have a conversation about decacorns versus unicorns, right?Because there's a, you could hit one decacorn, Robinhood's 19 billion today.And you think about 19 billion, that's, you know, 19 single digit unicorns.Like there is a power law amongst unicorns, right?Yeah.
SPEAKER_02: Yeah, but more than DecaCoin, I think the multiple makes a difference, right?Because you might only have a 10x for Series B VCs that get into unicorns that might not be that much.Right, exactly.But we were generally getting in at these $1 to $5 million valuations, I think. Probably YC is getting most of their ownership at a sub $1 million to $2 million valuation because I don't think they actually pay.They get a portion of that equity at a much lower price than maybe the rest of the LP money that they come in at.But it's a lot easier to get 100x multiple.
SPEAKER_04: You can't invest in that fund.You can't invest in the accelerator.
SPEAKER_02: Right.They internally own a piece of that, but not the LPs.But I'm just saying it's much easier to get a 50 to 100x outcome if your average entry price is a $2 million valuation than, say, a $20 million valuation, which you might see some seed rounds these days.
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This used to take Oh my God, you would ask your attorney, it'd take a week, and then it was wrong.And now it just gets done instantly.And this will allow you to focus on the things you need to focus on and not worry about your cap table.So here's a call to action.Visit w-i-t-h-m-a-n-t-l-e.com slash twist to get your first 12 months free. And you're going to lock in an exclusive rate of $100 a month after your first 12 months.That's withmantle.com slash twist for your first 12 months free.See why hundreds of founders are switching to Mantle right now.Jordan, how do you look at the accelerator space, pre-seed, just generally speaking?
Because it is a different beast than five GPs investing in 30 or 40 logos per fund.Very much.
SPEAKER_01: It's really hard to do successfully and to do really well.Y Combinator, I mean, Dave, to your point, really stands at the top there and kind of better than the rest.And they have developed this incredible community over the last 20 years.And I think just like any other ecosystem, it ends up sort of being worth the square of the number of users.And so I think that actually generates significant value that's hard for other people to catch.And so for us... We have a mix in terms of our portfolio being established brand names as well as emerging managers.And I absolutely would include Y Combinator as one of the best brand names in the world.A lot of people can recreate pieces of what they do in terms of providing capital, in terms of mentorship, product market fit workshops, all the time that they spend with their portfolio companies, but to recreate the power of that network and the signal value too, in terms of If you are a YC-backed company, that means something.
And it still does.And a lot of GPs look at that for Signal.A lot of people attend Demo Day and do all of those different things.And so from our perspective, I don't think we would compare other accelerators to YC.I think YC just stands alone.But if there is another group out there that perhaps is some other advantage.I mean, it could be a vertical advantage, right?There's some interesting kind of AI accelerators or consumer accelerators or people who, you know, in their own way, open the same types of doors that YC does.That could also be really, really interesting.
But I don't know that anyone's ever going to catch YC just given the massive lead that they've established for themselves.
SPEAKER_04: Jordan, how do you play an ecosystem like YC?Do you do an index style approach or do you look for funds that are stock pickers?
SPEAKER_01: It's a good question.And I don't know that there is necessarily a right answer to that.I think both strategies can work.And I also think it depends on your broader portfolio construction, right?So the way that we... But a fun together is when we are evaluating a manager, not only do we want to understand, hey, is this strategy going to work?And I think, frankly, if you were to create an index on everything that YC has done, you would be very, very happy with the results.You'd be happy with 20% of those results versus if you were actually able to repeatedly find alpha within that YC portfolio, that could also produce really high quality results. I think part of our decision-making also depends, well, what else are we putting in this portfolio?How much overlap is there going to be between strategy X and strategy Y and strategy Z?
Because there does become a significant amount of club deals and things like that that happen.So something we need to look out for.That said, we've looked at really compelling strategies where people have... put 70% of their fund investments into YC companies.And I think one of the differentiators I've noticed is some of those people actually bring YC companies, right?And so that to me identifies a little bit more from that LP or from that GP, from that individual, their ability to kind of do this more consistently.It's not just, hey, we're absorbing the value and sort of a derivative approach to YC.We're actually also as good at finding those types of opportunities ourselves.And so- So that's probably a little bit more interesting to us.
If I want to just sort of create an index around Y Combinator, it'd be better to find a way to sort of invest in Y Combinator, which though you can't access the early stage, the batch fund in a vacuum, there are ways to sort of play into that ecosystem.
SPEAKER_02: One thing about YC is it's great, but you also have to be aware of what the entry point evaluation is.I think these days, if you're If you're investing at YC demo day prices, you're probably investing at $16 to $20 million seed round valuations.And possibly the best of the companies have already been funded.Yeah, that's the dirty little secret, isn't it?
SPEAKER_06: That they will deny, but we all know is not true.They'll be sharp elbowed if you bring it up.
SPEAKER_01: And I think it's funny too, you know, you look at a group's portfolio and they'll say, oh, they'll have front and center on their website.We're investors in Stripe as an example.And it's like, okay, well, you know, when did you get in?Oh, we got in at their $100 billion, you know, round.It's like, well, then I don't care that you're an investor in Stripe, right?And so I think to your point, like, yeah, entry point absolutely matters.We've looked at plenty of funds who are like, oh, we invest in these YC companies and look how well YC's track record is.I'm like, well, is that your track record or like what's going on there?So it matters.
SPEAKER_02: I mean, I think if you are doing the entire index of YC companies, you're going to get a great return because there are occasionally the Coinbases, the Stripes that are in that group, Airbnb.But if you're stock picking, particularly at Demo Day, you're paying a pretty high premium to select and pick, and you may not be picking the best of the companies, either because they're not available or because you're not necessarily a great stock picker.That was easier 10, 15 years ago.We were doing 10% of their batches The batch size then was only 20 companies.It wasn't really that hard to pick two or three companies if you thought they were great.And the entry point of valuation at those times was probably only between five to 10 million.So it was a slight premium to market, but it wasn't a three, four, five X premium, which is I think kind of what you're playing for today.
SPEAKER_01: We've looked at a lot of track records.I'm pretty confident that if you just take their track record in their batches, that it is the best early stage track record probably of all time.It's really, really incredible.And Jason, you nailed it, which is when you're getting in at a $2 million valuation for all these companies and you're hitting unicorns and decacorns and then some, it's just, it's non-comparable.
SPEAKER_02: Yeah.But I think there are still companies that they're going to miss.And when we were getting started, we had to pick a strategy to compete against them.And it was difficult.We had already started five years later than them and Techstars.And so we went One thing was scale.We immediately were trying to do large scale, hundreds of companies per year.We were trying to do outside the US, which was at the time, YC wasn't doing a lot of stuff outside the US.We were betting on underdogs that we thought were overlooked.
At the time, I think they were indexing a lot into MIT and Stanford grads, a lot of CS majors and Maybe to put too fine a point on it, a lot of white guys.And so we were trying to invest in more women, in more minorities, in more international founders.And I think that worked for a while.When Sam came in and took over from PG, I think he also kind of recognized the value of large portfolios.He started scaling the batch size.They started doing more international stuff.And they also, to their credit, started investing in more women and minorities. We had a differentiated advantage for the first four or five years, but I think Sam was pretty sharp in looking at where those advantages were and trying to compete them away.
SPEAKER_06: There are two things I've heard from people who are Series A investors or seed funds.One is when you go to YC, a lot of the top companies basically don't wind up at demo day.They skip demo day. So that would be like playing in a poker game.And I said, hey, you know, Dave, you can get aces and kings and queens, but the rest of us, we can only get jacks, tens, nines.So let's see if we can beat Dave, you know, but he gets all the aces, kings and queens.And, you know, that's fine.No competition, you know, no, no conflict, no interest.There's a cobble of folks who are on the inside who Paul Graham's liked for a long time or Andreessen Horowitz or whatever.
And they sort of share the best of deals quietly and they don't go on stage.They'll deny that, but everybody knows it's true.We know examples of it.The second thing I've heard from folks is Demo Day is not... That's kind of the sucker's bet on Demo Day because it's overpriced towards what Dave is saying compared to... Well, it's retail....attraction. It's retail.So the price is going to be 20,000, you know, let's say 20 million for a company with no traction.That's got six weeks of like private data, but a great story.And I think that's one of the problems is people go to YC to maximize their valuation.Okay.
That's fine, but it can go too far.And if you have too much demand from dentists, like one time I went there and it was like, literally the person sitting next to me at demo day was a son of a dentist.And I said, Oh man, What are you doing?Oh, I just want to be an angel investor.I read your book, we take a photo.I said, Yeah, sure.And, you know, he was just in that high pressure cooker.And then they came up with this high pressure tactics.Oh, you know, the valuations 14 million this week, it's 18 million next week, then it's 24 million.
If you sign now and you wire and they, you know, kind of came up with almost over optimizing. to kind of create FOMO.And I think that's where a lot of the bad feelings about Y Combinator Demo Day kind of rooted themselves.Hey, it's a rigged game.Hey, there's high pressure tactics.I think that's come down a bit.And I know Gary, you know, even Sam Walton before him, they were not encouraging people to kind of do those things.But that is the truth.So what people have told me is, oh, it's just best to meet the companies, but then wait one year. they, you know, they'll deploy a million or 2 million.
And the valuation then has to catch up.So let's say you did get that $20 million valuation, you did raise the 2 million as David is nodding, we all know, you deploy that 2 million, okay, you went from, let's say $0 in revenue and a beta.Now you've got, let's say 500,000 in revenue, making 50k a month, 40k a month of reoccurring revenue 500,000 for the year.Okay. what's 10 times that what's 30 times that okay, 30 times that is 15.So now you're if you're based on 30 times that number, or 40 times that number, it's the same as the the demo day evaluation.And that second extension will be the same price as the demo day.So that that's what I have actually seen that a lot of folks coming out of demo day, they secure the bag 1520 million, they get Minimal amounts of dilution, fantastic, great job founders.But then when they come back to market, it's basically the same valuation.
So we will wait on a lot of valuations.And the truth is they only accept 1%.We accept just under 1% to our program.They get 45,000 applications less.They tweeted and we get 20,000 right now.So we're kind of right behind them.And what I would tell you is neither of us know in the 1% or 2%. of the top companies, which ones will break out?And I think Dave would confirm that having done this longer than I have, that is there any, do you feel there's any difference between what you determine is the top 1% of applicants or the top three?
SPEAKER_02: Could you know?That's what I was going to say is I think, you know, a lot of times, you know, the hot companies supposedly are the ones that already get funded, but those aren't always the hot companies five years later.And a lot of times, you know, people, you know, It may change what those are.
SPEAKER_06: Twitter, Airbnb were unfundable.
SPEAKER_04: Coinbase, too.Coinbase was not a hot company in their cohort.
SPEAKER_02: I had a chance to invest in Airbnb when they were doing the cereal boxes, and I thought that was kind of crazy, but it turns out I was stupid.But I think, you know, I would still say the top 10% of YC companies are probably worth it, but you just don't know which 10% those are. But still, to their credit, I mean, YC's built an incredible enterprise.It's very tough to compete with them.And I think you have to pick your spots if you're going to do something.You know, I think the new program, Neo got a little bit of there was some punching that was going on between Neo and YC, I think maybe six months ago.
SPEAKER_06: Yeah, they were definitely threatened by him big time.Did you see how nasty they got? They were like, we're going to take this guy down.He got in a lawsuit with the founder.He got really sharp elbowed unnecessarily.That's the other thing, is they're a bit sensitive, I think.Anytime any critique happens, they... Everybody, like they make it into a whole, like we're the underdogs.And it's like, you're not the underdogs.Why see?
It's kind of the opposite.You're the 800 pound gorilla.You're not the underdogs, but smart branding on their part to like attack him.
SPEAKER_02: But I think if you're going to do an accelerator these days, it's probably difficult to be a broad based, you know, global accelerator, unless you pick a category or geography or something specialty.Like I think probably antler accelerator, Maybe Entrepreneurs First, a few others, 500, and maybe Seedcamp are trying to compete globally.And they do have some advantages.
SPEAKER_06: I think I take the other side of it.I think it's easy to compete with them.The majority of publicly traded companies.
SPEAKER_02: If you pick a vertical or a geography or some specialty, I think you can compete.But I think it's harder to compete just broad-based.
SPEAKER_06: Now, see, I disagree.I think if only 1% are getting accepted, I think the second, third, fourth, and fifth percentile is the exact same.I don't think anybody knows the difference between those five, the top 5%.Maybe you could say, hey, this is the top 10% versus the top 20.But I think in the low single digits, they don't know.We don't know.Antler doesn't know.500 doesn't know.Which one of those is top 1%, 2%, or 3%?
SPEAKER_02: And that's why we do large portfolios is because you don't generally know. Exactly.
SPEAKER_06: And so I think it's that people don't want to do the work.It's really hard to do an accelerator, you have to meet with 1000s of companies to pick 100 companies.And then you have to deal with, let's say there's two and a half founders per you got 250 founders. who then want your support and want your continued investment.It is exhausting.Most VCs and GPs are lazy.They want to do one meeting, two meetings a day max.When you run one of these accelerators, how many meetings were you doing at the peak a day?Because I know my team is doing 70 introductory calls per week.We're at 70 per week.
Think about that.
SPEAKER_02: I mean, we had similar numbers.I don't know where 500 is at these days, but thousands of applicants, hundreds of screenings.And we sort of decided on batch sizes that were around 30 to 50 companies.But we were running them four times a year in two locations. I think YC is now doing north of 200.They came down a little bit, right?
SPEAKER_06: Yeah, I thought it was 225 or 250 per cohort.I think they hit three in one.Maybe 300 was the peak, which would be 600 a year.That's too much.
SPEAKER_02: They're also, what, sharding those into categories and verticals.So even though there's 200 or 300 companies, I think there's probably X number of companies in some sector, vertical, genetics, AI, life sciences, whatever.Yeah.
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SPEAKER_01: Dave and Jason, I'm curious from your perspective, you know, let's say there's 40,000 people who apply to Y Combinator, obviously very, very small amount actually end up getting in.How much of the remaining group, how many of them do you think are going to choose to go to another accelerator or just say, you know what, it was YC or bust for me?
SPEAKER_06: No, no, the majority of them will go to another accelerator.We know because we are now moving our dates to the week after YC sends out their confirmations.We don't really need to compete with them if 99 plus percent don't get accepted.So many of them will go to another program.And we've had many successful ones come to our program and become unicorns or, you know, sent to... million valuation companies already.So there's, there's plenty of opportunity for those folks to go to other programs than they would.I think there could, I think there should be more competition for YC.And I think who was the guy who they attacked again?He made the, I think he doubled their deal.
I think he offered two 50 for 7%.And once they did that, once he did that, that really upset them and they really went after him hard.So if you could get twice the economics from him, He knows a lot of people.He's got a smaller size.I would actually advise going to his program.And I think a lot of founders did.I think that's why they were threatened by it, because he just doubled their economics.If you double YC's economics, you would peel away a third of the company's, I think, with a reasonable product.
SPEAKER_02: I think YC has a really strong value add for their program.And so it's not always just based on the economics and the numbers.I think they've built a brand that sort of feels like Harvard or your brand, whatever you want to pick. And so you can compete with them, but you have to be the Stanford alternative in your field, or you have to find... Your piece of the ecosystem that is attractive.I think, Jason, one of your points, I would say people have been competing around dollar sizes.They haven't really been competing around equity portion.I think there's probably room for someone to compete by cutting the equity down to like 2% to 3%.Even if they offered a smaller check, even if they offered a smaller check, I think you could probably have an interesting program if you offered the same amount of money for 3% at a reasonable price.
SPEAKER_06: We actually realized that in the market.I was talking to Pioneer.app. So this is a really interesting concept.And I had the founder on This Week in Startups at one point, Pioneer.app.And they weren't originally offering money.And I said, you know, you have all these people doing this like virtual accelerator.Why don't you just give them 10K for... you know, 1% or something, right?And see how that goes.And they're like, oh, that's interesting.
And so then I started doing it.So we offer people at Foundry University, their first check, if they haven't raised money before, 25K for 2.5%, $1 million valuation.And we did it as an experiment and we put it on their weekly check-in form, Dave.And when we did, 60% of people asked for the 25K check-in. 60%.So I read it like an experiment.I was like, lean startup, hey, would you like this?We've done, I think, 80 of those checks so far.So there is definitely like the first check in 25k.We're not incorporated yet.
We're just two or three co founders, you know, with a business plan or a mock up.
SPEAKER_02: uh people will take that 25k check i've confirmed it in the market i'm glad i'm not in that business anymore it's very good it's a lot of work i'll tell you that it's exhausting i can tell you because i'm exhausted sometimes it is exhausting i would agree if you find good people if you have a value proposition that's differentiated you know particularly these days i would say you know competing on a vertical focus or geographic focus makes a difference.You need to have a real place to add value, whether that's on product, on growth, on people.But if you can really deliver on that, then I think you can be still competitive.
SPEAKER_06: And people who are complaining about Y Combinator or the terms they get or the price of companies coming out, just create a competitor.That's what I did.And we get into deals at the same terms as them or earlier, and we have our own proprietary deal flow.So do the hard work like Dave did, like I did.There's no need to complain about them.You can just compete against them and you will succeed because 99% don't get in. There's a lot of successful people in the country who didn't go to Harvard, by the way.
SPEAKER_02: I know it sounds crazy.And again, I think just people need to recognize that PG did an amazing job with Jessica getting it started.Sam took over, did a great job.Michael Siebel did a great job.I think Jeff, sorry, forgetting, also ran it for a little while.And Gary is new, but he's not really new.He was also a YC founder and he was running Initialize for a bunch of years.So They've had a great string of quarterbacks, if you will, running that program over there for 20 years.
SPEAKER_04: Moving on, Carta is reporting that capital call requests hit a high in January, not seen since Q2 2022, signaling a return of VC bullishness. Capital calls are a leading indicator in that they represent a VC firm's expectations to invest capital in the near future.Jordan, as an active LP in the market, are you seeing more capital call requests in this environment?
SPEAKER_01: We are seeing some.Look, our sample size isn't huge.In our first fund, we invested in 16 managers.We just actually launched our next fund last week.And so still getting that geared up.But we are seeing a slight increase. It's nothing crazy dramatic.I think that there's probably a few reasons for it.Number one, I think there's a ton of money going into AI, as we all know.And so I think there's a little bit of a frenzy there and a little bit of a hype there.
And I don't think that's going to slow down in the near future. I think there's a little bit of, okay, we're through a bit of the uncertainty in the market, right?Whether it's going to be a soft landing, a hard landing, you're seeing signaling of interest rates getting cut.And so from my perspective, I think investor confidence is getting higher and that's driving some of this. I think it's probably also an element of companies that fundraised in 2021 that have held off for as long as they can and are coming back.And you're going to have to make some decisions around, do you re-up in those companies and double down or do you not?And so I think it's real.I think all of that is contributing to what's happening.Have we seen a 2x or a 3x in capital calls?No.
But there is a probably statistically meaningful increase that we've observed, I'd say, over the last quarter.
SPEAKER_04: Dave, your fund Practical is a secondary fund where you take advantage of different macroeconomic conditions, including the lack of liquidity and the lack of LP capital.How are you playing the macroeconomic conditions today?
SPEAKER_02: Well, I think it's pretty simple.The macro condition going on is that nobody's gotten any liquidity for the last two years.And so people need to find an alternative path to liquidity that's not from IPOs or acquisitions, although we're starting to see some IPOs again. I think the secondary market's always been an interesting place for people to look for liquidity.It's been around for 20, 30 years in private equity.It's even been around a pretty long time in venture.But what we are seeing more of now is funds looking for liquidity, not just individual company founders and investors looking for liquidity. There's certainly a pretty active marketplace for individual company secondary, whether that's Forge or Equity Zen, which was a 500 startups portfolio company and others.But there's not a lot of places to go find fund secondary positions or LP and GP positions. um and what we've kind of found is at least um you know below a certain ticket size other larger secondary players like industry ventures and uh stepstone which acquired greenspring
folks are writing 30 40 50 million dollar checks there's not as many people doing you know sub 10 million certainly sub 5 million dollar tickets at least at the fund level so what we kind of found and this was partially you know myself as a customer i was looking for some partial liquidity in my carry in my first two funds at 500 about four or five years ago um there just weren't very many people who were buyers um at least at that time and i would say still If you're looking at non-institutional investors in funds, every so often those folks need liquidity.You're sending kids to college, you want to buy a house in Silicon Valley.If you're talking about a family office, they might go through death, divorce, or retirement, and there might be some restructuring in some of their venture assets.It's not really a solution that's as needed for institutional players who can be patient and long-term. But for the smaller LPs and sometimes for emerging managers who are still in their first 10 years, they're probably going to be looking for liquidity, particularly after going through the last two years.
SPEAKER_01: One thing I will say, you know, we incorporate secondaries into our strategy in terms of our fund.And one of the things that we've noticed in terms of why we believe there is a little bit of a sort of lack of participation or there has been historically is it's often really hard to get information.And from my perspective, you know, if you're a part of that ecosystem and, you know, part of that fabric, then you can get behind the door. uh, if you're underwriting, you know, a portfolio or a single asset, if you don't have a relationship with the GP, who's the investor in it, and you're trying to, you know, buy a piece from someone else, uh, sometimes that GP will say, well, I don't, I don't know if you want to do the transaction.Sure.But I'm not going to spend time to help, you understand where this company is or isn't.And so we've kind of put that as a filter from our perspective of like, okay, we're not going to engage unless we're already have a relationship with a manager.And so I think to be successful, you really have to have those relationships.And a lot of those smaller dollars that you're referencing, talking about, there's no way for them unless they're otherwise involved in the VC ecosystem to really get behind that curtain and that wall and understand it.
So I think That also impacts the decision-making a lot more than it would in other asset classes.Yeah.
SPEAKER_02: And I think even within secondary, there's a big difference between what's called direct or company secondary and the strip sales, which are really portfolio secondary.There's a lot of people who, both professional and I would say the tourist investors who are looking at individual company secondary.And because these marketplaces have uh you know interesting names on them people there's lots of people who want to get into let's say you know stripe or spacex or canva or something like that that's very well known um but again like you said you're not really even going to know about portfolio secondary deals unless you're part of the ecosystem and have relationships there you're going to need consent from the general partner of the fund you're buying into if you want to do that so you have to be an acceptable investor to them You're evaluating a basket of assets, not a single asset.And so you have to underwrite multiple companies.And then you also have to think about what's the exit trajectory for those vehicles.So it's a lot more complicated to do portfolio secondary than individual company secondary.But that said, for folks who are willing to go after it, because there's so few people doing it, you can get some really good pricing and arbitrage on that as a buyer.
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SPEAKER_04: Jason, you're in 24 funds yourself.Are you seeing more bullishness with these capital calls?
SPEAKER_06: No, it's pretty consistent, I have to say.It was a little bit slow last year, I think.I saw some funds weren't drawing down, but I think it's pretty consistent.And it's not enough that I would notice it when I make a commitment.It's typically somewhere from $25K for these $5 to $10 million funds, $50K, 1% of the fund, all the way up to $500K maybe when I do these for my family office.And yeah... I kind of have that money set aside.So I don't even notice this, this, you know, minor spike.I do think what it shows more than anything, is that VCs, the general partners at these firms have dealt with a lot of the triage that was going on in their portfolio.So just anecdotally, speaking to other VCs on a regular basis being on the board of some companies,
you know, there were a lot of companies that needed to do a big riff, like two thirds of the company.And instead of doing a two thirds riff, like Elon did at Twitter, they did a 10% riff, a 20% riff, and then a 30% riff, and then a 10% performance riff.And, you know, this occurred over 18 months of finally, you know, working with the founders to accept the reality that they didn't need 400 people for a $10 million ARR company. they needed more like 75 people or a hundred people max.Right.And so, you know, they, there was a lot of that going on, which I think was a distraction from putting money into new companies.And I think Jordan, you said like, there was just like some overhang, right.And I assume you were talking about valuations and like getting reset and coming back to reality.So I feel like, Nine out of 10 of my... Four out of five or nine out of 10 of my challenged companies, the challenge has been resolved either by a shutdown, an acqui-hire, or a right-sizing of the company.
SPEAKER_02: Do you think we're done with that?Because I'm not sure we're done with it.I think that the active management of turning the corner has probably been done by many companies, but the ultimate shutdown decisions, I think that's... We're still going to see a lot of that.I was talking to a friend over at SVB two or three years ago.There was an article last year that was written by Elad Gill about when these companies were going to run out of money.He was talking about how a lot of those companies had raised so much cash in 2020 and 2021, even though burn was high.Those companies had three, four, maybe even five years of runway.Once the downturn hit, everybody started trying to reduce their burn and they extended even further. And so I spoke to someone at SVB a few months ago.
They said, finally, the average company was down below 18 months of cash.And so my guess is we're still going to see a lot of blood in the water this year and possibly into 25, where people have to make decisions now.When you have three years of cash, even if you're trying to cut, like you said, you're not feeling like, oh, I have to figure this out tomorrow.Yeah.
SPEAKER_04: you know, this isn't, this isn't by the way, an issue isolated to venture.You have this wild, wild situation and public biotech companies where some public biotech companies, their drug has failed and they're sitting on a hundred million dollars.And basically public shareholders have to come in and do a hostile takeover and do some kind of negotiated agreement.It's a, it's wild times.Yeah.It's a, it's a common thing.
SPEAKER_02: Well, But see, the thing there is that at least for public companies, those valuations get reset based on what people know about the companies.In private markets, they're not getting reset.And so what's happening is VCs, we're all sinners.We're all liars.Almost every VC that I know is still holding their portfolios at valuation set in 2020 and 2021. The first thing that we say when we talk to people about assessing value in their portfolios is, have you done any proactive markdowns after Q1 2022?And if the answer is no, which is pretty much what it is for most of them, we're like, well, your portfolio is probably overvalued by at least 50%.You should be reducing or cutting by 30, 40%.
SPEAKER_04: Jordan, how do you look at that?You have multiple funds in the same company.You see them carrying at different levels.How do you look at that?
SPEAKER_01: you have a really interesting conversation with one of the two managers usually.And you say, hey, let's talk about this because this doesn't make sense to me.And one of your co-investors is holding it at a lower valuation.And frankly, given what's going on in the environment, and then they usually give you some line about how their policy, you know, kicks in in six months.And so they haven't proactively done it because They want to maintain policy, which makes them more conservative and consistent and all of that.
SPEAKER_02: Especially if they're fundraising.
SPEAKER_01: Yeah, exactly.That's an interesting point, too, is honestly, the ones who are fundraising are usually the ones who wait the longest to take the mark down.But truthfully, it's been a really important tool in our toolkit, especially in this environment, to try and understand the real value of these underlying portfolios.And so one of the things we've tried to do is whenever we're speaking with a manager, we're trying to understand that information and be able to reference it later so that if we're looking at fund manager X, we're going to say, wait a second, we've seen these few companies before.And in fact, they were marked with this.And so I think, like I said, sometimes it ends up being an interesting conversation, but honestly, the vast majority of the time, it's like, yeah, it's just our policy and we're being consistent.Don't you want us to be consistent?It's like, well, no, I need to be honest and realistic, but
SPEAKER_02: I want you to mark to market.I want you to assess a fair market valuation.I guess this is the point that I kind of want to make, though, is the reason that these companies haven't been marked down is because there's no market pricing activities that are forcing them to do so.Unless these companies get sold, go IPO. do a down round or shut down.Those are not market pricing events.And even if they're funding them, they're bridging them on notes that are not really setting a price, particularly for the folks who are bridging their own companies.They don't want to price them to where they really should be because then they'd have to remark their own portfolios.And if they're fundraising, that might mean bringing a three or four or five X portfolio down to maybe only a two or a 2.5 X portfolio.Robert Leonard
SPEAKER_01: The other thing I would say is we're pretty actively trying to pay attention to where secondaries are at.And that can be an indicator too, right?If something is trading actively on a secondary market, doesn't force repricing, but it does allow you to ask the question and say, well, someone's paying this for this asset, so.
SPEAKER_06: Yeah.And the fact that people are even paying anything for private market companies, like I'll get some lowball offers for some of our companies.And I'm like, oh, well, that's great that there's a trade occurring at all.
SPEAKER_02: There may not even be a price.Yeah.
SPEAKER_06: Yeah.Because in some cases, people are like, well, yeah, I'm not going to invest in that company.The overhang is too large.I have been getting a number of Some founders have taken it very seriously, getting to profitability or breakeven.So I've started to get the infinity sign in months of runway.We are infinitely, our number of months of runway is infinity.And I'm like, well, that's charming and awesome.Great. And then hope renews, and which is what's happening.
And people say, Oh, well, if you're growing, you're at infinite, and you've got 5 million in the bank, great, you're making 3 million a year.Great.What's the number going to be next year?And they're like, 4 million.We're like, Oh, okay, can we have a conversation about growing faster and losing some money?So here we go again.
SPEAKER_02: What?Growth over profitability?Oh my gosh.Back to 2019.
SPEAKER_06: reasonable burn in order to hit, you know, more aggressive growth topics, because I think everybody was just like, batten down the hatches.Let's make sure that our ship doesn't crash into the rocks.Okay, the storms over, okay, feels like we're gonna be choppy water, but it feels like the storms over, okay, we're out of the storm.Okay, now, let's, let's, let's start a plan to grow this thing again.And I think that was hard for a lot of people.And I'll just make a note to folks. and I've experienced it in my own career, man, moderate success is as bad or more pernicious to break out success and is more of a blocker than no success.Because if you have no success, you just shut the company down.It didn't work, failed experiment, we all move on. You get to $3, $4, $5 million in revenue.
You get this tweener company.Okay, great.We got to $3 million, but we can't move it up.The revenue is not coming.Okay, great.What do we do?And you're like, well, we have a $3 million business.Let's try this strategy to grow.Let's try this strategy to grow.And you just may have hit the natural audience and...
You got to really, that's a tough one for founders is what do you do with the $3 million, $5 million, $10 million success, quote unquote, but it's not a venture success.
SPEAKER_04: Have you seen any of those break out or they all stay middling?
SPEAKER_06: I don't think it ever.Yeah, they just have to get sold.They have to get sold, spun out.
SPEAKER_02: I have a favorite expression to describe the situation, which is usually winners keep winning, losers keep losing, and tweeners keep tweening.And it's very hard to move a tweener to a winner.I think in a few cases, you can pick your battles and try and get some folks back onto a growth path. But I would agree with Jason.Again, this really depends.From an investor perspective, something might not be a win that from an operator perspective could be a win.If you've got a company doing $10 million in revenue, generating $1 to $2 million in profits with modest growth, that's probably not a win for an investor.That could be a great business for the operator.So it really does depend on your perspective there.
SPEAKER_06: And that's where the difficult conversation of buying out the investors has to occur.Yeah. So they can at least take the loss or wind down a fund.When funds get to 15 years, People just, my understanding is buy the shares, have their shares brought back for $1 from the failed investments or just try to sell them in a strip, maybe to Dave or no.Do you find yourself?
SPEAKER_02: That's not where we buy.We're generally buyers around the seven-year mark.So our optimization is for when we look for funds that are doing well, where the losers have been written off and winners have emerged.Probably, let's say it's somewhere between series B and D. 30 to 50 million and up in revenue.But there's a whole other business in secondary that's kind of like wrapping up end of life vehicles, establishing continuity vehicles.It probably happens between years 10 to 15.And generally, we sort of bump up against that, but those other buyers are buying out the entire position of the fund, or really what's happening is they're finding out the LPs who want liquidity.They're figuring out which are the core assets that are still growing.
And then they basically create a continuity vehicle with the high quality assets, roll in the LPs who are still patient, buy out the LPs who are not patient.And now you've got a great high quality portfolio you can run for another five years, whether that's maintained by the same managers or new managers. You're basically sitting on high quality assets that are hopefully heading towards an IPO, but you can extend the life of the vehicle three to five years and manage out the LPs who are patient and pay off the LPs who want liquidity. I think that's going to be a really big business that's going to start happening in the next couple of years.The other one that we are doing that I think is really probably on a lot of people's minds right now is buying secondary and strip sales to generate DPI.There's a ton of managers who are sitting on paper gains and performance. Maybe I don't always believe that they've got 5x there.That's probably based on that 2021 valuation.But they might have 2.5 to 3x of real value, but they have zero DPI or very small DPI.And so IPO activity and
Honestly, not that much M&A activity.I think you're going to see a lot of people doing deals to do strip sales to generate DPI, and those fund managers want to be able to raise their next fund.So that's another area where we're seeing a lot more interest from managers to do secondary sales.
SPEAKER_06: Are we seeing funds that are shutting down looking for custodians to wind them down?I know of like two funds I was involved in as an LP that are not continuing on.They're not doing a next fund and I'm, I didn't ask them explicitly, like, are you going to manage this for the next year four of the fund?Who's going to manage it for the next 12 or 10 or whatever it is?
SPEAKER_02: Yeah, 10 years at least.Right.
SPEAKER_06: Yeah.So what happens to all these fund managers who are quitting?
SPEAKER_02: There's a lot of it depends.Depends on whether the LPs are friendly or not.Depends on whether it's an audited fund or not. It depends on whether they have winners in that fund or not.But I think that half the audience is probably the default case, which is a lot of people jump into venture and don't continue.In fact, that's the majority case.And when these are larger funds, maybe there's some continuity there.They have management fees to live on.But for most smaller funds, you're not coasting for five years on the management fees of a $5 to $20 million fund, at least in most cases. So I think those will probably bifurcate into the folks who have winners and or the folks who are committed to a career in venture.
But for the majority of those folks who don't have winners or are not committed to a career, yeah, those funds are probably going to be walking dead to some extent. It depends on what kind of support is required from the companies to maintain them.The real question is from the investor's perspective, do they expect anything out of that?And are they expecting to get quarterly reports?And who's watching the store?
SPEAKER_06: Have you had it happen, Jordan, to any of yours?
SPEAKER_01: Not yet.No, we have not.I haven't had it happen.I haven't had anyone signal anything. that it's going to happen, but you know, our first fund, the first investment we made from it was 2022, uh, right into a net new 2022 fund.So we've invested into 2022, 2023, 2024 funds.So I really hope nobody is thinking about shutting down within their first, first or second year.That would be problematic.
SPEAKER_02: I really enjoyed the first year.
SPEAKER_01: I'm out.
SPEAKER_02: Yeah.It's between year four to eight when people decide to check out.I mean, you're past the investment period and you're probably past when you've had sort of the front loaded management fees.When you're done writing checks and when management fees start to ramp down, typically around year five, six, seven, if you don't have winners, a lot of people check out.
SPEAKER_06: Yeah, it's a paradoxical career because you don't know if you're good at it until year six or seven.
SPEAKER_02: Seven, yeah, right.
SPEAKER_06: And so like, how often is it like playing the, yeah, you can play basketball and we'll tell you when you get to year seven playing basketball or running marathons or being a chef, like your seventh year as a chef, we'll know if you're any good at it.It's like.
SPEAKER_02: If you haven't been able to raise a fund every three to four years, you're going to check out if you haven't raised a fund in the last four or five years.
SPEAKER_01: And that's a really interesting point, too, where it's like, okay, when we're, for example, going to re-underwrite a fund, right, and we're, let's say, for this current fund that we have right now, I'd anticipate, you know, half our managers are going to be re-ups from fund one.And, you know, what do we have to look at?Well... the investment we made in fund one is not going to have a whole lot of performance.And to your points, it's not really like you can draw a whole lot of conclusions from it.You can look at, you know, did they say, did they do what they said they were going to do?Did they improve their team?Did someone leave?Is there any drama?You can look at their older portfolios and say, okay, they seem to think this thesis was going to work.
And by now we actually see more of it working or less of it working, but it's a new fund.And all you have to go on is, you know, one fund or even potentially two sometimes, right? that can be a little bit more difficult.
SPEAKER_04: What do you go off of?What are some leading indicators that you look at that help you make that decision?
SPEAKER_01: So it can be a number of different things.And I think it can be case by case basis as well.Our thesis around venture is centered around the following, which is, you know, is this individual, is this fund manager, this firm going to see the best opportunities and the best founders?Are they going to be able to win investments into those founders and into those companies?And I think that's a really key element.And then, you know, how do we kind of prove that those two things are true and that they're able to pick the right ones from the bunch? And so in a lot of cases, you know, from our perspective, we're never going to invest in a fund one where that person hasn't invested in a company before.And it's like a true first time venture capital investor.The three fund ones that we did in our first fund were all generally spin outs from institutional firms. And so, you know, there you at least know, okay, well, here are some of the companies they invested in prior.
And so you can continue to follow that story.You know, we'll do new references.We'll talk to their founders that they've invested in, you know, from prior funds, as well as the fund we've invested in trying to get to the answer of, would you recommend this person to a founder friend of yours?Have they done the things they said they would get, they were going to do right.And maintain the type of reputation where they will continue to be able to win deals and continue to be able to support entrepreneurs. It's a lot of qualitative work, I would say, and requires pretty significant resources to be able to get right.And then we'll also talk to the rest of the community.We'll talk to other venture firms and say, hey, Andreessen Horowitz, what's your perspective?You've been working with this group here on two boards with them.How have they delivered over the last couple of years?
How has that reputation maybe changed, not changed?And so talking to those GPs is equally as important. And then we'll talk to other LPs too, right, who are generally able to do similar things that we can from those references, from their analysis, and really benefit from aggregating the information that they've generated along with ours within that community to try and make that assessment.But, you know, beyond that, it's not like you can run some model and say, yes, this checks or no, this doesn't.
SPEAKER_02: Yeah, I think, you know, we do a fair number of small checks as LPs, primary LPs into funds.And I've been doing that for probably the last 10 years or so.So we've invested small tickets into about 40 or 50 fund managers.And when we were doing this at 500, we had started about 20 small funds within 500.Jordan's spot on.It's very difficult to do diligence in the first three, four years of a VC's career. But I think Jason mentioned this on a previous podcast, and it's sort of the same math that I look at, which is what's the progression from pre-seed or seed to series B?And there's several rounds in between there.And you're not looking at it on an exclusively quantitative basis, like everybody can get lucky and get one big winner here and there. But what you're looking at is a proportional progression of the portfolio where you're getting consistently, let's say, anywhere from 30% to 50% of your bets from pre-seed to seed, from seed to Series A, from A to B. And probably somewhere around Series B, you've got a company that's actually got revenue, got product market fit, and is progressing.
And not necessarily that that's going to be a great investment. But if I'm looking at early stage managers, I want to find out what's their ability to sort of pick and or help companies from those early stages to some level of sustainable progress, which is usually, in my opinion, three funding rounds.But somewhere between pre-seed, seed to series B is that progression. And if they can get a minimum of 10% to 15% of the companies, regardless of the quantitative outcome and TVPI, that's interesting.Certainly, if they're getting 20% from seed to B, that's a pretty good number.
SPEAKER_06: Yeah, that continuation strategy and that data is something I was introduced to going out for my fourth fund.I had never studied it and really focused on it, but I did see that some of the larger LPs did look at that.And we had to... you know, have them not benchmark us versus seed funds.I was like, oh, no, no, no, we bring the inventory to seed funds.So at seed funds, our percentage looks really bad.But then when you compare it to other accelerators and pre accelerators and pre seed, it looks just fine. So each of those jumps, if you're doing your job correctly, you have a very low batting average if you're an accelerator.Because if you're an accelerator, you really are trying to work the power law.You really need to look for crazy ideas like Coinbase and Airbnb and Uber and Robinhood.
You really need... people who are, you know, trying to attack windmills, like you need the crazy lunatic founders to bet on.And you can't just be betting on, you know, all SAS, you know, run of the mill copycat products, you need outliers, and you need to bet on crazy things.And those have just a very high attrition rate at the earliest stage, right?80 90% going to zero when you're running an accelerator pre accelerator.
SPEAKER_02: But you're getting it at low prices.So, I mean, I think they always have to balance that.You know, there's something we used to look at, which I was calling like value weighted progression.And usually it was like, what's the round to round step up in value?What's the follow up on or survival percentage?And what's the dilution?And if you multiply those numbers, theoretically, they should be better than one.In other words, if you're deploying a dollar, you should get better than a dollar's worth of value at the next stage. But it's also interesting math to look at for whether you should be doubling down or not.So we did that analysis at one point.
Even though there's high attrition rate at the accelerator, the step up in round-to-round valuation is usually like 4x.Sometimes it's even more than that.So again, if you're getting in at between $1 million to $2 million valuations and these companies are raising... at a minimum of eight to 10 million or even more, you have a really incredibly good step up in round to round value.And so if you get a significant percentage, let's say at least 30%, 40%, you're getting a number that's far greater than one.And conversely, it usually means that that's not such a great place to be making a follow on bet. Because what we would typically see is that even with the attrition, because of the low valuation, we would get our best IRR check at pre-seed in the accelerator program.That's not always true in less competitive environments.In other places outside the US, that step up in round-to-round isn't as significant. So it might make sense to have more of a follow-on strategy in those less competitive markets.
But if you're doing a good job as an accelerator manager or as a seed fund manager, you should be getting your best IR on your first check, in my opinion.
SPEAKER_06: Yeah, and just to build on that, it's the conversation I have with our RAAs, we call them, researcher, people we hire out of school, analyst, somebody who's done 500 introductory meetings with the founder over Zoom, recorded them and written coverage of them.And then 1,000 calls, you get to associate level.So these are... And people can do it in less than a year.They can get to 500, 1,000 calls in one year each step up.So we like them progressing quickly.And with that group, I will ask them to advocate.And they write their deal memos.They advocate for companies.And we have that record for all time, that they were saying, yes, we want to do this.
And then I say, no, here's why.And then we have to live with that. But the framework I put into it when I'm asking them is, okay, we already own 7% of this company for 125K.Call it a $2 million valuation.Okay, now they're going out of 10.In order for us to get another 7% would be 700,000.So to Dave's point, do we need to get to 14% right now?Probably not.What have they proven since they've graduated?Who knows?
But maybe we want to get to 10% ownership.And then I asked them for that 300K. Would you rather do three more accelerator companies or two and a half?
SPEAKER_02: Or would you like to do- This analysis is so smart.
SPEAKER_06: Would you like to do 12 more swings at bat at the 25K, two and a half percent?And inevitably they come back and they're like, I would like to do another 125K bet and I would rather do seven 25K bets or I'll do two 125 bets and two 25K bets.I'd rather have more shots on goal for my performance, right?So this is a very-
SPEAKER_02: That's super smart that you do that.So many people have that follow-on framework.You have a limited amount of resources.You have a finite amount of bets that you want to make.Is the marginal amount of ownership you're going to get in this company worth it?Because you already have a bet on the table on this company.You really need to be buying 50% more relative ownership for I would say arguably 100% more relative ownership in order for that to really make sense.Because if the company is going to win, you've already got whatever ownership you've got.Are you sure you want to add a marginal amount of ownership in that versus betting on something else or betting on five other something else's?
SPEAKER_06: Yeah, and it really is a function of your deal flow.Maybe you don't have a better deal in your deal flow, or maybe you have too many good deals.I find myself having too many good deals wanting to come to our programs.And so I tend to lean towards that.But I did come up with a framework that has taken me about a year to come up with to train the team on what I think is a likely winner coming out of the sea shades and what I think is a definitive winner. And now that I've codified that, we have a much better framework.So we do those two frameworks.Is it a likely or a definitive winner? Or would you rather make these more smaller bets in the programs?And it's just changed everything.
SPEAKER_02: I love to see like three, four years of that.Okay, great.You're already thinking about it.I mean, that's got to be gold four years later.
SPEAKER_06: Well, I've also tagged the data.So we now, you know, every week, hundreds and hundreds of applications come in and 70 meetings, 70 calls, 70 call notes, you know, and the stuff.So yeah, we are, The other day, I was just like, tell me how many marketplaces we didn't invest in.And they were like 397.I was like, email them all and ask for an update.I love marketplaces.A lot of the money I've made in this life has come from Uber, Thumbtack, a lot of marketplaces in our portfolio that have done pretty well.So I'm like, get me the marketplaces from the database.We don't have any deals.
Great.Let's go back to the deals in the database and Being able to pick and my obsession, and I've said it before on this show, I have two things I'm super obsessed with right now.We have the deal flow.We have the decision making.We don't need to compete to get in deals because it's seed and pre-seed.They're passing the hat most times.So really, the doubling down strategy is really the thing I am most... And portfolio construction, which is the same thing, essentially.Our doubling down strategy... is everything for us now because we know we'll have in fund for 250 names and we just need to add we know there's going to be some breakouts we just need to know which 10 which five percent will break out and that's 12 13 companies out of 250 will break out which ones are those how do we know it's a breakout company or not that's the obsession i have right now
SPEAKER_02: I think there's a great article.I don't know if it's widely distributed, but Clint Korver at Ulu Ventures wrote a pretty interesting analysis on follow-on strategy.I think it was probably written about five or six years ago.And it really... I think a lot of LPs, particularly institutional LPs, look to see conviction, which I think probably induces more follow-on behavior than the market should really be exhibiting. I actually think the default case should be you should not follow on in most scenarios.You're better off making a diversified bet on another company.And it's only in the very clear cases of strong growth and significant marginal ownership that that follow-on bet really makes sense, unless you're doing it out of a separate pocket or separate fund.
SPEAKER_04: I think from the LP perspective, they have exposure to 2025 managers, and each of those have 2025 companies.So they have 500 underlying companies.So they feel like they're capturing the power laws, but they want that alpha.They want the next Airbnb you put in 25% of your capital into that.They want that high outperformance.So there is some rationale there, but...
SPEAKER_02: If that follow-on bet is based on... Again, it might be a good rationale for the LP, not for the emerging manager.
SPEAKER_04: For the GP, it's similar to a VC investing into a company.It ends up being an N equals one.And if you win, you win marginally.It doesn't really change your life.But if you lose, you don't do another fund.So there is somewhat of a mismatch there.
SPEAKER_01: I think from the LP side too, it's very funny.I've seen people who have shown me presentations that have said, if I had just leaned in more to this company, which is what we now do, look at the returns I would have made.And I have seen people say, if I hadn't followed on as much, which we don't do anymore, look at the returns I would have made. you know, you can be successful doing it either way.I think some of the better returns we've seen have been from doubling down, tripling down.If you get it right, I think it works really well.And if you're able to leverage the kind of asymmetric informational advantage you may have, it can work really, really well.I'll tell you another concern is, you know, especially if you're investing across funds or if you're leading multiple rounds in a row, are you propping this company up?Are you throwing good money after bad?
And understanding that dynamic too, I think is something that's important from the LP side.
SPEAKER_06: Yeah.If I could go back, I probably made 10 bets in each of the funds, first fund, second fund, third fund, maybe 20. where I wouldn't say they were sympathy bets, but they were founders who really resonated with me as a founder and who convinced me, yeah, they were going to figure it out, and I placed the bet.But maybe those bets would have been better into... you know, another new company.And, you know, that we've now figured out a way to communicate that to folks that we are not the permanent source of capital for our companies, and that we don't invest in bridge rounds, we invest in companies once or twice and get to seven to 15% ownership. And then we deploy capital into new companies.And once we explain that to folks, they were cool with it.They still might ask us, but, you know, I think a lot of GPs get caught up in loyalty to founders, which I understand.And I've been super loyal to founders and I want to give them that support.
But, you know, you have to have a portfolio strategy.And now we just say, hey, the fund you're in is fully deployed. That's it.And you wouldn't pass the rigor of the new fund because it's not growing right now.So we can't bridge you.That fund's closed.The new fund's open.You'd have to have 3x growth to compete for those new fund dollars.And when you do, we're happy to have that conversation.But the company's sideways.
You got to go find money in the market.And I think that discipline... is really important.It's really important.And you only get to that level of discipline.I feel when you get to your, you know, third, fourth, fifth fund, and you have to face the scrutiny of LPs are like, tell me about these re-ups, you know, tell me, you know, somebody Jordan, like, Hey, I see you did these bets.What was your thinking?And I got to pull it up and go to the deal memo, go to the Slack conversation and, Okay, yeah, I made a mistake.That was a poor bet.
I put bad money, I put good money after bad.I made a bad bet on a startup.Okay, we're all adults, but then that second or third bet, that's where you really have to start questioning, do you have a good portfolio strategy?I don't think I had a great portfolio strategy in the first couple of funds.I think I had the standard one, which was bet on 100 companies, hope for the best.
SPEAKER_01: By the way, Jason, you hit on something I think is interesting, which is the growth mindset, ability to get better and to learn and to evolve your strategy.When we talk about going back to how do we look at a fund, evaluate a fund one or a fund two when they're back in market, that is a part of it, right?Hey, I want to hear about the bad investments you've made and what did you learn from them?I want to hear about what you would do differently in your next fund and continue to see that growth.And so I think that's another element too. I don't think anyone would be surprised to hear me say that there is, you know, sometimes a little bit of ego in venture capital.And so, you know, to that extent, you know, when I know, right, crazy.And when you can see a little bit more sort of humility and growth and ownership and like, you know, I can always be better and I can always get better.I think that is also something that we find compelling.
SPEAKER_04: Now on to the lightning round of top three investments from each guest.Dave, go ahead.
SPEAKER_02: Well, I guess most of the investments we do are at the fund level and private, so I can't really talk about which deals we've done that are great there.I can talk about the direct secondary deals we've done.So I guess three of those, Mercury, which a lot of people probably know, is a startup banking and APIs for companies and credit to Zach Coelius.I'm an LP in Zach's fund.Zach is really amazing.I've tried to hire him at least twice in his career, my career, but he's running a great fund and Mercury was one of his winners and he helped us get into a private secondary in the company that was great and We'd love to own more.So that one's doing great.Also great as a customer, if you're a startup looking for banking services.
SPEAKER_05: Yeah, Mercury has supported my podcast over the years.Great company.Yeah.Really supportive of founders.
SPEAKER_02: Another one that we're an investor in is a company out of Germany and Austria called Gropius, actually working with them on changing the name to greener.com.But they do factory automation and robotics for building prefab multifamily housing, so condos and apartments. You can kind of think about it as like a Tesla factory for building condos.Pretty amazing company.The founders have both been involved in other public tech companies.One of the founders was previously involved in Delivery Hero.The other one led engineering at Zalando. It's about 400 people.Half of them are software engineers.And they basically do programming on these robotic arms to build prefab housing, basically walls and siding very quickly.
And their customer isn't the end user. owner or renter, it's the real estate developer.And so they put together those walls and sidings, deliver them to the construction site, and then the real estate developer builds those houses a lot faster because they can just assemble them fairly quickly. And I think this is an interesting theme that I think we'll see in a lot of physical manufacturing companies is automation and robotics, you know, sort of improving the economics and productivity of physical manufacturing.In the same way, everybody's going gonzo about AI making software companies better and more productive.I think robotics automation is going to make a lot of physical bits companies more productive. And then last one I'll highlight, we've been doing a fair number of secondaries in Latin America.For folks who aren't aware of it, you know, Brazil and Mexico are really, you know, big drivers for the Latin American market, but it's a pretty large overall market that's larger than California GDP and half the size of China GDP. A company we invested there is called RecargaPay.That's out of Brazil.
And basically, I don't know if many people know about this, but about two years ago, Brazil adopted a payment system.It's really driven by the central banks and the government over there called PIX.It's highlighted right there, P-I-X.In less than two years, about 80% of the population is now using it broadly.It's kind of amazing how quickly the adoption has happened. um so ricardo pay is basically a payments platform kind of like a super app uh similar to maybe we pay in china that does a lot of things or uh like grab in singapore um and the i guess i want to say dirty little secret but not so dirty latin american companies are very reasonably priced um there's just not a lot of uh Not a lot of VC capital in Latin America, at least not on the scale that you see in the US or even maybe in Europe or India.And so valuations are quite reasonable.I think SoftBank had a big portfolio that was investing in Latin America many years back.It was about a $5 billion portfolio.
For whatever reason, I won't get into SoftBank changed their mind. pulled out of that.And the guy who was running SoftBank's portfolio in Latin America, Marcel Claret, raised a fund called Bicycle Capital that was $500 million and is still investing in Latin America.So I think there's really great opportunities, not just this company.We've made three or four investments down there.Brazil and Mexico in particular are really taking off, but the overall market for Spanish-speaking Latin America and Brazil, which speaks Portuguese, is tremendous.
SPEAKER_06: amazing.I'll go super fast have a little bit of a theme today about websites, and people building websites.So this first one is called motive.This company reached out to us, it was like one of these seemingly boring businesses.It was a website builder.But this was a website builder for people who own dealers and dealerships.And it turns out, you know, These dealerships need websites.They're incredibly complex to build.And a lot of commerce goes through them and the entire world is moving to buying online.
And we invested in this company that helps these dealerships build websites.And man, is it doing really well.So there's Squarespace.We love Squarespace for general and, you know, building anything.But there are some websites that are super complex and Long tail of websites.And we've found a number of companies that are working on that.TestRigger went through, Foundry University, NR Accelerator.We made two bets on them, I believe.And it's a generative AI-based test automation solution.
People should be writing tests when they write code.They don't. And they're just taking that little narrow spot and trying to solve this problem.And then finally, Krepling is building a drag and drop WYSIWYG style editor, AI powered editor for building modern e-commerce websites.And so you can go into this, as you can see here and build workflows. about registered users coming and then have them send an email then offer a discount.So it's kind of pulling together offers and publishing and app building.Really amazing how this company has done.We made a small investment and then we watched them raise their prices.One of the great pieces of advice we generally have for companies is raise your prices.
Same number of customers, triple your price, lose 10% of your customers. Net-net, you're now at 270.Let's say you were at $100 and you had 10 customers paying $10 each.You raise it to $30, you'll lose one.That's just fine.You're going to still do okay.
SPEAKER_04: And you'll lose your worst customer too.
SPEAKER_06: And you tend to lose the worst one.But I really like your sustainable living company here.We had an investment in a company that was doing modular housing and it was incredibly hard.And it seems like almost everybody who's gone up this hill has failed.But I do think somebody will figure it out and it's going to be a great investment.
SPEAKER_05: So I really would love to meet them at some point.
SPEAKER_02: Well done.I'll connect you.They've got a pipeline of business in Germany that's huge and we're trying to bring them to the U.S.
SPEAKER_06: Really, really hard business.And developers are really hard customers.That's one of the things we learned is that developers, selling into developers is really hard because they want to pay the lowest price possible and then sell at the highest margin.So their incentive is to deliver the cheapest product and have the highest margin. What's the price per door, but they don't realize is like, running of an apartment is the most the cost of running the apartment is equally important for the person who builds or owns the thing.So your HVAC, your efficiency and energy, resistance to flooding and fire, which are the two biggest disasters in apartments, and the biggest cost centers is floods and fires, even if they're contained. And so you should be incented to use better materials, better HVAC, better insulation.But the construction people are like, oh, screw that.Just give us cheaper, cheaper, cheaper, cheaper.We want to buy this for $50 a square foot and sell it for 400 a square foot.
You know, we want to open each door for the lowest price possible.It's like, well, the ongoing, you know, maintenance of these things also should come into play.
SPEAKER_02: Well, you hit on the part two of their business because they build digital building sensors into all those materials.So once they deliver them, there's actually a building operating system that the developers can run to measure all that as well.
SPEAKER_06: Which is super important.Yeah.To know that this unit's got a flood or this one's on fire, pretty important information that they generally don't have.
SPEAKER_04: Jordan, real quick, last three fund investments.
SPEAKER_01: Yeah, I'll go super quick.So the first two investments out of our recent fund, the one we literally just launched like five minutes ago, are Andreessen Horowitz, who was a fund one investment that we made as well.Long relationship there.Love what they do.I think they're absolutely fantastic in that sort of upper echelon of top tier firms. I'll say Founders Fund kind of by default, in the sense that we invested in their prior fund, which they ended up cutting in half given the macro, and I applaud them for it.They're one of very few managers I know who has sort of taken money out of their own pocket in a sense to become what they view as in line with the macro.And so Some of that initial exposure got pushed to their next fund, which we are investors in out of our fund that we just launched as well.So those are the first two.
And then the last investment we made out of our fund one, which was last fall, I want to say, was 776.So Alexis Ohanian's fund, a lot of respect for what he's built there.And obviously, that goes back to the first thing we talked about as he was with Gary at Initialized.
SPEAKER_04: And he was the co-founder of Reddit.That's also, yeah, you're right.I was getting there too.
SPEAKER_08: Lest anybody forget in their tweet at a firm that he co-founded.You know why it's so contentious, right?Because there's so little at stake.It's just a tweet, folks.People are starting to spill tea and shade over a tweet.
SPEAKER_07: I mean, how do they leave him out?
SPEAKER_01: I think I was a co-founder.He is incredible.And going back to the comment I made earlier about being humble and gracious, I would put him in that camp for sure.He is just such a really, really good human being.And so those are our most recent three.
SPEAKER_05: Amazing.
SPEAKER_01: Awesome.
SPEAKER_05: Well, this has been an amazing episode, David.Thanks for hosting again.Well done.
SPEAKER_06: Am I going to see you at the liquidity summit, David?
SPEAKER_04: You will.You will see me.And I'm excited about it.I saw some of the guests coming.They're pretty impressive.So I'm excited.Pretty impressive.I need more LPs to come.
SPEAKER_06: It's going to be June 2nd, 3rd, 4th, and 5th.But the main days are 2nd and 3rd.I'm sorry.The 3rd and 4th are like the content and activities days.The 2nd is just a welcome dinner and poker. And then the Wednesday is going to be like a closing brunch, but I'm kind of, making it, it used to be called Angel Summit.Now I just called it Liquidity because it stopped being about angels.It started being about the LPs and the GPs.And we had, I just emailed all the GPs in our world and I think 70 of them signed up.
And so now I'm in the process of inviting the LPs.
SPEAKER_04: What do you want?You want foundations?You want endowments?Let me know.
SPEAKER_06: I think a couple of each would be great.And then, you know, I'm trying to figure out what to do with this event.I want to do it twice a year.I want it to be super constructive.So, One day of full content, poker every night, second day some content, and then the afternoon events.But I'm wondering if I should do what iConnections does and have speed dating.But I kind of find speed dating... I don't know.How do you feel about it, Jordan?If I was like, hey, here's five fund managers.
Do you want to sit with them or would you rather just...
SPEAKER_01: meet them casually i have always found that at those types of events when you try and do speed dating you suffer from massive adverse selection from my perspective i'd so much rather just identify who it is ahead of time and try and find a way to connect with them yeah um yeah i did like eye connections i went to eye connections twice and it was nice to set up meetings they weren't all they were double opt-in what did you say uh dave
SPEAKER_02: I think you should facilitate that process before they go and then have, have the meetings that everybody opted into double opted into there.But like, usually what I would say is the speed dating is a mismatch for like 80% of the dates, but there's no reason why you couldn't figure that out ahead of time.
SPEAKER_06: In my opinion, you don't need to have the GPs have tables and let the G the LPs come to meet them if they want to one morning.
SPEAKER_02: Yeah, I think if you've got the GPs to give you a one-pager on their fund, maybe a 30, 60-second video if they want, or a short deck.
SPEAKER_06: Oh, that's a good way to do it.Send it ahead of time.
SPEAKER_02: Oh, yeah.
SPEAKER_06: Here's a presentation on my fund and a deal memo.And then if you want to meet, you meet.That's a good way to do it.Yeah, there's a lot of GPs coming.
SPEAKER_01: As an LP, if I got a list of one-pagers on all these firms, I think I would start by prioritizing the ones that I'm familiar with and say, okay, this is actually someone I've wanted to talk to or someone I haven't talked to in a while or whatever.And I'd go through the rest and say, this is actually really interesting or really compelling or whatever.And I love that idea, actually.That would be, from my perspective, fantastic.
SPEAKER_06: What do you think of the video?You like the idea of a video or you just want to do a memo?
SPEAKER_01: I think videos are always helpful.I would watch it if I liked the memo.I would not watch it unless I liked the memo.
SPEAKER_06: All right, Dave.Do I get to come now?Sure.I mean, you're here, so of course.Where is it happening? I do it in Napa.This is the sixth year I've done it.I remember the seventh.I just did it because my book Angel came out and a lot of angel investors were like, hey, I want to hang out.And so we would just do this angel summit.
And it was originally, I thought maybe we get 50 people together.And then it's always been 125, which is the maximum most restaurants in Napa will take. So I've tried to keep it to 125.I got 70 GPs already.So I'm going to cut off GPs coming and then I'm just going to have the other 50 slots be for LPs and founders can't come to it.And then service providers, we let them come if they buy dinner.So if they do a 25 or 50K sponsorship, we give them one or two tickets and they just pay for the dinner, whatever.And so it defers a little bit of our cost if they want to do that.So typically banks or law firms or accounting firms or whatever will... you know, they'll want to buy lunch for everybody.
And so it's quite nice.But I'm trying to figure out a way to do it that doesn't become overbearing because I don't, Want it to become like a bizarre and haggling and hard selling.So I like the idea of like more activities.Hey, we go on a wine tasting.We go to cooking class.You meet some people.You meet some people at poker, you know, or some board games will be set up.So you kind of more casually meet people is my goal.
SPEAKER_04: You know, it's interesting.Mark Schuster did this for a while and it became so successfully stopped doing it.He would publish the list of all the LPs and GPs that are going and people self-aggregate.That could be another potential solution.
SPEAKER_01: Yeah. I will say I have found the less you can make it like a conference, the better in my perspective, the more you can just have people organically converse and get to know one another.Um, I think it's far more, more valuable.
SPEAKER_06: All right.Got it.All right, Jordan, you're in, uh, you're a fund of fun.So you should come anyway.Yeah.It'd be great to have you.We're going to do a fund of fun panel.So you should be on that panel, like panels.We're going to have three fund of funds, give like a five to 10 minute, like, Hey, here's how we think about the world.And then have a round table discussion with the audience.
So I'm trying to have it be just five minutes, 10 minutes of like, here's what I think is happening in the world.
SPEAKER_09: Mm-hmm.
SPEAKER_06: So it's like low pressure presentation.Like it could be one chart.Here's what we believe.And then the next person, here's what I believe.Next person, here's what I believe right now.And then group discussion and then audience microphones passing.It worked out really well in the last time.All right.
SPEAKER_04: Close this up, David.We went long.Well, it's been another great episode of the Liquidity Podcast for Dave McClure, Jordan Stein, Jason Calacanis.This is your host, David Weisberg.Thanks for listening.
