SPEAKER_04: Second conversation I had was Keith Raboy.And I had a conversation with Keith when he was at Coastal Ventures.I'm like, I keep seeing you write $2 million checks into rounds led by other people and you're not taking the board seat.Like, what the are you doing?Like, how can that's, VCs don't do that.He said, VCs are so dumb. He's like, if I could put $2 million into work into a deal led by a partner in Sequoia that I hugely admire and respect with the founder, I really think the world of, and they're going to do all the work and I get a free ride, I'll write 10 of those.
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SPEAKER_02: Welcome back to this week's Liquidity Podcast.With me today, I have Mark Schuster, who is a managing partner at Upfront Ventures, a national seed stage VC firm that's headquartered in Los Angeles.Next, we have Samir Khaji, co-founder and CEO of Allocate, a fintech company designed to help investors build and manage private market portfolios. And of course, we have Jason Calacanis, J-Cal from The Launch Fund.And I'm your moderator, David Weisberg, co-founder of 10X Capital.Today, we have four topics on the docket for you. A historic fund is raising $1.3 billion for their 18th fund.Financial indicators for a potential IPO-friendly year in 2024.Kleiner Perkins Partners on AI.And we'll end with our guests sharing their latest three investments.
Let's start.According to the information, IVP, a 43-year-old venture capital fund that sparked startups such as Coinbase and Twitter, is raising their 18th fund and targeting between $1.3 and $1.5 billion. While this is down from their last fund of $1.8 billion, this signals renewed confidence in the venture fundraising market, particularly at the Series B stage and beyond.Samir, what do you think about IVP going out for a fund in this market?
SPEAKER_00: Well, I mean, they're essentially doing what they've done in the past, which is raise every three years.So if you think about IVP now 43 years, last fund was 2021, before that 18, 15.So they typically do raise every three years.So I think the question is, where is that Series B and Series C opportunity today?And are there tailwinds or headwinds that we see from our side?So I'll say a couple of things. So 2021, of course, was the peak of Zerp.And we had Series B, Series C, Series D valuations really go through the roof, largely as a cue from the public, you know, multiples, if you look at SaaS multiples in 2001, 25 to 50x. And so as things have changed, we started to see the change in the private markets in the last two years have been really chill when it comes to Series B and later.You know, seed has been fairly insulated if you look at the numbers.
But today, if you look at the valuation of Series B and C versus Q1 2021, So according to Carta, Q3 2023, Series B is down about 21%.Series C is down 37%.So for someone like IVP, which has been around and one of the known players in the growth stage market, there's actually a lot of tailwinds.So reduced valuations.Companies today have better discipline.So over the last couple of years, companies didn't have to raise because they raised so much money in 2021. But to extend that runway into 2024, they've done things like make cuts, think about how to achieve better unit economics.And so the overall discipline and the financial fitness of these companies are better.And so IVPs now investing in a scenario where there's less players, the crossover funds are effectively gone, and the supply of capital going to series B, C, and D is less.
So from our standpoint, Series B will be back, Series C will be back.It's still not going to be anywhere close to 2021.But if you look at 2018 and 19 valuations, companies and the quality companies, I think it's a great time for them to come into the market.
SPEAKER_02: And Samir, take us back when a firm like IVP is looking to raise a fund, how do they right size the target?Tell me about that process.
SPEAKER_00: Well, I mean, some of it's supply and demand, right?So what is the LP market?Of course, in 2022 and 23, most of the institutional investors were not able to do much because they had the denominator effect, right?So their public portfolio had gone so far down that they were over allocated.So a little bit is based on the supply of capital. The other thing fundamentally is what is the right fund size to be able to execute on your strategy?And in the case of IVP, in 2021, they had to raise a bigger fund because the rounds are much bigger.Our view is you don't really need to raise that much money. As a Series B company, do you really need to raise $50 to $100 billion?Now, there's some exceptions in AI where you're essentially buying a lot of compute power.
But most companies don't need that.And capital efficiency, I think, to a certain degree, is coming back.And so it's the factor of LP supply. And it's also where is the market today?And what is a reasonable way to deploy capital responsibly?Because if they raise too much money, they got to write bigger checks, the valuations are going to be bigger.And you're really going to stretch to do deals that you probably shouldn't.
SPEAKER_02: And Jason, you're you're out there fundraising in the earlier stage, do you see a reset?Do you see kind of back back to bull market in the early stage?
SPEAKER_03: Well, I think this story is a bit of a nothing burger.This is like a legacy firm.They're going to obviously raise their next fund, and their LPs probably didn't change this time around.It might be that the size and the commitment may have changed.So you might have some LPs who are saying, we did $50 million in the last fund, but we want to do $40 in this one.So maybe people changed their ticket size because they're over-allocated or waiting.But these filings get done with the SEC, and journalists can look them up. Usually there's like a high watermark.So you put some... The attorneys tell you, you know, triple whatever you think you're going to raise or make it 50% more.And as Samira was saying, it's really supply and demand.
In the United States, the existing fund of funds and... endowments a lot of them have been pencils down in terms of adding new funds and then sovereigns individuals and family offices started to get active i think in the second half of 2023 2022 a lot of people were pencils down trying to figure out if it was the end of the world and i suspect going into 2024 um it'll be slow but steady and maybe a return to normalcy i'm interested in what mark thinks in terms of having a fund that now would be like a legacy fund i'm not sure what number you're on or a vintage you're on here mark but um you know it feels like the the funds that have great lp relationships are just you know going about their business raising their next fund and yeah it might be a little smaller but that's just the game on the field
SPEAKER_04: So a couple of things.So Upfront Ventures is now in year 28, if you can believe that.We are on our eighth vintage of our early stage program and we're on our fourth vintage of our growth program.Let me give you some data and then let me tell you my instinct on the market.Let's start with the data. Between 2019 and 2022, the top 10 funds that raise venture capital dollars to deploy raised on average $4.5 billion per year.$4.5 billion per year.That is up 4x or 400% between what they raised the prior four years.So the market was nuts, okay? And all of the tourist capital is left.
Anyone who was a public crossover is left and all of their teams are gone.And they have stranded every company they invested in.So let's hope that founders are no longer going to seek capital from tourist capital because now you're starting to see what happens.Number two fact is that contributions from LPs to VCs right now so far in the last 12 months is down 60%. OK, so the market is right sizing and that's healthy.I think that's a healthy thing.Disproportionately, the dollars are going to buy IBM. What do I mean?The top names have raised 70% of all LP dollars.So there's a couple of factors that are happening.
Number one is the big funds are getting right-sized.I suspect the biggest will be cut by about 50%.Look to Founders Fund, amongst the best firms in our industry right now, and they proactively went and cut the size of their fund by 50%. So I think you're going to see that the platforms are going to go down by 50% and some of it by choice, because asset gathering and making fees when you're already incredibly rich makes no sense when your focus really should be on returns. Secondly, the number of emerging managers that have been able to raise is also down north of 65%.So it's cut by two thirds.I also think this is healthy.All it's doing is letting the cream rise to the top.There are amazing emerging managers that can raise capital today. But the third trend that no one really talks about publicly, so I'll just say it so you know it, especially Jason, if you're going out to raise, there used to be this ideology of one and done and you could close a fund in three to four months.
Like that's out the door.Everybody knows that it's hard to raise.It doesn't matter who you are.Well, maybe exceptions, Sequoia or Benchmark or whoever.But like if you're not Sequoia or Benchmark or somebody like that, like it takes time.And what... ordinarily took nine to 12 months got shrunk down to two to three months is back at six to nine months.And, and many of the big platforms themselves are doing two to three closes, not one close.So that's the market.And I think there's going to be a lot of pressure on emerging managers, a lot of pressure on solo GPS.
And I think the cream will rise to the top.And you know, Jason, if you're looking for investors, I think you'll do incredible like you have, a very unique platform relative to most people.And I think investors are looking for something that's unique.
SPEAKER_03: Yeah, we're in business and we're able to close.But I will say this has been one of the harder things I've ever done in my career, which is to say I've had a charmed existence as an executive.I always raised so easily, whether it was for startups or for funds.And now people are doing diligence.And we had one sovereign meet, I don't know, 30 of our founders.I mean, this is... significant diligence, and they did it through a third party.And we just had a bunch of folks say, Hey, you know, I got this phone call, I got this phone call, I got this phone call.And so that to me, means that it's a healthier market.And then people were really challenging me on, hey, you made this investment, we made this investment, you didn't follow up on this investment.
These are questions I never had to field.But now on our fourth fund, we're starting to field really hard questions.Ultimately, if you're dedicated to the pursuit of being a capital allocator, like I am, This makes you sharper.It makes you much, much sharper.And so I feel like this has been a blessing for me having to weather the storm.I feel like I'm a better sailor because I went through the chop and, you know, through this, but we had to pause our fundraising.You know, I was thinking about going out when Silicon Valley bank happened and I was like, well, that's, that's impossible.People were thinking the world was over. And so I'm glad we did it.
We're going to wrap up May 1st.We did 506C.But, you know, it was interesting.And I've shared this a little bit publicly.I had people at some fund of funds and some other programs who were like, yeah, we might be downsizing ourselves. What do you any career advice for me?So when you're, you know, the person on the other side of the table is unsure of if they're going to have their gig, you know, that tells you how, what a cleanup process we had over the last two years.And I'm seeing a lot of solo GPS, as Mark is pointing out, for people who did one fund who are maybe touristy, not be able to clear market.And I've had a couple of funds that I was LPs in or looked at being an LPN and They're not doing their next fund.
So I think it's all healthy.You really have to want to do this.This is a discipline.And there was a lot of weird behavior, like people getting really addicted to the fees and doing larger funds.And I don't know if you got these, Mark, but I was getting, Samir, I was getting people sending me their returns in 2020 or 2021.And they'd be like, our fund is up.Our IRR is 376%. And I'm like, didn't you just start this fund?And they're like, yeah, but we're, you know, they're sending monthly updates, quarterly updates on their fund.And I'm like, if you're up that much, why don't you sell half those shares and lock in a 3x fund in year one, and then deploy the rest of the capital?
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SPEAKER_02: Mark, you've been around for 28 years.You've seen DPI, you've seen everything.What is your strategy today on DPI and how do you look at that?If you could give us some examples.
SPEAKER_04: It's a great question.So first of all, I wanted to find it for anyone who doesn't know what the hell we're talking about.Okay.So DPI is distributions per paid in capital, right?So that's cash, that's cash given back.When you invest in a company, let's say that company gets marked up three times.If you take that at a three x, that's called gross multiple notes, it's moik.
SPEAKER_03: It's actually on invested capital.Yeah.
SPEAKER_04: So that is the highest number someone will quote, let's say 3x.Then you need to subtract out your fees.And that's when you get to TVPI.TVPI is what your paper holdings are, irrespective of distributions.But at the end of day, TVPI doesn't pay anyone.TVPI is like saying my company's a unicorn.It doesn't really mean anything if you don't ultimately get exited at that.And then DPI is cash distributions or distributions full stop. Okay, so in the run up between 2017 to 2021, we were hyper focused.Samir knows this.
We spent time together hyper focused on DPI.So we exited $1.2 billion worth of positions.Now, if you're raising... billion and a half dollar funds, maybe that doesn't sound like a lot.Most of our funds are sub $300 million.So distributing $1.2 billion is meaningful.And it didn't come without focus.It wasn't like all of our companies got bought by big companies, or we IPO them all. We IPO'd some, we did trade sales on some, but we did secondaries on some.Some of our companies, the valuations got really high.
We still love the company.We might have sold 15%.We might have sold 25%.And I was very comfortable with returning cash because in 2021, valuations were bonkers.I'll give you one data point is November of 2021, software companies, public, We're trading at 24.6 times next 12-month revenue.Private, we're trading at 100 times NTM.And that's just nuts.If you want to know the 20-year average, the 20-year average is 6.2.The 10-year average is 9.6.
So we could say... Maybe 9.6 is relevant, maybe 6.2 is relevant, but somewhere between that football field is what a SaaS company's worth.And public markets, 24.6, private markets, 10x, 100 times.And so we were willing to sell. Conversely, we are buyers right now.So we have started buying secondaries in companies at 60% discounts because, you know, like be fearful when others are greedy and greedy when others are fearful.So over the course of the last year, we've been looking for the companies we have really high conviction in and where other people for their own reasons might like liquidity and we're able to buy into those companies.And so we've aggressively pursued that strategy.
SPEAKER_03: Are any of those companies, I'm curious, companies that you met with and weren't able to get into because they were competitive when they were at 2X and now they're at a haircut and they've grown maybe 10% or 30% year over year.So it's actually more like the valuations might be reset to 25% or something.It's a good question.
SPEAKER_04: It's not the strategy we're pursuing, but there are other people pursuing it.I want to tell you why I'm pursuing the strategy I'm pursuing.I'm buying in companies I'm already on the board. Because if you're going to invest in that company, I have governing rights.I have visibility in how the management team is performing.I understand where the risks are in the business.And also, an investor who gives me money to buy secondary stock, they don't have to... overly do due diligence because management teams are not necessarily wanting secondary transactions to happen.And then outsiders call the management team and the management team might say, we don't want to do secondary, we don't want to take your call.I don't need to do that diligence because I already understand the companies and what the inherent value is.
I understand the liquidation stack.I understand, you know, whether or not investors are going to write a check or not going to write a check.So we've been buying up very aggressively. But I want to make sure Samir gets a word in.Samir, what are your thoughts on what's going on?
SPEAKER_00: Yeah, there's a few things that I actually wanted to cover.And one is, let me tell you what has happened and why we haven't seen as much of this secondary liquidity when people should have been taking money off the table, certainly in 2020 and 21 when we were at peak valuations.Jason, you mentioned raising capital in this market. So the number of emerging managers that have come to market over the last 14 years, so if you think about 2010 and 2009 to 2023, 2,700 new firms in the US alone.And these range from small funds that are raising three to five all the way to somebody spins out of brand name X firm and raises $250 million. Now, the stats are only one out of five fund one managers make it to a fund four.And so what you have is you have a lot of new funds coming to the market that are doing it for the first time.And so, you know, what we saw is the eradication of the J curve, right?So there was no J curve in 2019, 20 and 21.And I was seeing the same thing, Jason, where I looked at the quarterly report and after two quarters, we were up 84%.
That allowed people to raise capital from investors who are pouring in in a risk-on environment.And now everything's changed.And now you can't raise just some of those dollars because no one trusts Marx.And at the end of the day, the J curve is back.
SPEAKER_03: Explain the J curve in case people don't understand you.
SPEAKER_00: Yeah.So the J curve basically is with private funds, a particular venture capital, in the first few years, you are making investments and your returns tend to be negative.Your cash flows tend to be negative because there's no markup in your portfolio and you're paying fees, right?So the manager typically charges two and 20.And so what you will have typically in the first two to three years of a venture fund is negative returns.Well, that went away in 2019, 20 and 21.In fact, it felt like everything was working.So to that point, when everything was working, people didn't feel like they needed to sell.It didn't matter what the valuation was because somebody was willing, there was a willing buyer to pay a higher price.
But if you look back in history, liquidity management has always been a part of good VCs.Benchmark, for example, has done a lot of secondary along the way with some of their big winners.It doesn't mean they sell the entire thing, but they sell parts of it.Uber, for example.USV, Fred Wilson talks about this all the time.They have been very thoughtful about when to take chips off the table.Not 100% of the chips, but some of the chips.And I can tell you just from looking at some of the DPI numbers of all the funds that we've looked at, some of the best, most experienced managers had some level of liquidity management during the peak where they were participating in some of these secondary tenders.
SPEAKER_03: Yeah, it's definitely something that I have carried forward.We were reactionary.People would offer us.We would take advantage of them.Now I'm actually establishing relationships with the secondary markets that are out there, and I'm going to deputize somebody in this fourth fund of ours, you know, one of our 20 people or so to be monitoring.And then I'm actually Mark, I'm interested in your thoughts on this.You know, when we are on board of something, and I preceded it, you did the Series A, whatever, you know, going proactively to other people, you know, not necessarily to the CEO of the company, the CFO, but just saying to the other participants, you know, we've reached our targets, at some point, we might consider selling 20%, just letting you know that in case you want to increase your
SPEAKER_04: multiples since you've been at this a little bit longer than i have what do you think the right way to do that um with proper manners so the only uh major things that we've seen number one is if you get into a company that's doing incredible okay so we backed an ai company in 2016 it was held at about 40 million dollars on our books And it went to $184 million.And then it went to $500 million in two years.Okay, $4,184,500. And in that $500 million round, there was way more demand for people to invest than the founder wanted to take dilution.So everybody started calling me and saying, would we sell?So suddenly I'm sitting on tens of millions of profit, and we just sold 25 million.I'm majority still long.I love the company.I think a lot.
I think they're incredible.
SPEAKER_03: They're going to do well.What percentage, if you're willing to say, of your holdings ballpark? around 40.
SPEAKER_04: Yeah, that's the higher end of what we sell.But the reason is the run up was extreme to me.And it was a meaningful amount to return.And there was a lot of demand.By the way, after I sold, I got like three calls for more buyers, and people willing to pay up to 700 million, even though the last round got done at 500.And we said no, like we're holders now of that stock. I have another company, it went from 850 million to 1.7 billion to 3.7 billion in three years.Okay.Now, this is a company that is selling, it's a marketplace, it's selling more almost $3 billion in its marketplace, its take rate is hundreds and hundreds of millions of dollars, incredibly valuable, but the run up was really big.And we were sitting on 350 million of gain.
So I sold 150 because again, at that 3.7 billion, a lot of people wanted access.I could have sold more.I probably could have sold all.
SPEAKER_03: We decided- Have you had an LP come to you and say like, hey, you shouldn't have done that or- Has that ever happened?I'll tell you a funny story.
SPEAKER_04: Were they not greedy?
SPEAKER_03: I'll tell you a funny story.
SPEAKER_04: We did one other thing is I thought the right thing to do was to go package up my 2009 fund and kind of sell that because it seemed like it was getting long in the tooth and people would want distributions.And as I talked to secondary buyers, I actually met the major buyers in the market, people who do this for their profession. And they said there wasn't diversified enough risk in that platform for them to invest unless they paid a huge discount.So I suddenly said, Okay, what you're looking for is more diversified risk.They said yes.So what I did is I took 20 companies, and I sold 15% of 20 companies. And I manage that fund for them.So for the individual CEOs, for the other board members on those companies, it doesn't look any different.It's just money moved from pocket one to pocket two.I'm still the board member.
I'm still managing all the money.But it allowed me to send $165 million in distribution to LPs.Some of those companies I invested in were already worth, call it a billion dollars or more.And some of them were worth like $30 million. Now, it just happens that that really good company I told you about that went from 40 to 184 to 500 was one of the companies we sold 15%.So that investor got all the upside.And now they're sitting on all the upside.Okay.
SPEAKER_03: And so these are those called strip sales.I've been getting a lot of there are people raising funds just for strip sales.I understand Dave McClure might have done one of these.
SPEAKER_04: david's focused on this market i did a strip sale i think it was great for people to send liquidity to people who have other needs for their capital i can send that capital back and i still believe in that vehicle and i put millions of dollars of my own money into that vehicle like because i'm betting on the long i'm buying the long term on this portfolio no problem
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SPEAKER_02: Samir, you've seen strip sales, you've seen continuation funds, you've seen all these exotic secondary vehicles.What are your thoughts on them?And when should GPs pursue that strategy?
SPEAKER_00: Well, I mean, DPI for the sake of DPI is not the right thing.And so, you know, if you're being pressured by LPs in the early years, it's year five, give me DPI. But it comes at the expense of the long-term return, obviously not the right thing.There hasn't been a lot of this in venture.So private equity, very prevalent to do continuation funds, to do strip sales, to do secondaries.And part of it is most VCs are actually exempt reporting advisors.So you're not registered as an RA.So if you do a continuation fund... You actually have to be registered.So there are some barriers that do exist for it to happen at scale and venture.
So I think what we've seen historically, and I think we'll continue to see this, is more funds, more VC funds, thinking a little bit more critically about when to sell and having some level of parameters and policy.Mark, you mentioned 40% of this one company.Most cases, it's 15% to 25%. And you have some kind of methodology that says if a company is going to return X amount of the fund, like if I can get 30% of my fund back by selling 25% of this position, it may make sense.Or if at the time that I'm selling, I look at the upside and say, the upside might be 5X, but it's going to come with a degree of risk and it's a five-year liquidity cycle. I might make the decision to sell some.And I am seeing those conversations happen within the walls of the VCs that I talked to.Whereas five years ago, I really didn't see that that much.
SPEAKER_03: Are those continuation funds and script funds continuation fund, I think is, hey, we're going to extend the life of the fund by creating a new vehicle, new investors, we're resetting the clock, right?And then script fund, hey, we're going to take a percentage of this fund and package it up for sale, which is essentially, you know, kind of a similar thing.Do you think these throw to Mark or Samir? Do you think those are a function of the time period we're in right now?And is that time period going to end given what we're seeing in the public markets?Like if Stripe goes public, Reddit goes public, those things go well.Are people suddenly going to be like, you know what? We got an active public market here and exits.And this might be a good segue, David, to the next topic.Why would we do these?
SPEAKER_04: Ask yourself why founders sell 10 to 15 or 20% of their positions, right?Because they're locked into a single vehicle and their goal should be hopefully to stay in that vehicle for 12 or 14 years.And at year three, four, five, six, When they don't have liquidity, they still need money to buy a house or maybe by then they've had kids and they have increased costs and pressure.And I've always said that it's healthy when you have a successful company. to allow the founders to sell a small piece, I call it feed the family money.Because if you feed the family, then we have aligned interest in trying to create something much bigger.Now, it just happens that venture capital funds used to be eight to 10 year funds.Well, we know damn well that they're 15 year funds right now.And so your goal should be to get liquidity back to your LPs earlier.
And if the exit environment doesn't allow you to IPO or do M&A, I think there are going to be other ways to create interim liquidity of a partial part of the thing.Now, look, there are three ways to exit a business.Traditionally, it was IPO.That's all anyone had wanted to do. But unless you're one of the magnificent seven or now somewhere between magnificent six and a half, maybe.But unless you're one of the top companies, I can tell you, ask anyone who has IPO to company that is not performing well, there's no liquidity. Like you're not able to get out being public.You're being punished for being public because you have all the reporting requirements and none of the liquidity.So you get none of the benefits.So IPO is becoming harder.
And even I think only the best names, the stripes of the world are going to be able to IPO.Number two is trade sale. Well, we'll just sell everything to Facebook or Google or Amazon.Well, you know, the FTC is starting to crack down on this.The SEC is starting to crack down on this.You're going to see a lot more oversight of M&A.So that's not a viable exit for as many companies as it used to be.So the third bucket is private equity, Sal. Okay, so private equity investors are going to buy venture backed businesses, that's going to be an increasing trend.
SPEAKER_03: But here's the problem.Of course, it's of course, it's like, that's what there was a big boom of that happening.
SPEAKER_04: Because that's what Vista does.That's what Silver Lake does.That's what Toma Brava does, like all these firms have been doing this over the last decade. And it's great for founders, too, because what they often will do is allow the founder to get paid out and continue to have upside.But here's the thing is they pay based on EBITDA multiples.So none of the funny money bullshit like ARR, venture capital stuff.It turns out entry price matters because exit price is going to have some limitation unless you happen to get into something like the Magnificent Seven. And if your exit is more to private equity, it's going to be EBITDA multiples.And so we have to, in our industry, start talking about that.Wow.
SPEAKER_03: Yeah.So they're going to buy at Samir like a, I don't want to say bargain basement, but they're going to be really sharp pencils when they buy something.There's no dressing this up.
SPEAKER_00: It's exactly right.And if you look at, I mean, these private equity folks are really smart, financially sophisticated people where they're paying out a very different type of return.They're not shooting for a 40x return, right?This is not a power law type of business. We haven't seen this at scale yet, but I do think to Mark's point, there are a lot of companies that were on the venture treadmill that have slowed down growth.And those companies can actually get to cash flow break even.And the exit itself is unlikely to be a large M&A.And of course, Adobe with... Somebody like Figma.I mean, part of the issue is Adobe had to pay a billion dollar breakup fee, which a lot of big firms are going to look at as, is this going to be a deterrent to doing this big M&A?
So private equity.And to your question, Jason, about is this now?I don't think so.I think it's amplified now because everyone needs liquidity. But the length of time companies are staying private are so long now.An average early stage venture fund is 14.7 years, twice the time of a US marriage.So ultimately, you have to find a way to get some level of liquidity, whatever the market cycle is.
SPEAKER_02: One question, Samir, you also see we've been talking about funds holding on to positions too long for all sorts of incentives, but you also have funds sell too quickly for the wrong incentives.Can you talk a little bit about that?
SPEAKER_00: Yeah, I mean, an example would be, you know, you're, you know, you do a seed or series A deals, typically seed, you know, it's usually the seed investors, they do a deal, maybe it's a $10 million post. A few years later, the company is scaling.And it may be a great company that's really this rocket ship.And they have the opportunity to sell the whole position.And it returns like a third of the fund or half the fund, maybe.And they sell it.And what they do is they want to sell it because maybe they're raising the next fund.So to show DPI back to the first investors, or maybe it's two funds before, and to show prospective LPs, hey, we have some DPI because everyone's focused on DPI. is is probably not the reason if that company as a gpu thinking underwrites you another two or three turns of the fund and so we have seen a little bit of that i can't say we've seen it it's not been ubiquitous but that would be a reason of taking a short-term gain of getting dpi to be able to raise a new fund show people that at the expense of the long-term return because if you're investing in a seed fund you are expecting to get at least a 3x but really a 4x net or higher
SPEAKER_03: That's why seed funds are becoming popular these days, I think, with LPs.That's what I've heard being a pre-seed fund and a seed fund.People are like, the average for seed funds is so much better than the later state.Well, not so much better, but slightly better.
SPEAKER_04: I think, though, the one thing is, look, I think right-size funds matter.We never increased our fund sizes above $300 million in a world where people were raising $2 billion because it changes your strategy.It changes how you deploy cash. And it requires you to have huge sophistication on how you're going to exit this at $3 billion or $5 billion or $7 billion.And there just aren't that many $5 billion publicly traded tech companies.Jason, do you have any idea how many publicly traded companies are actually unicorns?
SPEAKER_03: Yeah, that's a great question.It's going to be, gosh, over what time period?You're just all total from venture?As of today.From a venture start.So we would include Apple in that, we would include Google in that, everything.Oh, wow.It's going to be... Low, I'm going to say 75 to 200, somewhere in that zone.
SPEAKER_04: Okay, well, that's low.Like most people assume, because there's 1,400 private unicorns.Okay.Right.
SPEAKER_03: I would say 20% get there, 300 more.So maybe that's 300 now.343.Oh, okay. You helped me with my math because I was gaming.I was like, I think 20% get there.Yeah.
SPEAKER_04: And so that is the what do you what is a call those paper corns?I call them companies that are valued at a billion dollars.But that doesn't mean they're worth a billion dollars. And the problem is then you kill all the incentives like management team no longer has upside.You have seed funds that are 6x TVPI, 8x, 12x TVPI, but no DPI.So they look good if you're an unsophisticated LP because an unsophisticated LP won't understand that that cash is never going to come home to roost. So the problem is between 2015 to 2022, we've had all these markups.So there were 723 net new unicorns in 2021.60% of those were priced by just four VC funds.Okay.
Hold on.I got to grok that.
SPEAKER_03: What was the total number?723.Okay, so 723, 60% of those, so more than half of them, like 400 of them, were priced by Andreessen Horowitz, KOTU, Tiger, something like that.
SPEAKER_04: I'm only going to name two of the firms, SoftBank and Tiger. Got it.Okay.I won't name the other two, but let's suffice it to say you could have an educated guess.So what I tell people is at least the two that I mentioned are not active in venture capital right now. So if I were an LP doing due diligence, I would look through my seed funds and I'd say, which one of those had markups in 2021 or 2022?Because I mentioned 723, but it was something like 429 the year after, right?So I would take those two years and just like draw a line through those and they're probably massively overvalued.
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SPEAKER_02: today mark you mentioned 1400 how many of those are dead dead men walking you have 1400 private unicorns over under i think that at least a thousand of them will never exit at north of a billion dollars wow two out of three two out of three that's pretty wild
SPEAKER_00: But I think that's true because some of those companies were able to get a billion-dollar valuation at a 1 to, in some cases, 1 to 150x forward-looking revenues, which is crazy.And so, Mark, I think you mentioned the number 6 to 9x forward-looking revenues in the public markets, which basically means as a company to even get a billion-dollar valuation in the public markets, you're at 150 to potentially $250 million in annual revenues.How many companies reach that?
SPEAKER_04: And that's just software companies.Like if you take marketplaces, marketplaces, 20-year average is two times net revenue.So you take net revenue next 12 months, average valuation is two times over 20 years.If you look at a 10-year average, it's three times.So marketplaces are valued between two to three X. Maybe if it's an N of one, you could say three and a half X. But three and a half X net revenue, like it's pretty predictable what they're going to exit at ultimately in a market that's paying rational prices.
SPEAKER_03: we are in rational price land, but the founders have taken the medicine.I think that's the one thing I'll take solace in is, you know, our conversations on all in for two years of like getting fit and taking the medicine.I don't, I mean, who's, who hasn't taken the medicine?I don't do, does anybody have examples in and around their portfolio of people who are still in denial of all I can say, Jason is God bless Elon.
SPEAKER_04: Because what Elon showed our whole industry is how bloated our companies had become.And God bless Bill Gurley for talking about stock-based compensation.It's a real cost.It's an expense to the business.And in some cases, people are taking 6%, 7% stock-based compensation per per year.Now in a company that grows from 50 million to 200 million to 800 million to 3 billion to 10 billion on paper, everyone kind of said, Oh, okay, well, we have to incentivize people. It's a real cost, and it's real dilution that shareholders are paying, including founders.Like, founders are getting diluted too, and they just didn't really think about the math of it.But between Elon showing people just how much inefficiencies was in company, and he gave air cover to Mark Zuckerberg to then go and do it, and then even Mark Benioff, right?
Yeah, like one of our industries, one of our industry's great leaders, like he was led based on growth for his whole career, said it has to be growth plus cost focus, right?And so as a result of that, you have more efficient companies.And that's what I love about capitalism.That's why I'm so short China.That's why I'm so short Russia, because command and control markets, they can do well for a little while, but capitalism creates much better outcomes.
SPEAKER_03: Because it's a competition, right?And when you start rigging the system, it's like, and picking the winners or picking the losers.I thought that was the crazy part about China.
SPEAKER_04: Just a great read for everyone.Go read Chip Wars and go read about the competition between the US chip industry in the United States and Russia. and how Russia we were so scared in the 1960s that they were going to pass us and they talk about how the command and control because they were sworn to secrecy they were controlled by the government there was no one trying to mess each other up or get ahead there was no collaboration because no one wanted to talk so they got like caught up with us and maybe they looked like they were going to get slightly ahead but the creative destruction of the United States produced better results same thing happening with China right now
SPEAKER_03: IPOs?I know we want to talk about IPOs.
SPEAKER_02: Yeah, well, from China, command and control to American public markets.Moving on, F Prime Capital, formerly known as Fidelity Investments, put out its 2024 state of fintech report last week.In this report, F Prime analyzed the pricing of public fintech companies across payments, insurance, banking, lending, and wealth and asset management, arguing that public stocks have come off their 2022 troughs. F Prime argues that 2024 will be a pivotal year for fintech IPOs.Samir, what do you think about this?
SPEAKER_00: Well, I mean, fintech was the hottest period or the hottest sector for most of the 2010s.And I think going back to 2021, if you look at the public market fintech multiples, there were about 26x.And then they crashed down to roughly what the standard is, 4 to 6x. So fintech, and we've seen these large companies, whether it be Robinhood and Coinbase, go through a lot of difficulties in the public markets.Fintech was one of the most, in my opinion, overfunded and probably overvalued sectors.Now, fintech is everything.So every company, to a certain degree, is a fintech. Have the public markets completely reverted?Well, I mean, the public markets did really well in 2023.So if you look at 2022 versus 23, 23 ripped.
Now, most of it was a small group of companies.Most of the fintech companies in 2023 still had a lot of deterioration in terms of stock price multiples. I think that fintech is still very difficult.And I do think that from an IPO standpoint, it's hard to see a lot of fintech companies going out because I just don't think they have the fundamentals to go out in terms of what the public market will pay for.
SPEAKER_03: Robinhood doing great today.I think they're here for the long term.I didn't sell my shares.We were seed investors.We distributed them.That was a crazy whipsaw with Cathie Wood buying a bunch of it.I think she bought it 50 or 60.It went way up.We weren't able to sell.We were in lockup.
probably had the opportunity to sell at a higher price than we distributed at in the private markets talking about secondary before but we believe in the company i still believe in the management in the company i think that's going to be like a company for the ages but i'm holding my personal stock forever i i believe in the company and that they're executing at a very high level but yeah fintech's razor then margins and not being differentiated is hard it could be a commodity business you know mark what do you think about the fintech market and the overall ipo market for 2024
SPEAKER_04: Well, first of all, I'm very long fintech.I'm long fintech because it's a significant part of GDP.It's got significant inefficiencies in the market.I'm less bullish on alternative banks. Because most of them end up just being marketing schemes, like they don't actually have fundamental banks beneath them.And so you've got to compete with financial institutions with basically what's a front end for a different bank. Where we've been investing in FinTech, we've been trying to do things that are novel.And I'll just give you a couple examples.We invested in a company that does something called Dynamic CVV.What they do is they take a credit card.
Well, this isn't a credit card, but imagine it was.And on the back, you have the little CVV code.And they use e-ink. to iterate it every time you use it so that you never have the same CVV twice.They own global patents on it.They can manufacture it at scale.And it turns out that there's a really big growing problem called CNP fraud.CNP fraud is Card Not Present e-commerce. So what they do is they pay mafia rings and restaurants and retail stores to take photos of your front and back of your card, and they send them to criminal rings that then run up as much e-commerce transactions as they can before they're discovered.Dynamic CBV, that can't happen.
That's just one example.But we're trying to do things that are novel pieces of technology or infrastructure that are different than what exists in the market. I'm so I remain bullets.I like we're trying to solve problems in the biggest industries that exist in our country that are intractable and other people generally don't want to invest in because they're hard.
SPEAKER_02: And FinTech is very idiosyncratic.It's it's unique.How do you diligence FinTech companies versus other industries?
SPEAKER_04: I mean, it's hard because there's in a lot of cases, there's regulatory oversight.We actually own a fintech company that owns a bank.So we had to go get compliance done.It took three years to get approvals to host the national bank.It's a very interesting company.Also, it's called GICO, J-I-K-O. What Chico does is it effectively has created a treasury T-bill trading desk.So it takes your cash deposits and it puts them in T-bills, but it built its own ACH rails so that you can take money out of the T-bill markets and use it as cash.So it allows a seamless transition between cash and T-bills. What it allows you to do is earn a T-bill rate so you can earn 6% on your cash.
You can build a ladder of 3, 6, 9, 12 month yields and still pull your cash out anytime you want.So we're investing in infrastructure like that where what we've built is truly unique.It doesn't guarantee success, but it's truly unique and we think therefore likely to be valuable.
SPEAKER_02: Jason, you're investing sometimes at company formations very early on, you're seeing the next generation of FinTech companies.What are you seeing in the FinTech early stage market today?
SPEAKER_03: We're definitely not seeing crypto.That's out the window.So just zero crypto pitches, which is great because those founders were largely scam artists, not real technologists.They were just writing white papers and telling some story about how a blockchain would be better than Airbnb and everything they learned about consumers and all kinds of nonsense. um you know there there is a lot of this kind of like rapper bank stuff that mark is talking about where it's like a thin veneer on top of stuff and we're not super interested in that we do see the very common education or personal finance kind of stuff and again that's not differentiated enough so frankly i'd like to see a little more ai driven uh finance stuff and i did see a couple of um let's call them AI, tax and accounting type softwares, which is tangentially FinTech, but helping people with their taxes, helping people with complex bookkeeping, or even basic bookkeeping.So I do think there's going to be a massive AI you know, my thesis is every business that locked in a win in the cloud or locked in a win on mobile has a chance to be unseated with an AI chat interface or a better interface.And so really excited about that.I don't think most of them get disintermediated, but I could see pilot or, you know, QuickBooks or something be disintermediated by somebody who does a better job with AI doing your books.
SPEAKER_02: Sameer, you have FinTech-only funds on your platform.You have these multi-stage funds like Andreessen and Andreessen-like and Andreessen Sequoias that have FinTech practices.What's your take on FinTech as a whole industry?
SPEAKER_00: I'd probably share the same sentiments as Mark.Obviously, we're a FinTech company as well, so we're very long-term in terms of what it means to the macro, both here in the U.S.and then globally. It's just overfunded.Like a lot of things, it was amplified by a lot of overfunding and, you know, things like the neobanks, which I think everyone is referring to, you know, you're basically building something that was technology, but you didn't get all the benefits that banks got. in terms of the net interest margin and things like that.So we are going to see a washout.It's going to be painful for some folks.But long term, there's going to be some great companies.And I think AI, whether it's in wealth management, whether it's accounting and finance, we're still at the first or second inning.
And I think that's where we'll see sort of this long term value creation. And, you know, I think fintech, you know, it's only been a term for about 13 years.And so as we look forward, the next 13 years are going to look very different.And I think better fintech companies are going to be found and they are going to disintermediate some of the big players, both legacy and some of the Gen 1 fintech companies that were funded back in 2013 to 17.Should we move on?
SPEAKER_02: Yeah, for sure.Yeah, maybe do our top threes.Top threes are Kleiner on AI.
SPEAKER_04: How about if we, at least since you brought up Kleiner Perkins, I'd just like to do a shout out for them.I work with so many venture funds.I have so many boards that I sit on where people barely do any work or just like cheerlead CEOs.Kleiner Perkins has made a tremendous turnaround since they brought on Mamoun and Ilya and probably other people that I'm not mentioning, Bucky and other people. They're just such a pleasure to work with.Ilya does the work.He has knowledge.He cares.He dials in.He pays attention to the details.
Founders love working with them.Mamoun is the same.I just think it's the most under-told story in our industry, just how much KP is back.
SPEAKER_00: One hundred percent.And, you know, I know this is one of the questions that I just wanted because I have spent a lot of time with both Mamoun and Ilya.In fact, Ilya and I talked last week about, you know, sort of this regeneration of Kleiner.This also highlights the fact how hard it is to maintain this durable for Kleiner.For those that don't know, it's been around 51 years.And if you think about Kleiner in the 80s and 90s, along with Sequoia, that was these were the top of the top. And over time, they had some partners leave, like Finod Cosla, of course, left.You had the entry into certain areas like cleantech, which didn't work out the way they thought.They added a bunch of products.The growth product, of course, now Mary Meeker is left to start her own firm, Bond Capital.
But now that they've been doing this for now six and a half years, so Mamoon comes in from Social Plus or Social Capital.And then you have Ilya coming from Index. Kleiner is, you know, it's hard to say what is back.But from a directional standpoint, you look at the companies they back, whether it's Figma or Rippling, that firm is now firmly in the minds of every founder right now.
SPEAKER_02: Mark, you mentioned about the story about Kleiner.How did they do?How did they reboot?And how does a firm reboot like Kleiner?
SPEAKER_04: There have been just fantastic people who have come out of Kleiner who did not get anointed to lead the firm.Aileen Lee is ex-Kleiner. Matt Murphy, who's an excellent investor, he's over at Menlo Ventures now.Samir mentioned Mary Meeker was there for a period of time.Al Gore was there for a period of time.Like, they had, like, murderer's row for a little while.And... You know, they just didn't quite figure out like how to hand from John Doerr.Again, John Doerr and Mike Moritz are like two of the legends of our industry and how much they succeeded at Sequoia and Kleiner.They both backed Google, you know, when Google was its infancy.
I think they each had, I think, 10% of Google, but someone can fact check me. But anyway, there was a period of time where John didn't just find the right person to hand off the firm to.And I say hats off to John because he stuck with it.He did the hard work.They have that other gentleman.I'm forgetting his name.Older guy who's still there.I don't know.
SPEAKER_03: Session planning is hard.
SPEAKER_04: I mean, they have a guy who's been there for a long period of time who knows the venture business.I'm just blanking on his name, but they didn't quite get it right. And, and I think they actually tried to bring in Mamoun years before they actually were able to bring him in.
SPEAKER_03: They were trying to recruit Chamath.Chamath, exactly.Originally they tried to buy social capital and put Chamath in charge of everything.And then when Mamoun left social capital, I think they went to Chamath's, you know, previous, one of his previous lieutenants, Mamoun, and they've done a great job.
SPEAKER_04: I mean, like if you look at Upfront, so we've been around for 28 years.I joined in 2007.I wasn't the founder.And the founder is still to this day actively involved.And he's a close friend of mine.I've worked with him for 25 years.His name is Yves Sisteron.You know, he backed Starbucks, Costco, Office Depot, PetSmart, you name it. um and so a really storied investor and uh between 2007 to 2011 we did things together in 2011 he gave me the nod and said i think it's time for you to run the firm so i've been running up front since 2011 and we have an incredibly talented bench of young people kevin zhang who's been with me this is his 12th year And he's got the hottest hand.
He's leading our healthcare practice.It's 20 to 22% of our investment is in healthcare.And then you've got Nick Kim on the other side, who's only been with us for about a year and a half, but he's leading all of our hard tech and national defense, which is also about 20% of our investments.And both of those guys are mid thirties.You look at a DT who leads our FinTech practice, mid thirties, right?So like it takes the wisdom and maturity of someone like me and my fifties By the way, in order to have lived through the global financial crisis, the rise and fall of the GFC, you have to be in your 40s.In order to have seen .com rise and fall, GFC rise and fall, you have to be in your 50s.That's why we didn't do NFTs.That's why we didn't do crypto.
Because I'm like, guys, I think inherently there's some value here, but everyone's overpaying on prices.But the reality is you also need 35-year-olds and 28-year-olds who are connected to the networks of the next generation of founders who are gonna do things in a different way than we did them.
SPEAKER_03: You need 10 years too to do this.Like if I remember when Ruloff went to Sequoia and Alfred Lin, and I just watched those guys who brought me in as a Sequoia scout, obviously.And they were mentored for a decade to take over and become the stewards.And I think Sequoia really figured out a new concept, which is to become stewards of the brand. you know, not to run the brand necessarily the CEO of the brand, but the stewards of it, it's almost like inherent in that word, is you will be doing this for a period of time, and then you will be handing it off to the next group, right.And they did a really good job of that.And then I can tell you just from hanging out there, And I was there last year and saw Doug Leone there, and then I came back another day and saw Doug Leone there again, and Michael Moritz another time when I was in the San Francisco office.Like, they're not done.It wasn't like a hard handover, like, here's the baton, go, and I don't have the baton.
It was more like... Hey, we'll lay back.We'll lay back.And when I got there and they had funded one of my companies, some of the previous, Don Valentine was there sitting in the back of the room watching Michael Moritz and Doug Leone run the show and Jim Getz, right?But Valentine was there.He was in the back of the room.He came up to me after I pitched the entire firm and asked me a couple of questions and introduced himself.And I'm like, who are you?
SPEAKER_04: It's the same thing.You'll still see Eve, you know, you'll still see Eve around up front.Like he's a large part of our culture and training young people and providing wisdom that matters.
SPEAKER_02: Mark, you've had a career right up there with Moritz and Dor.When are you going to hang it up? How much longer?
SPEAKER_04: How much more do you have to take?Moritz and Dorr, first of all, like they're a different status than I am.They've achieved more than I have, but they're also more than a decade older than I am.I'm only 55.If I was running for president, you'd say, thank God someone young is running.So I'm all in, you know, I'm an empty nester as of September.This is my thing.This is what I do. But I will tell you that my goal is to make sure that the next generation within upfront, many of which who have been with me 7 to 12 years, that they understand more than just writing checks, that they understand portfolio construction, that they understand risk management, that they understand cash distributions, that they understand... incentives.
We're now an RIA.So they've got to understand compliance and SEC.And by the way, I have a whole ops team, right?Like that's the thing you're blessed with when you've been around for a while and you have a portfolio.You know, Stuart Lander actually runs the firm the day to day.I don't.He's phenomenal.I have a guy just as i are like that's his full-time job he's phenomenal like we have you know my my cfo is ex goldman sachs banker and she was a two-time cfo in startup companies like she knows how to run finance so it means i can stay focused on the job of writing checks and sitting on boards how much of vc is an apprenticeship model seems like all the top vcs are all apprentice is there another model that you've seen worked or is it pretty much apprenticeship Samir, why don't I let you talk and then I'll jump in?
SPEAKER_00: Yeah, I mean, I guess from my perspective, I mean, running a VC firm is more than just investing.And so when you, you know, Mark mentioned some of those things around operations, hiring, talent acquisition.It's, you know, how do you create some repeatable model to add value to founders?It does require a certain level of apprenticeship.I think it's very difficult. to not have done at least some level of investing.Whether it's angel... You can do angel investing.I think you learn a lot.You learn pattern recognition.And for a lot of folks that start angel investing in the beginning, everything looks good at the beginning.
Everything looks good.When you meet 100 companies, 1,000 companies, 2,000 companies, you start to actually do a small percentage of those deals.And you start to realize how to actually look at a particular company and understand the probability of success.So... Our view, and this is something that I've seen so many times over, is that you have to learn the craft.And the craft is incredibly hard.So most people don't know this, but the 25-year track record, if you look at top decile, is a 3.06.Top quartile is a 2.4x. And so what that suggests is a very small percentage of people are going to be consistently successful, not just one fund, but fund after fund.What it requires is methodology and consistency.
So we brought up Mamoun over at Kleiner, you know, prior to working at Chamath. you know, learned a lot.And going back to even before that, when he was, I think, at Interwest, learning, you know, the craft.Well, those folks learned the entire craft of not only investing, but running a firm.And so I do think it's an apprenticeship.Now, with the amount of, you know, content and what, you know, Mark and Jason and other people do, you can accelerate.And I think the learning curve can be quicker, but you still have to learn.
SPEAKER_04: I think it's important to have a belief system and to not do what other people are doing.I think you make money by having a belief system that differs from other people.And that's a really hard thing to do because VCs, they want to go to their cocktail parties and share with all their friends, all the generative AI companies they're doing.And in 2021, all the crypto deals they were doing.And in 2017, all the AR deals they were doing. But you have to have a fundamental belief system that's different than other people.I always preach the idea of triangulation.Triangulation, a term that comes from sailing, is like looking at multiple points to sort of figure out your reference point for which direction you're sailing in.So if you have that as a metaphor, go out and talk to all the VCs you admire and understand what makes them unique. So I want to give a plug for Jason.
You just hosted a brilliant show.I don't know how long ago it was, but it was with Brian Singerman from Founders Fund.Like everyone should go listen to that.It's a great interview.It's a great discussion.I went to see Brian when we both started.So I started in 2007.I think he started in 2008, but somewhere around there.And maybe I went to see him in 2009 and he said something heretical to me. He said, we're looking to invest in people who don't want us on their boards, don't need us on their boards.
I'm like, what the are you talking about?Like every VC I know says you have to join every board.And he said, okay, listen, like we'll do board seats, but we want to back founders who fundamentally don't need us.Like, what do you do on a board?Set 409A valuations, talk about the budget, talk about Susie and marketing that you're trying to recruit or whatever you're trying to do, right? And he's like, I don't know, those aren't the world's most talented founders.The world's most talented founders don't need us.And he said, and it was so heretical, but I had a hard time mentally arguing against that.I'm like, that's not who I am, but I actually think that's pretty smart.And it always sat in the back of my mind.
Second conversation I had was Keith Raboye. And I had a conversation with Keith when he was at Coastal Ventures.I'm like, I keep seeing you write $2 million checks into rounds led by other people and you're not taking the board seat.Like, what the are you doing?Like, how can that's, VCs don't do that.He said, VCs are so dumb.He's like, if I could put $2 million into work, into a deal led by a partner in Sequoia that I hugely admire and respect with the founder, I really think the world of, and they're going to do all the work and I get a free ride, I'll write 10 of those.So, Everyone has a different belief system about how they're going to make money.And I'm not saying they're all right or they're all wrong.
I think the Jason Kalkana style is amazing.I tell this story all the time.So, you know, Jason, like I always say, I did it once with you present, which is I compared you to Donald Trump. But you have to hear me out.You have to hear me out.So Donald Trump goes on stage, and he says all sorts of wacky stuff on stage every day.Not that you do, but he does all sorts of wacky stuff.But over time, he develops an intuition for what his base really cares about.What are the issues? So by the time he's on the national stage, he knows what the he's talking about.
Okay.Then steps up a guy five times smarter than him called Michael Bloomberg.He gets on the stage without ever appearing in small comedy clubs first.And he goes to film his Netflix special.Let's call it like, the debate yeah and he gets eviscerated by kamala harris eviscerated in one time because there was no stage leading up to that what you do jason by doing your show on a consistent basis having debate ideas having to talk to people seeing patterns or whatever then when it's time to write a check you just have that intuition for where the market is.So I think it's brilliant.I tell people that all the time.I used to do your show when you had This Week in BC and I did that together and I felt like that made me a better investor.
SPEAKER_03: Definitely.Thank you for that.I do think having great conversations is a key part of my strategy, because it makes you sharper, right?And, you know, when I came into the industry, there were two schools of thought, spray and pray, Ron Conway, Chris Saka, 100 names in a fund, 200 names in a fund, Y Combinator, Techstars, whatever. And then there was concentrated classic Fred Wilson or upfront benchmark 300 million, five partners, whatever, 30 names in a fund.And I studied that.But then by having all these conversations, I learned what Sequoia was doing with WhatsApp.I learned what Brian Singerman did with Airbnb and SpaceX.And then when I did portfolio construction, I was really thoughtful in my... fourth fund.
And you know, I kind of discovered in the third fund, which is, well, if you have massive deal flow, and you can get enough surface area, and you have the rights to put more money in and you have a way to track the spray and pray, which is a derogatory way of saying, you know, making 200 investments.Well, if you actually know which four of those are unicorns, and you can back up the truck and get to fit 10 15% ownership, you're going to be in a great place.
SPEAKER_04: I mean, that's what you said on the show.You said you're willing to do up to 20% of your fund if your wide net that you cast, if we could put a better term on it, the wide net that you cast happens to catch something that looks worth backing.
SPEAKER_03: Yeah.And so that's, you know, that I would have never come to that strategy if I wasn't having this debate and having LPs tell me this makes no sense.
SPEAKER_04: You know who was years ahead of his time was Dave McClure. He called up 500 startups.I'm like, what a nut job.And then, but I love Dave and I've always loved Dave.And then I sit down with them and I'm like, okay, he's got a different point of view than I do, but it's pretty hard to argue against the principles.
SPEAKER_03: I think the only issue was he didn't have a system to figure out who to double down on. And that's what I spent the last three years studying was looking at the existing portfolio.
SPEAKER_04: And when did I know Robinhood, Uber, what he didn't do is he didn't have a follow on vehicle or the capital to double down on Twilio, but he had Twilio in their seed round.
SPEAKER_03: But did he know?That's the other piece.Did he know Twilio was the one?He f***ing knew it.He f***ing knew it.Yeah.So if he knew, that's the tragedy.And so what I've done is built a system to know.
SPEAKER_04: He didn't have the capital, I think, to properly back it.
SPEAKER_03: Can you imagine what that second bet would have done if he had put a million dollars in?
SPEAKER_04: Go back to the mistake that VC managers make is not understanding how to run a venture business.By the way, we only invest 42% of our fund. I reserve 58%.I have enormous reserves to then go back our winners.But I think VCs don't understand.
SPEAKER_03: What's the largest percent historically you've put into one company?
SPEAKER_04: We've never put more than 10%.God bless Brian for writing 33% of his fund into one deal.I don't have the conviction to do that.That's a different strategy than what I will do.But I just think understanding the need to put time into LPs. I think a lot of VCs don't put enough time into relationship with LPs.And the truth is, and no one wants to hear this, but I believe it in my bones.I think LPs are your customer because what's your job?Your job is to raise capital and return more capital than you get.How do you do that by investing in startup companies?
But like your end customer is an LP, right?
SPEAKER_03: Yeah, I'm learning that now.When you get to your third or fourth fund, you actually have to develop an LP, relations, IR function.You have to learn how to do that.And they're so different.Every time you meet with a family office, you're like, yep, this had nothing to do with the last meeting.This literally has nothing to do with the last 10.And then you meet one sovereign, and the sovereign has nothing to do with the four other ones.They have a completely different strategy, completely different organization.Oh, yeah, they both have a... you know, a CEO and a CIO and but like how they make decisions completely different.
You're just starting over every time.Incredibly frustrating.
SPEAKER_02: Samir, you coordinate these conversations with LPs.What are mistakes that GPs regularly make when interacting with LPs?
SPEAKER_00: The biggest mistake is approaching every single LP the same.So Jason mentioned this, a family office is very different than a sovereign wealth fund.In fact, there's this old adage, you meet one family office, you meet one family office.And I think that's fundamentally true. So what I often see is GPs going into a pitch room, going into a discussion for the first time, and just pitching, talking at the LP.Not really understanding what the objectives are, not understanding the person.Those first five to 10 minutes, Mark, you and I have talked about some of the things that you do. Mark shows that he actually cares about the other person across the room and what they care about.And then from there, Mark is able to provide a better perspective of like how to tell the upfront story in a way that's going to resonate.And so that pitch and talking at people simply doesn't work.
And when you think about the VCs that have been very good, in fact, the time for fundraisers for a fund one or fund two is about 17.7 months.I mean, from start to finish, it's a long time, a lot of people. is that you really have to know the person.Second is you need to know how to move people through the funnel.It is enterprise sales.And so those are the two things that I think people struggle with getting to know the person and treating LP discussions as enterprise sales.
SPEAKER_03: I've had to fix that in my game.Because they're always like, pitch us, tell us everything about you.And I had to change that.It's a trap, right?
SPEAKER_04: Yeah.The advice I give people is this, and it's going to come from Zig Ziglar, one of the greatest sales coaches, teachers of all time.He's a bit older, so young people don't know him.But he said something that always resonated with me.He said the following, people don't care how much you know until they know how much you care. And if I look at LP relationships, Jamie Sparren's bet on me in 2011, when I just took over for upfront, when everyone else said, I want to see one fund, two fund, three fund. And he said, I believe in you.I'm going to put $22.5 million into your $195 million fund.That fund right now, I think will return north of 5X in capital.We've already returned more than 2X the entire fund.
We have another 2.5X in TVPI and a lot of upside remaining. um and he left morgan stanley where he made the investment i don't know eight years ago he doesn't deploy capital into vcs anymore but he's a super close friend of mine he's a consigliore for me i still call him for advice i know his kids i know his family um like these are long-term relationships lindell ekman like he wrote a check from utimco into my fund and then he left a year later to go to foundry and i'm like Damn it.You know, because I really wanted to work with Randall.I wanted to work with and also I love Lindell.And to this day, he hasn't been an LP of mine in many years.But like, he's such a good human.He has so much wisdom.He really understands how the industry works.He's a really good human being.
And I consider him a friend first and foremost.
SPEAKER_02: Mark, you hired an IR person.How often do you meet with LPs?
SPEAKER_04: I probably meet three to five LPs per week. consistently like i don't know like i'm a broken record on topics okay um i tell ceos abr always be raising ABR, I have the same philosophy inside my own fund, right?Like it's my job.It's not my 50% job or my 80% job, but it's 15% job.And so I always just try to do 15, 20 minute calls, half hour call, 45 minute calls.If someone's coming through Los Angeles where we're based, I'll always take time to meet them.I'm not necessarily doing 90 minute meetings, but I try to really keep calls and relationships active.You know, we also co-invest sometimes with our LPs.
So sometimes they're contacting me to want to understand more about our portfolio.That's my job.My job is to tell them, like, I know you want to write a check into that company.I really don't think it's the right move for you. Or I know you want to write this check into the company.You should do everything you can to write in that company.But you got to go meet the CEO because unless the CEO knows that your dollars are going to be valuable, he's not going to take money from you.
SPEAKER_02: So let's go to the final segment.Last investments that our two GPs have done.Mark, we'll start with you.Last two.Okay.
SPEAKER_04: So one is called Bland.ai.Think of it as Twilio, but instead it enables AI voice bots.So we have 7,000 developers on the platform.You can go to Bland.ai.You can build applications on top of it.And we are the fastest to serve up lowest latency platform you can use. It blew my mind.I was super skeptical that you could have voice-based AI.And honestly, there were a couple of phone numbers.I actually dialed the phone numbers and I can't stop showing it to people.
It's so impressive what you can do with it.The second one is Kubera Health. It's such a talented young lady.She's out of South Carolina.She got into med school at 16 years old.And by the way, she went to Brown.So she graduated from Brown with an undergrad and MD in five years.She's worked in the industry.She's knowledgeable.She went from Brown to McKinsey, from McKinsey to Harvard Business School.
So take that background. a young lady named Roja.She could go work at a hedge fund.She could go work at Goldman Sachs or McKinsey.She's so driven to work in a startup solving a problem in the healthcare sector.What Kubera Health does is it sits between the payer and the provider and helps manage the billing.If you look at healthcare, 17.3% of GDP is healthcare.It's enormous, $4.5 trillion market. And the problem is only 15% of the dollars consumer spend go to doctors.That's it, 15.
35% go to administration, just overhead costs.And this is the kind of overhead costs that exist.So payers are increasingly doing something called value-based care with providers. And that arrangement of billing has a lot of inefficiencies.That's what Kubera Health is doing.And the third is we're doing a lot in defense.So we're putting 20% of our dollars right now into hard tech and defense.Here are the categories we care about.We care a lot about satellites right now because that's going to form the basis of a lot of national competition.So there are...
dozens of spinouts from SpaceX based here in Los Angeles that all ran things like the satellite systems for SpaceX.And they're all building their next company here in Los Angeles.We're backing a ton of them.We want to back more.The second is shipping.So we're doing a lot.The US has inability to create new ships.So we're looking a lot at how can you automate the process of shipbuilding?That's another example.We're doing a ton in cyber.
We very proudly backed an amazing company in Israel solving cybersecurity problems.Right now, they're very busy, as you can imagine, in the Middle East solving actual problems, but like very proudly doing cybersecurity, shipping, hard tech and national defense.
SPEAKER_02: Amazing.J. Cal, you're up.
SPEAKER_03: Oh, I'll just give you a trio of marketplaces.I've made a lot of our returns on marketplaces.First one, Stone Algo, pretty straightforward kayak for diamonds.You do a search.We found these two developers.They went to buy diamonds up on 47th Street, I think in Manhattan.It was a chaotic experience for them.And they decided to index them all and make their own Zillow score for that. Then, you know, we do a lot of events.And we came across this website, gigster, they help you book locations for events.
So they started with film locations.So you're doing a TV show, you're doing a movie, you want a database of spaces.But then they realized people were doing events, productions, photo shoots, music, videos, social stuff, birthday parties.And then this new category came out, you want to rent a pool, you want to rent a tennis court, you want to rent a basketball court. you can do that too.And, uh, so they will just help you find, you know, a tennis court for you and your friends to play pickleball or tennis.Um, and, uh, you'll be off to the races and you can rent it by the hour.So kind of like Airbnb for everything else.And then, um, the hotel, you know, uh, turns out this, uh, incredible founder who went through our accelerator refuses to take additional investment.
She loves to run a profitable company and every year she exceeds our expectations.And there's been all these overfunded dog walking services.Cats are weird cat owners are weirder. uh and contrarian bet and so she was like yeah no you you need to like stay at the house you need to be like vibing and so she found all those weird cat ladies and cat guys and people to create this other marketplace so three marketplace you need a diamond you need a cat sitter or you need a location for a party or a photo shoot or your tennis love marketplaces
SPEAKER_02: Well, it's been another great episode of the Liquidity Podcast for Mark Schuster, Samir Khaji, Jason Calacanis.This is your host, David Weisberg.Thanks for listening.
