Animal Spirits Podcast - Talk Your Book: The State of Venture Capital

Starting point is 00:00:00 Welcome to Animal Spirits with Michael and Ben. On today's show, we are joined by Samir Kajee. Samir is the co-founder and CEO of Allocate. Allocate is a platform that allows advisors and family offices to access venture capital funds and it's technology-based and you're easy onboarding and all that good jazz. And the jazz is so good that we invested in them probably a year and a half ago. And the thinking was that there are, as I mentioned on the, in the conversation we have with Samira.

Starting point is 00:00:31 There's a lot of companies that have done fairly well bringing alternative investments to advisors, private credit, real estate, et cetera. The venture industry is different. It really is about relationships and access, and it's not easy to get access to the best of the best. And so Samir and his team have been doing that for a long time. They're great people, great relationships.

Starting point is 00:00:55 He said relationships are at pretty much in venture capital. Yeah, that's the thing. Yeah, money's not the thing. It's about relationships. So on today's show, we discuss, we spent the bulk of the conversation talking about the state of venture where we are in relationship. Obviously, this is a much more sober market to said the least compared to 2021, where we saw some wild shit flying.

Starting point is 00:01:18 And we are now definitely on the other side of that. So here is our conversation with Samir from Alicate. Welcome to Animal Spirits. a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Riddholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholds wealth management may maintain positions in the securities discussed in this podcast.

Starting point is 00:01:57 We're joined today by Samir Kaji. Samir is the founder and CEO of Allocate. Samir, welcome back to the show. Thanks for having me, guys. All right, so we're going to be spending the next 30 minutes or so talking about venture capital, where you fit in the ecosystem. But before we get into the state of the industry, we tend as investors tend to think about venture capital through the lens of investing. but we don't often discuss why venture capital as an idea is so important and all of the benefits that everyone in society gets to take advantage of, whether or not you're an investor.

Starting point is 00:02:42 Can we just maybe talk about like the good that, and I don't want to like overstate, overstate it, but seriously, venture capital has provided wonderful benefits with the companies that they've invested into the services and products that they provide to Americans and people all over the world. Just talk about that idea for a second. Well, I think that maps back to what venture invest in, which are technology companies that have kind of reshaped our entire lives the way we work. Of course, right now we're on Riverside, which is a venture back company. But going back, you know, 30, 40, 50 years to the early days of venture, it was the only type of equity source that was willing to invest in companies that were at the very inception phase of

Starting point is 00:03:26 their lives. So companies like Google, Amazon, were all companies that were venture funded. And at a time where, you know, the first check in those companies were done at a time where there was a pitch deck. Maybe there was an idea on a napkin. And absent the venture capital funding source, these companies would never have been able to go on to build and scale to what they have now. And so as you've thought about venture over the last, you know, let's say 40 years, it's always behind creating these massive super cycles of technology innovation. So going back from mainframe computing to personal computing, to the internet, to mobile cloud, now AI. These are all things that were enabled by the venture capital industry. And of course,

Starting point is 00:04:10 over the last 25 years, we've seen the number of public companies in the U.S. decreased by, you know, roughly, you know, it's cut in half. And these companies not only stay private longer, but the necessity for a funding source that can help those companies get to a point where the public markets will take them is just much more important. I saw a tweet today that Uber was either founded on this day 13 years ago or they got their first money or whatever it was. And it was, I think they were raising at a $5 million valuation.

Starting point is 00:04:44 The company now has a $90 billion market cap. So obviously the venture capitalists in there have had a hell of a run. And venture capital has had a hell of a run. I mean, let's be real. This was like certainly in the aughts and the teens and I guess culminating with like the fever pitch of everybody doing venture capital in the early 20s. But we are on the other side of that euphoric mania in all markets, but certainly in venture as well. there's a there's a an index refinative venture capital index i don't know how this is i don't know what's

Starting point is 00:05:22 in here maybe you do but i'm looking at this chart and uh it's down 50% from the peak which feels i don't know if light is the right word it feels right it feels right how does it feel to you i mean look there's going to be a lot of pain that continues to happen you know we were we just exited a you know long-term zirp period where everything was up into the right There was so much capital sloshing around that in the private markets, you had a complete divorce from reality. And the public markets face this too, right? So we saw 2021 being one of the most frothy markets we've ever seen for gross stocks. That filtered into the private markets.

Starting point is 00:06:02 And a lot of these companies were fundamentally financed on the basis that the public markets and the multiple expansion that had happened would continue. And of course, now that's not happened, you have a lot of companies that, that are sitting there in the private markets that just simply have to be marked down. Now, those aren't death nails to these companies. In fact, you know, you think about Facebook. Facebook actually had a downround in the private markets. I think a lot of people overreact by seeing down rounds

Starting point is 00:06:29 when you realize that the public markets have down rounds every single day. And, you know, we sometimes forget the fact that, you know, companies go through journeys and they go through ups and downs. And in 2020 and 21, companies were just fun. at valuations that, you know, actually anticipated something very different than what we've seen over the last 19 months. So it feels right. And, you know, you talked about Uber. Uber actually was started in late 2008, early 2009 during one of the toughest periods. Airbnb did the same thing. And what you have is a resetting of everything, resetting of

Starting point is 00:07:07 expectation, resetting of values. You have, you know, what we would consider the grifters leaving and the tourist leaving, and people that are actually building things, you know, for the long run that now are staying in it because capital constraints are so difficult to navigate. And so I like times of sobriety. I started my career at the peak of the dot-com bubble in the late 90s and then went through, you know, the dot-com collapsed two years later. And so times like this are just a natural cyclical overlay to, what venture capital is.

Starting point is 00:07:44 I'm so glad you mentioned that. So, Bennett, we've spoken over the years a million times about does zero, do the zero interest era change how a pension fund will allocate? In other words, are they really going to take money out of bonds and put it into stocks and take money out of stocks, put them into venture capital? And I think some of that obviously happened to the extent that it did. Some of it might have been overstated, you know, I'm sure it varies by company. but what is what is hard to argue is the distortion that zero interest rates created for how

Starting point is 00:08:18 loosey-goosey investors were with the money that their companies were doing right it was just build product market fit get market shared we could subsidize it doesn't matter i remember in i don't know 16 or 17 well it was probably it was a podcast pitch so much been 2018 or so where bet and i were talking to somebody and it was was a neat idea. And I can't remember if it was free. And we were like, well, how do you make money? And they were like, we're not worried about that. And we were like, sort of laughing. And I think we said like, oh, thank you venture capitalists. But that era that we, that we, you know, it was a good run. It was a decade, right? Of Uber losing money on every ride of just everything that the

Starting point is 00:08:57 consumer imagined was was heavily subsidized and everything was artificially cheap. That era is obviously over. And then that culminated with just this boom of crazy valuations, crazy multiples, crazy rounds, crazy speed with which the rounds got done. Like we are, that's done. Are you seeing any remnants of that or is that just completely buried at this point? I think it's largely buried. And, you know, we could put AI maybe in this separate bucket, because I do think AI still exhibits some of the craziness that we, you know, saw a 2022. You know, what happened during the period that you just described, you know, let's call it 2011 to 2021, was not only the amount of capital, but the incentives that were in place.

Starting point is 00:09:47 So if you think about venture as an assembly line, right, you raise a company raises a seed round, then they have to raise a series A, series B, series C. There's always a downstream buyer. And what companies and investors realized was that there were downstream buyers that were willing to pay a higher price, usually based on one fundamental metric, which is top line revenue and revenue growth, no different than what we saw in the late 90s when it was eyeballs. And so companies were manufacturing growth only to understand that they can just get to the next round at a higher valuations, secondaries. But if you look at under the hood and look at the quality of those revenues, we call them dirty revenues, because ultimately, if I pay $2 to make a dollar,

Starting point is 00:10:29 probably not a good long-term business model, but that's what it was, is buying Facebook ads. But the market was buying it. Even the public markets were buying it, right? So you saw the SPAC explosion of 2020 and 21. So from an incentive standpoint, you were incented to put a lot of money to work, have somebody else mark it up. You can raise the next fund and raise much more capital, get more management fees. And it was a rinse and repeat. And a lot of people won't necessarily admit that that was what was happening. And you'd always look to justify when you're in the moment that the markets change. We're in a new paradigm, but effectively gravity has now come back in. And outside of AI, which still remains frothy, everything else has course corrected to what

Starting point is 00:11:12 the actual reality in the public markets are and the fact that people have more options to where they invest their capital. Taking the speculation piece off the table, because obviously that was a big part of it with the 0% rates, financially, couldn't you make the argument if we're doing a private versus private comparison that venture capital, is in a much better space than private equity because there's not as much reliance on debt, right? So you don't, though, the higher interest rates, I think eventually are going to make such a higher hurdle rate for private equity and adding leverage that, obviously, you need the funding to still come in for venture fund or venture firms, but or startup firms, but since

Starting point is 00:11:46 there's not as much debt, that financially it's not as big of a burden there. So, so, yeah, I mean, we've, we've seen the, you know, the downside of interest rates in the, in the world of mortgages right now, the mortgages, you know, rates are over eight, private equity, as you mentioned, does heavily use leverage when it comes to acquisitions, venture does, and it's an equity play. So, yes, you know, from the standpoint of, you know, returns, actually, you know, I would make the case that venture, just what I've seen historically is going to outperform, and that actually has outperformed private equity. The knock against venture is it's a longer-term illiquid asset category, slightly more risky, depending on where

Starting point is 00:12:27 you invest and how you invest in venture. And during times like this, people tend to not be return focused, but risk-oriented. And so that's why we have so much capital flowing into things like private credit, secondaries, and private equity versus early-stage venture, which logically would make sense when valuations are down. And founders today have to exhibit better behavior in terms of building companies. But to your point, yes, interest rates do matter in the private equity world. I'm also curious about, like, doubling down in venture. because the market cap or the index and everything is down and valuations are down, is there more doubling down on companies?

Starting point is 00:13:07 Obviously, people wish that they could take back a lot of those investments and valuations from 2021 or whatever, but is there more doubling down or a lot of venture capital firms just saying, you know what, we overpaid, let's not double down on that mistake and let's fund something new or just fund these other handful of firms? How much of that is going on now where you've seen this big repricing? It's a tough thing to answer in a blank a way. So I think it really depends on company by company. And what you're describing is do you put bad money, I mean, sorry, good money after bad, right? So you invest in this company. It hasn't really scaled. Yet the company needs some level of capital to sustain. What I'm seeing in those cases is, in what we've seen over the last 12 months, is a lot of those companies are getting spoon fed by their existing investors at different terms. maybe it's a convertible note financing to see if the company can, you know, cross over to, you know, cross over the spectrum and sustain during this really tough time. There's other companies

Starting point is 00:14:08 like Hopin that were a product of, you know, the pandemic, right, that, you know, soar to, you know, this massive valuation and then ultimately sold for 15 million. I think for, from a VC standpoint, you know, the question, you know, really is around this dynamic at the board level of what is going to produce the best return for that existing fund that might be compromised because of the high price I paid. And it really is company by company. I do think there's some good companies out there that are getting absolutely obliterated in the valuation market where the venture investors are doubling down. And there's others where it's just very clear that there's no product market fit. There's no chance that this company is going to drive anything

Starting point is 00:14:51 but a one-x return. And in those cases, those companies are either going away quietly or getting acquired essentially for parts, hopefully at an amount enough to take care of the preferred shareholders, which are the venture investors. I want to go through some charts from CB Insights. They do every quarter they do a state of venture, global trends. And in the most recent quarter, there was 6,100 deals, give or take. that's down from a peak of

Starting point is 00:15:24 damn my eyes suck it looks like 11 12,000 okay so cut in half basically so cut in a half the number of deals the amount of funding also more than cut in half from the peak

Starting point is 00:15:37 but up from Q2 around flat from Q1 so it seems to be stabilized but it's all a lot of money $64 billion that was invested into these companies around half of that came from the United States

Starting point is 00:15:49 $64 billion is a lot higher than zero. Like, stuff is still happening. Yeah, stuff is still happening. And there's areas that are a little bit more insulated than others. Like the seed in early stage tend to, you know, still have investments because at the seed level, you know, whether it's an $8 million valuation or $10, you know, companies are still being founded during this time.

Starting point is 00:16:11 The growth stage markets are where we've seen the biggest, you know, reversion. And it's partly because people need to understand, like, how do you price something in a market that is uncertain on a go-forward basis. It's also the fact that many of these companies really don't deserve that quantum of capital that were received. I saw a stat recently that the average unicorn, which there's about 1,200 unicorns right now, have raised a median amount of $350 million, which makes absolutely no sense in terms of why do you need that much capital. You have companies like Viva and WhatsApp that were these massive-scale companies that, you know, I think Viva raised like $4 million. WhatsApp was, you know, roughly $50,000.

Starting point is 00:16:50 million or less. And so a lot of these companies are just in this kind of death zone. But I think that the biggest thing that we've seen is the crossover funds start to depart. So during the peak times, the Tigers, the CO2s, the D-1s, firms like that were the ones of writing massive checks in debt. So for example, you look at some of the big firms, Insight and Tiger. Collectively, they raised $33 billion between the two of them and two fonts, right? These are just two funds. And Tiger was writing checks at a pace of a billion dollars a month. So when you extract that level of capital, you're going to have the late stage market, which was the vast majority of the capital deployed, completely atrophy to what it is right now. How have you noticed the

Starting point is 00:17:41 changing dynamic between VCs and founders? Because obviously for a while there, the founders had complete upper hand. And Michael and I were hearing things like, listen, here's the valuation. You have 48 hours to decide off of basically a pitch deck and a 10-minute call or something. And now I'm sure it's flipped. But how quickly did that dynamic change? It took a while. You know, I think during 2022, we were still in the world where there wasn't full capitulation to the new reality. And remember, a lot of founders were raised in a period where they had only seen one thing up into the right. I mean, two, 2009 could have been a lifetime ago. That was 14 years. So you had, you know, people that were

Starting point is 00:18:21 in their 20s and 30s that had never seen the downturn. So like the beginning of 2022 is this just a blip that we'll get through and, you know, everything's transient. Interpretts will go down. Everything will be back to normal. The party's back on. Obviously, that didn't happen. Now what we've seen is kind of this, I always look at the 90-10, right? So, you know, in markets like this, you have 10% of the founders that can dictate those type of terms, say, hey, this is my valuation, this is what I'm going to raise, this is how quickly are you in or not? During the hot period of 2019, 20, 21, it was a reverse, and it felt like 90% of the founders we would meet were like, I'm closing on Monday, here's my valuation, we're over subscribed. And so I don't

Starting point is 00:19:07 know that we're quite at the 10, 10, 90 now in terms of founders, but I think we're getting pretty close. I had a small Roth IRA that I had rolled over to Angelus to have fun and write some small checks. And in 2000, I guess, probably 21. And I remember there was a bunch of like deals that just were completely filled in like 20 minutes. Yeah. It was crazy. Like legitimately, like the email went out and these SPVs were, were, all accounted for, like literally in 20 minutes or less. And that, what your experience was exactly what was happening all over the place. And many of these companies were like the third derivative of something that had already

Starting point is 00:19:57 been created too. And it was based on hype and everyone is moving very quickly. There was a lot of dispensable capital and disposable capital. And if you remember, you know, during that time, there was another asset class that was bringing people a lot of wealth, which was crypto. we had the meme stock. So people had this ultimate risk-taking mentality where they actually lost the notion

Starting point is 00:20:18 of what risk-wise. And so, yeah, it's going to make it. And remember, you know, I think it was on Twitter, this, you know, the saying for crypto people of have fun staying poor. And it was just this, you've got to take as much risk as possible, and that's what happened.

Starting point is 00:20:34 And now, of course, we've seen the painful and winding of it. Do you see any benefits or positives? Because a lot of the dot-com boom, a lot of people said, like, well, that totally built out the telecommunications that set the stage for the next level of the internet. So is there anything good that got overfunded here that we might look back on and say, you know what, not all of these companies made it, but there was so much money invested that we laid the groundwork for the future. Are there any spots that you can think of that happened to this time around? Yeah, I mean, I do think AI is this incredible sort of platform. And I do think it's part of this new super cycle.

Starting point is 00:21:07 Yes, there's going to be a lot of companies that are overfunded. But the companies that, you know, do make it are going to have disproportionate impact in terms of our lives on a go-forward basis. So, but venture is always that, right? So if you think about venture from a return standpoint, it's the ultimate parado principle of 80% of the returns come from 20%. And if you miniaturize that even further, of that 20% of companies that are driving those 80%, it's actually maybe 20 of that 80% of return. maybe 20% of those returns are actually getting, actually, let me start up, let me do the math again. So that 80-20, that kind of says that if you go down one layer deeper, of that 80% of

Starting point is 00:21:57 the returns, it's probably 4% of the companies that it returned 64% of total returns. And 20% of the 4%, which is 0.8% returns about 50% of returns about 50% of returns. And so you have such a right, you know, right skewed power law business that investing in venture, you just have to accept that there are going to be overfunding when things are very hot. But ultimately, there's going to be those companies that fit not a linear curve, but an exponential curve, which is just hard for us as human beings to get our arms around typically. Samar, you just became the actual manifestation of the Zach Alfenakis Schiff, where he's pointed with all the bat of the numbers. Yeah, yeah, I did. I did. There was a saying that I heard that might still be true, but it just is wildly like emblematic of the times, the boom times.

Starting point is 00:22:51 Like venture investing is not about what you say no to. It's about what you say yes to. In other words, like maximize your surface area because it is about the outliers. And I don't know if that's exactly how like true venture capitalists would describe their philosophy, but whatever. Okay. There's a great chart showing the breakdown in terms of who's investing in these companies. And so there's VCs, which account for 30% of it. There's incubators and accelerators.

Starting point is 00:23:18 There's private equity. There's CVC. I don't know what that stands for. What does that stand for? The corporate venture capital. Okay. Okay, got it. Yeah, like Coinbase was a huge crypto investor.

Starting point is 00:23:28 All right, there's corporations. There's angels. And then there's other. And other is big. Other's 22%. What do you think is baked into the other slice? I don't know. I don't know what the individuals or endowments maybe? I don't know. It could be family offices.

Starting point is 00:23:43 Could be family offices. Could be government. It could be sovereign wealth. It's hard to actually know what that other 22 percent, but that 22 percent is actually pretty significant in terms of the entire pie. Yeah, it's not. Yeah, that's why I was sort of thrown off. All right, just in terms of the average and median deal size, this goes back to your point earlier that these growth companies were effectively publicly traded companies that were just happened to be it, right? Like, just in terms of size, there was, I mean, I'm just going to assume that there's not a gigantic gap between, say, a firm and Klarna, except for one was one's shares traded every day in stock exchange and the others didn't. And so, our firm was down 90%. Well, guess what?

Starting point is 00:24:21 Clara's down 90%. I mean, in real life, right? Like, and then they took a huge write down. So the average deal size, year to date is 13 million, all from a high of 23 and a half million in 2021. But the median deal size is pretty much unchanged because the early stage companies, it doesn't really, really matter what's happening in public markets today. Because these are ideas. These are companies that, assuming a normal trajectory, would not even begin to potentially sniff public markets, you know, the one in a million company until 2030 or whatever, right? So they should be less impacted. Now, of course, there's impacts because, you know, appetite for risk and all that sort of stuff. But in terms of

Starting point is 00:25:00 of where seed companies get valued, and that just is what it is. I think that's right. I mean, we're basically buying out of the call, I'm sorry, out of the money call options, right, that are long-dated. So if you think about a seed stage company, in all likelihood for a breakout company to exit at 7 to 10 years. So the only thing that you're really thinking about at that time is when you fund that seed company, is the company going to have enough runway to be able to hit those milestones to be able to get downstream financing, which we know is much more constrained than before. So that's series A, that series B. In fact, one of the things that we chart and a lot of investors chart at the seed

Starting point is 00:25:42 stage is graduation rates, right? So what percentage are companies that you invest in at the Series A then go on to raise the next round of capital or seed to Series A? And during the heyday of 2019, 21. It's hard to, you know, call it the heyday. It was just recent. But, you know, ultimately, we were seeing funds at the seed level that 70 to 80 percent of their companies were getting Series A financing. And if you look at... And what's normal? 30 percent. Wow. And a lot of those seed to Series A were probably happening pretty quick, too, right? Oftentimes within six months. And so think about the IRA bump. If I invest in a company at a $20 million valuation, six months later, company doesn't even need to have a lot of traction.

Starting point is 00:26:30 Somebody else at the Series A, who has a big fund, comes in and invest at $100 million post-money valuation at the next round. I have this nice, shiny markup on my books. I can go back to my LPs and say, look how great I'm doing, and then raise the next fund. And so that is the one thing that investors have to think about at the C level is, is this company going to get downstream financing? how much, what are the real milestones they now need to have? Because even Series A investors, they're not investing in companies that lack complete product market fit. Now, there's a couple

Starting point is 00:27:03 of, a couple of maybe exceptions if it's deep tech or bio. It's just, you know, those are long gestation businesses. But your average SaaS or consumer company is not getting this huge round six months after the seed round. And therefore, that's the risk that you have to underwrite to at the seed. I saw a crazy stat a couple of years ago. And I'm making this number up, but it's, you know, directionally right, Samaria, you might know it, that even like 60% of whatever of companies that end up raising like a series D or maybe even an E fail to have an exit. Like, it's really, really, really hard. Yeah.

Starting point is 00:27:38 And well, and there's two ways to look at it. So I've seen that stat too. And sometimes it gets a little bit mistaken. So not just because a company gets a series D does not mean it's going to have a successful exit. Now, it may still have an egg. exit, but that exit could be a fire sale of, you know, certain assets where nobody makes money. The common shareholders get wiped out. And only if a bit of the preferred stock gets

Starting point is 00:28:03 their money back. And so that, in my estimation, is a loss because at Series D and above, you should not, in theory, lose money as a Series D investor. But, you know, we are going to see a lot of that, especially for those Series Ds that were done in 20 and 21. So the IPO market, there's green shoots. They were up 24% code over quarter. We had Armholdings, Berkenstock, Instacart, Clavio. What are you seeing or hearing from your community about the window opening back up? Is this a head fake or is it real?

Starting point is 00:28:44 What do you think? So the windows, you know, in my estimation, never really closed. It's just what the price point that people are willing to pay. And unfortunately, the price point that people are willing to pay right now is too low for the board to get comfortable with taking a company public. So if you think about what's happening at these later stage companies, you have really kind of three groups of shareholders that may have different incentives. You have the common shareholders being the employees. You have the late stage investors who might have invested at that series C, D, and E that have these preferences they want to hold on to because they invested at a $12 billion evaluation. The company goes public today.

Starting point is 00:29:20 it might be a $3 billion, and then you have the early stage investors who, like the common shareholders, probably want everything to convert into common so they can get their notional piece of the exit. And so there's a lot of tough board discussions that are happening in these companies, because as a growth stage investor, if a company goes public, I'm probably going to lose my money, or at least lose a large proportion. I'll give you an example. And this was talked publicly about, you know, Airtable, which, you know,

Starting point is 00:29:50 you know, has been one of the gross stories in Silicon Valley. Last valuation was $12 billion. You know, today based on the reported numbers from a revenue standpoint, this could be a company that exits in the public markets for a $2 to $5 billion valuation. So if you invested at a $12 billion valuation and now this company goes public for $3 billion, you've lost, you know, 75% of your stock price. if the company is sold tomorrow for $2 billion, you'll probably get your money back. And so that is the uncomfortable tension that's happening with a lot of these companies right now. Yeah.

Starting point is 00:30:29 Yeah, interesting environment for sure. All right. So where do you all fit in this ecosystem? Who is allocate? Where did the idea come from? Talk to us about it. Yeah. So, you know, having been in the venture industry for 25 years, you know, venture has actually

Starting point is 00:30:43 been a bigger and bigger part of the asset allocation strategies of big institutions, right? Yale went from, you know, less than 10 percent to now 22 percent. And it's really the things that you mentioned. It's the investing in kind of the future, like these game-changing companies, getting in early, the fact that you don't see companies go public in three to six years anymore. But what we saw pretty commonly, you know, during the time, I was both at SVB and First Republic, which, you know, hit a little bit different talking about those two banks today than it did last time I was on, is that, you know, there was a lot of individuals. that simply just didn't have the luxuries of investing in the very best firms, right?

Starting point is 00:31:24 So there's a lot of adverse selection. And so I'd see the returns that the institutions were getting and then the returns of the non-institutions. And coming from a background where, you know, my dad, you know, was a first generation immigrant, didn't really have a lot of opportunities. You know, I didn't feel this was right. I felt like family offices, individuals, as they were inclining toward alternatives, simply didn't have a good place to invest responsibly in highest quality venture and really capture that power law.

Starting point is 00:31:53 And so what Allocate does is work with advisors and families to make it easier for them to have the same luxuries as institutions. So this little corner of the market, which now has grown, and it might be only 5% to 10% of somebody's portfolio, but how do we make that such that that person, when they do invest that 5 to 10% in venture capital over some period? time can enjoy the same benefits of return risk mitigation as the biggest institution. So that's what we are. We're a platform that enables venture investing in a responsible way. Obviously, I hope that these more institutionalized VC firms offer better returns over the long term,

Starting point is 00:32:30 but how are they set up to manage this type of environment where we've seen such a roller coaster? How are they better positioned to handle it than the person who's just doing some fund on Angel list by themselves? So experience. So a lot of these firms have had experience going through cycles. You know, it all comes down to people at the end of day. And, you know, what type of, you know, mental model they've created over a long period of time, how they think about navigating these markets. And, you know, when you think about venture, it's usually down to three things that matter in terms of returns. It's sourcing, winning, and picking. And over time, you know, picking takes a long time to determine if anyone's good at pick. Like, I just don't know within a 10-year slot if somebody's a real good picker, if they got lucky. But over time, the more consistent you are in terms of helping founders, building your own brand, getting the right people on your staff, the more likely you are to increase your probability of these upsized returns and be able to navigate, which probably is going to be a two or three-year period where everybody has PTSD. And so sitting in front of managers, it's very, like within five or ten minutes, you can see who's in it for the longer and how do they think about navigating and are they self-aware to make the necessary changes to adopt to a new economy. You mentioned investors having PTSD. Is there a still appetite for venture capital on the part of family offices, RAs, et cetera?

Starting point is 00:33:57 It's actually a pretty interesting comment. So on the family office side, I would say yes, because most people are so largely underallocated. And if you take history as any type of lesson, we've looked at the performance post and economic dislocation versus pre. Great companies are always founded. Like, things don't change. Like entrepreneurs don't get out of bed and say, because the markets suck, I'm not going to, you know, great entrepreneurs at least, I'm not going to start a company. They still do. And so people view this as, you know, the starting of a new potential super cycle, really driven by AI, driven now by better behavior.

Starting point is 00:34:35 more sober behavior. So family offices are actually increasing from what we've seen. And that's not a blanket statement. I'd say that it's largely concentrated with family offices that are either new or have been through the movie before and aren't in a place where they overallocated so dramatically and are just liquidity constrained. I think on the RAA front, there's a lot of advisor education that's needed. So how risky is venture? What are the different flavors of venture? Because Venture can actually be risk-mitigated, depending on how you invest, whether you invest in a fund of funds, a fund that's doing growth versus a pure, early-stage single-asset direct investment. So I'd say RAs realize that the next generation of investors do want access to the private

Starting point is 00:35:21 tech economy, but are still going through that educational process. And to be fair, RAs now have other options that they can invest client capital and still get a reasonable risk return, right, private credit, things like that. And so we are seeing appetite. It's just a matter of education. Plus, letting some of the, you know, the pain that, you know, we have started to see further a little bit more and settle a bit more before people, I think, start to get comfortable at scale. Are you seeing a bigger opportunity set now for investing on the platform? I am, yeah, I am. And, you know, we've, you know, as a company, like we've grown from nine people at the beginning of 2022 to 45 today, scaled assets to a little over half a

Starting point is 00:36:09 billion dollars during a time where we've seen this economic dislocation. And it all comes down to can you get the quality of assets, the right fund managers consistently on the platform. And those are the ones that, you know, if you look at historic performance, even through cycles, top quartile venture has been north of 25%. And so that's where we see the opportunity said increasing. We also think that we're still pretty early when you think about technological curves or technology is an S curve, whether it's bio, whether it's AI, all of these things are still in the early innings. And so, yes, if you take a long-term horizon, venture is a really interesting asset class during times like this. There's a lot of alternative platforms that

Starting point is 00:36:53 have had a decent amount of success, bringing advisors onto the platform, companies of the platform and assets onto the platform. But there haven't really been any that, in my purview, that I've done a good job on the venture side. And I think that's largely because, as you've mentioned, it's sourcing. And you can't just go knock on Mark Andrewsson's door and get access to A16Z or somebody else.

Starting point is 00:37:20 So could you explain what might separate, allocate from others that have tried and failed to do something similar? Yeah, and I think you have to go back. to why would somebody that has plenty of capital, even in this market, you know, take on capital from a new LP? And it's usually around three things. Number one, you know, do you have a reputation of being a long-term advocate of the asset category? Have you been through times? Do you understand the space? And are you going to be in a long, for the long term, not just a tourist? So that's one thing. The second thing they look for is, do I have some level of a relationship with you? Have you, you know,

Starting point is 00:37:55 like why, you know, what is it about you that I want to do business with? And, you know, a lot of people have a hard time crocking this, but venture is such a relationship-oriented business versus, you know, private equity. Private equity, if you have a large enough check and you can show yourself to be a fund after fund investor, you're probably going to get access if you have the dollars. Venture does not operate like that. You really have to have these relationships. And the third is, have you provided any tangible value to the actual,

Starting point is 00:38:24 on GP or their underlying companies in some way. So we spent the last 15 years, at least me, working with these venture firms and actually investing in them early when many of these were on a fund one, helping them get maybe their first LP check or introducing them to people. And so this goodwill that's been built over a long period of time is now manifesting in us being able to get access to these hard-to-access names consistently. And a dollar amounts that historically have been reserved for the biggest or big, biggest institutions in the world. So if advisors or family offices want to go on to allocate's platform, are they able to eliminate some of the single sector, single manager risk? Are they able to build portfolios

Starting point is 00:39:09 to diversify their holdings in venture back companies or funds? Yeah. So we, I mean, we operate in kind of three different ways with advisors. One is, you know, you can pick and choose individual funds that we've approved on the system. We have a full diligence team that has invested over $10 billion in venture and private equity funds in the past. Everything goes through the strict vetting process, so we are fiduciary, but they can pick and choose, right? So we can bring on a name, and I can't name, but let's say it's an ABC company that we brought on, and ABC fund has 30 companies. They may pick and choose and be comfortable with that. The second is vintage year funds where we create a basket of a number of funds that really

Starting point is 00:39:54 reduces the overall risk because now you're investing maybe in a basket of 350 underlying companies across the basket of funds or for advisors that are sophisticated, they may want to build their own basket of venture funds and companies, and they can do that on the back of the allocate technology. So think of that as a complete white label solution for somebody to roll out their own vintage your solution to their clients. Samira, if people want to learn more about accessing venture capital through Allocate, where can we send them? Best is to either send them to myself. And so I'll just kind of give my email, make it public.

Starting point is 00:40:34 Samira at Allocate.co.com.com.com.co. Or you can simply go to the Allocate.com website. And there is a apply, which will prompt somebody in our team to reach out to have a conversation. All right. That'll do it. Samir, thanks for coming on. We appreciate the time. Thanks, guys.

Starting point is 00:40:54 Great to be on. Thank you. Okay, thanks again to Samir. Remember, if you want to learn more, allocate.co. Send us an email. What's the email address? Animal spirits at the compound news.com. See you next time.

Animal Spirits Podcast - Talk Your Book: The State of Venture Capital

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