This Week in Startups - 2024 VC trends, portfolio construction, & more with Churchill's Raja Doddala | E1914

Episode Date: March 14, 2024

This Week in Startups is brought to you by… LinkedIn Ads. To redeem a $100 LinkedIn ad credit and launch your first campaign, go to http://linkedin.com/angelpod Mantle. The AI-powered equity management platform designed for modern founders and operators. Get your first 12 months free at https://withmantle.com/TWIST DevSquad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one US developer plus 10% off at http://devsquad.com/twist. * Todays show: Jason Calacanis welcomes Churchill Asset Management’s Raja Doddala to the show to discuss startups and the VC market in 2024. They dive into the competitiveness in pre-seed, seed, and series A (10:40), portfolio construction (30:24), the future of the vc industry (50:59), and much more! * Timestamps: (00:00) Jason welcomes Churchill Asset Management’s Raja Doddala to the show (1:52) Trends in pre-seed and seed deal values (9:19) LinkedIn Ads - Get a $100 LinkedIn ad credit at http://linkedin.com/angelpod (10:40) Competitiveness and predictability in pre-seed, seed, and series A (21:28) Mantle - Get your first 12 months free at https://withmantle.com/TWIST (22:46) Trends in exit values (29:19) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at http://devsquad.com/twist (30:24) Exploring portfolio architecture and the difference between mega funds and smaller funds (50:59) Prospects in the vc over the next few years and the rise of the next generation (59:26) The role of secondary sales in venture capital and importance of liquidity for VC funds * Check out: Churchill Asset Management - https://www.churchillam.com * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Follow Raja X: https://twitter.com/rdoddala LinkedIn: https://www.linkedin.com/in/rajadoddala * Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Thank you to our partners: (9:19) LinkedIn Ads - Get a $100 LinkedIn ad credit at http://linkedin.com/angelpod (21:28) Mantle - Get your first 12 months free at https://withmantle.com/TWIST (29:19) DevSquad - Get an entire product team for the cost of one US developer plus 10% off at http://devsquad.com/twist * Great 2023 interviews: Steve Huffman, Brian Chesky, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Substack: https://twistartups.substack.com Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups * Subscribe to the Founder University Podcast: https://www.founder.university/podcast

The amount of cash being invested in preced and seed is now at a 13 quarter low, and the number of deals also has come crashing back down. I think the last 10 years, everybody just went crazy. LPs went crazy. They forgot that there's a J-curve managers deployed. So quickly, companies raised very quickly, spend too much money, too fast, without any new information, new milestones. Looks like we're back to sort of normal way of.

doing venture. And this is, I think, the danger of how attractive venture capital can be. We never seem to learn our lesson or we forget it after 10 years. People get too excited. They put too much money in and it breaks everything. This week in startups is brought to you by LinkedIn ads. To redeem a $100 LinkedIn ad credit and launch your first campaign, go to LinkedIn.com slash AngelPod. Mantle The AI-powered equity management platform designed for modern founders and operators. Get your first 12 months free at with mantel.com slash twist. And DevSquad.

Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one U.S. developer plus 10% off at devsquod.com slash twist. All right, everybody, welcome back to Twist this week in startups today. We're thrilled to have Raja Dodala on the program. He runs venture and growth at Churchill Asset Management. We'll hear a little bit about Churchill in a moment, but we want to talk about the VC world and exits and how capital's being deployed.

Raja, welcome to the program. Thanks, Shikl. Thanks for having me back. Yeah, let's get right into it. A bunch of data that will just level set with the office. audience. Let's start with the deal value in 2023. This is the National Venture Capital Association and Pitchbugs data that we're showcasing here and look at the number of deals that occurred in 23 versus previous years. And this is a quarterly chart. What we see here is that the deal count

is sort of down from the craziness of 21 and 22. It's down, but it's sort of back to what I think is sort of a normal pace and normal amount of financings, I think. We're reverting back to our average 3,000 deals a year occurring, whereas at the peak, we broke 5,000, you know, four or 5,000 deals going on per quarter. Yeah. Per quarter, that's a lot of deals. And the deal values are what we see in the blue bars. So the value of those deals rocketed up to, looks like almost 100 billion deployed,

80 billion at, you know, the peak there. And now we're back down to, you know, the 40 billion, every quarter being deployed in something around 3,000 deals. So the madness is over. We're back to what is normal. Let's go to the next chart here. This will just show the yearly. And so if we abstract this on a year, it becomes even more pronounced. What do you see here in the yearly chart of deals and the volume of deals in terms of dollars? Just back to pre-pandemic levels. It's still a little. bit elevated if you compare it to 2015, 2016, but just generally back to the mean, I think. Yeah, we had 170 billion in deals in 2023. Obviously, even though the number of deals has come

back down, it looks like 15,000 deals for the year. And we were averaging in that 2014, like 11, 11, 12,000 deals. So it's still elevated the number of deals. And it should be growing. Venture grows, capitalism grows. So there should be some growth, typically. Yeah. Yeah. I mean, definitely, this is probably, you know, AI. round sizes, the valuations and round sizes are quite elevated, and that probably explains the deal value. So this is where you can start to get a little bit more granular pre-seed and seed deals here. This is Q4 pre-seed and seed deal value slumps to 13-quarter low. So the amount of cash being invested in pre-seed and seed is now at a 13-quarter low as of Q4.

This is Q4-2023 data that's come in. And the number of deals also has come crashing back down. So when you look at this overall, Raja, a healthy thing, right? Very much so. Yeah, very much so. I think last 10 years, you know, maybe seven, you know, it's just everybody just went crazy. LPs went crazy. They forgot.

We, as I said, they, we forgot that there's a J-Curve managers deployed, you know, to quickly. Companies raised very quickly, you know, spent too much money. too fast without any new information, new milestones. Looks like we're back to sort of normal way of doing venture. And this is, I think, the danger of how attractive venture capital can be. When venture capital is a boutique industry, when we're doing a small number of deals, when things are concentrated and we don't have venture tourists coming in, people plowing money into venture because they get excited about it.

When we don't have entrepreneurial tourists, people starting companies who, you know, hey, they might have been a great CMO, a great CTO, a great VP of sales, but then they get the CEO slot, maybe they're not cut out for it. And the talent gets spread a little bit thin. You know, you get a little spreading the peanut butter too thin. And then you don't have this, you know, talent. So on both sides, it gets a little too loosey-goosey. And it feels like this keeps happening in venture. Every couple of decades, whether it's dot-com, Web 2.0, now at this, you know, 14-year run-up we had, I guess what we're going to call the ZERP era, all three of these. We never seem to learn our lesson, or we forget it

after 10 years. People get too excited. They put too much money in, and it breaks everything, yeah? No, it's true. I think, you know, even though there's a lot of data that suggests that work, at least some of the industries back to sort of normal art, you know, sort of a boutique way of doing things. But if you look at AI, J-Cal, I think there's probably still some of that behavior still sort of people using AI sort of as a cover to still do that. Brian Singerman, I think it was on your podcast. He was at a conference that I was at upfront a couple weeks ago. He basically said AI is uninvestable. And his thesis is why, because evaluations are too high? No, I think his thesis is a little different. I think the way

they do it at Founders Fund, they're, you know, they like to be non-consensus. They think there are, it's a completely consensus investing in AI. So he feels like for him, is completely uninvestable. But from where we see, I think some of the reasons why, even though the deal count is down, the valuations are still record high for seed and precede, even higher than 2021 and 2022, or round sizes are also having budged. I think that's probably a function of AI. And let's pull that up here. So this is where we can start to get super granular. We can actually look because we have some good data here. Now, pitchbook data is not perfect. And the NVCA's data, Nobody's data is perfect in this regard, but it does show a decent trend.

Carter also releases some good data. Crunch base releases some good data and the fine folks at TechCrunch. So you can kind of triangulate this data and it all kind of will bring you to the same place here. This chart we're looking at here, these two charts, median precede deal size remains the same as 2022. So somewhere around 2019, we started to see the valuations of these, um, the deal size, rather, how big pre-seed deals were, started to climb. In other words, more cash was given to pre-seed companies. So pre-seed company at a level set here, it's typically a two-three-person company,

two or three founders, building a product. Yeah, we would agree. Yeah, I think so. I think, you know, 600,000 is what looks like pre-seed deal. You know, that used to be, you know, just a couple hundred thousand back in 2013. And that's a 3-X. increase and that hasn't budged. And so when you look at this, this means founders at the pre-seed, select founders are getting a larger dollar amount. And I am still seeing founders raising

500K. So it is quite normal to see a 500K around. I suspect because these are averages. I mean, if you look at the 75th percentile, it's like a million and half, you know, at the top end, it's like a million and a half. Are you seeing that a million and a half? seed rounds. I guess once in a while we will see somebody break out in a pre-seed and do a million and a half. What to me is shocking is then we have seed deal sizes, which is the second chart on the right. And again, those four lines we're looking at are 25th average median 75th percentile. And when you look at that 75th percentile, I mean, you're talking about raising 5 million, which to me is a series A. No, I think you talked about this in other episodes. I think the seed is

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How would you define these two? This is kind of a sticky issue. Right. So some of the best, you know, pre-seed seed managers that, you know, we have in our portfolio when I ask them this question. And they say the difference is used to be, especially 21. in 22, just a PowerPoint deck and, you know, the founder and idea, especially a second time founder, you know, no questions asked, you can get a half a million

bucks. Now you got to have a product and even maybe a pilot, you know, if it's enterprise, maybe an early pilot or two. For Seed, a real contract, like a real customer or two, with some real traction and revenue is what they're looking at. Yeah, so pre-seed, just so we're clear here, the definition would be, A couple of co-founders. They've got a proof of concept, a demo, and maybe somebody, you know, beta testing the product.

They may not be paying. They could be on a pilot. But there's somebody giving some feedback. Whereas previously, Preseed would have been the friends and family around. I would have defined Preceded and Friends and Family is the same thing. Angel. We're just passing the hat, a couple of folks and an idea, a business plan, a mockup. But because it's easy enough to build products now, people kind of get the prototype done.

then at the seed stage definition is you got paying customers. Somebody took out their credit card and paid for it. And maybe you can even start to talk about growth. Maybe they got 12 weeks. Maybe they got 24 weeks of people using the product. You can actually maybe dig into the engagement stats and see who uses a product every day, who uses it every week, who signed up but stopped using it. And so maybe everything just has moved over to the left one.

You know, we're looking at it here is actually C. in Series A, seed and Series A deals going on here, is another part of this, the attractiveness historically of the seed round and the pre-seed rounds has drawn investors down. GPs are saying, you know what, Series A is too competitive. I'm up against Sequoia, Kraft, whoever, light speed, you know, pick a firm, E, Kleiner, they're all, you know, battling it out for the Series A. Maybe I don't want to get in that mix. The seed stage and the pre-seed, certainly, there's five to 20 people in the round. I just need to secure an allocation.

I don't have to be the lead. I don't have to join the board. Yeah. Is that what's happening here? You know, I think you also said another sort of key word there is the lead. So where we see is two places that are super competitive. One,

the lead position at seat stage. You're a seed firm. Then you're trying to sort of, you know, you started out as a $20 million sort of firm and you sort of graduated. You raised fund three. now you have $125,000, $2 million seed fund, and now your portfolio math requires

to get some ownership and a lot of times lead. And there's super, you know, some of the multi, the platform funds are now sort of wanting to lead seed stage deals and they want 12, 14, 15 percent, and that's getting very competitive. And then Series A, obviously, is, you know, as competitive as ever. And in terms of metrics used to be,

you know, yeah, some early product market fit, you know, a couple of customers that are real. Now, they're looking at customer cohorts. Are there similar customers, you know, more than three, four, you know, contracts that are sort of similar, meaning that the product sort of is, you know, hit, you know, sort of popularity with a segment of customers. So a little more predictability might be a way to say it. Yeah. So you got your third customer and they look like the second who looks like the first.

And now, if you got the. those three, you can just extrapolate from there the next 300 and then onto the next 3,000 and 30,000. And if you have a SaaS business, it gets a 30,000 customers, you know, at $1,000 to $25,000 per year, you got a real business on your hand. So that really is what I've learned investing is about. The price goes up, the valuation of the company, and your ownership goes down as the founders figure more things out and risk is taken out of the business.

Yeah, you get more cards to build. Definitely. Yeah. And so if you're precede. you have no customers, valuation is going to be low single digits. Now you got three customers, all of a sudden your valuation starts to get towards high single digits. That's right. Now you start getting predictable. Now you've got an eight figure valuation. And then if it's year over year predictable, you know, you're in year three and you went from 100 in year one to 500 to 1.5. Now guess what?

Now you get to have that $50 million valuation and qualify for the Series A. Right. And so this is where founders, I think, I don't know if this is your experience. if you're a founder and you're aggressive, you always want to get credit for the next level of work, maybe work you haven't done yet. Because you're aggressive and you want to be recognized.

And this is a hard, I just had this come across my desk, desk being slack, had a company we liked at a founder university or a pre-accelerator. You offered them to come to the accelerator, 125K for 7%,

just like everybody else, my combinator, 500 global, tech stars, launch, all the same terms, basically. And they said, you know what, we got some angels to put in at, let's call it, 7, 8, 9 million. And so would you put the 125K in at that level? And we would say, you know what, maybe we'll wait for you to get to 10 customers, 20

customers, because you don't have paying customers yet. So, you know, and that just takes discipline. We might like the company, but, you know, there's- And that's your typical entry point. Is it not, you know, your accelerator is kind of where you try to get in and sort of of a build-up portfolio and then sort of double down and the sort of the That's, that's, yeah, so this is, like, I think a great pivot point for us, which is portfolio construction.

And so maybe just to level set with the audience, because we kind of got right into it, how do you invest, who do you invest in, and then what are your expectations? And then I want to jump into the exits chart and then go into portfolio strategy. Yeah. So the way we think about it is, I mean, you had a couple of really interesting contrasting LPs on your, you know, on your podcast. You had Michael Kim, a sort of, you know, early stage, precedency, sort of, you know. Fund of funds.

Fund of funds concentrated, you know, they take a big chunk of the funds. And then you had David from Vencap, sort of very concentrated 12 sort of platform funds. It's terrific 12. Yeah, that's terrific 12. I don't know you kept trying to get him to tell you which 12 and he wouldn't. You know, the way we're probably somewhere in the middle. The way we think about venture is there really like three products in there, three asset classes, if you will, pre-seed and seed is sort of a different risk profile, different stage of the company,

really company creation stage. And then you have sort of series A through D that sort of really used to be sort of what used to be called Venture. That's why I think Pitchbook still calls it early stage, series A. And then sort of post-series D through IPO sort of growth stuff. We play in the first two. Pre-seed and C is sort of one cohort and then A through D. And the way we think think about our own portfolio construction is series A through D. We think, you know, on a risk-adjusted basis, A is probably the best point of entry for LPs. So because of that, we, you know, 55 to 60 percent of our total committed dollars going into, so that they go into series A through D.

And the way we select managers there is very much like David. We're sort of concentrated eight to eight, you know, let's say 10 approaching 10 now. And we'll probably stop there. Those 10 managers, you know, as long as they're doing well, according to the way we think about, you know, investing, they'll be our sort of marquee sort of names in the portfolio. Then seed and precede, you know, according to the historical data, returns are higher in precedency. And so, you know, there's alpha there, but also, you know, risky and it's volatile. Because of that, well, we sort of have a long tail of 20 to, you know, now approaching 25 smaller managers. smaller for us is anywhere from 25 to sort of the top end,

maybe top out at 100, 110. Total fund size, right. Yeah, total fund size. And that means you like to put three to ten million dollars into each of those? Yeah, three to ten. We like to anywhere from five to 15% of the fund. Perfect. So 25%, if it's a $25 million fund, you might put in two.

Two and a half, two million. We're willing to do that. And a lot of this, institutional investors are our size. don't like to, we see a couple hundred to 300 funds a year. It takes a lot of work sort of sifting through, you know, what is that person's comparative advantage? Why are they going to get three, four, five, seven percent ownership, you know, seed and pre-seed? Are they going to be able to help and graduate, et cetera? So we think some of them won't make it. Some of them won't graduate to fund three and four, but we think it's important to play in that space.

because of that dollars-wise, about 35 to 40% of our dollars kind of go into that space. But it's a long tail of the seed and the pre-seed. The seed and pretty long, you know, and then we like to, you know, just like, you know, you like to sort of layer in additional capital in sort of outliers. Yeah. We sort of have close relationship, you know, with our managers and we like to do co-investments, you know, sort of post-product market fit, you know, reduce the duration of the holding period, potentially lower fees, a little lower risk.

These are companies that we, you know, technically will know beforehand and where we can get access. So you might see this company in a seed stage and you watch one of your Series A funds invest in them. And now they're at Series C or D. They're, you know, maybe projected to be two to five years off from an IPO. And you can put in an extra $10 million or $20 million into that one deal. We'd even do smaller. What we like to do is, you know, we want to make sure. that it's easy to make room for us.

Some of these rounds, there may not be enough room for $10 million, but we're willing to do, in a three-year period, we'll probably do 25 to 30 of these. Direct investment. Some of them would be one to five million range. And more often than not,

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You've reduced massive amounts of risk. You may be nothing's guaranteed, of course. But you may have reduced 60 cents. 80% of the risk. They've now gotten to 25 million, 50 million in revenue. And it's a straight shot to 100 or 250 million in revenue, which is when IPOs, I think, can be considered now 250 million. Something in that range would be the floor for an IPO, I think, in today's market.

In the U.S., obviously, in other markets, you can go out with 10 million in Japan or even. Yeah, it's interesting. You know, we can go into it. Exit values are really super interesting. Everything we do in venture. is predicated on the money coming back at some point. And you can have great periods where founders and LPs and GPs want to hold their position because things are growing and they have long-term greed.

Airbnb is growing, Coinbase is growing, Uber's growing, DoorDash is growing. You know, they would just stay private longer, right? Stay private longer was the move. But then we saw Airbnb, Uber, Coinbase, DoorDash, get out and eventually great IPOs that were a little bit sticky and it was a little choppy at the beginning. Maybe they were just overpriced relative to where they were at. But here we go. Maybe you could describe what you see in this chart, this quarterly chart of exits. Just to put it into perspective, I think the narrative is that exit environment is really tough, which it was. But if you

look back, you know, some of us have been around a while, the exit value was low. In total 2023 exit value is about $68, $70 billion, something like that, down from $800 billion almost in 2021. And that $201 exit value is completely bonkers. It just never, that never happened before. That's a complete anomaly and that's probably never going to happen again. I mean, you know, we did have that dot-com era, you know, a bunch of people got out. So you did have a spike there. As I like to tell people, fortunes are made in the down market.

They're collected in the up market. A lot of what we saw in this crazy 2021 era were companies that 10 years earlier, 2011, were invested in by folks, whether it was Robin Hood, Uber, DoorDash, Coinbase, you know the companies who went public. And then I guess M&A being turned off in the EU, the UK, and the U.S., the U.S. And everybody just sort of putting the kibosh on M&A, that means IPOs is the only way to go. Right.

And we see something like the Adobe Figma deal, you know, that was 20 billion that you should have been consummated some here, maybe in 2023 somewhere. And so that 20 billion would have popped up one of these quarters, right? That's right. If it's not one of the quarters, it would have come back in terms of LP dollars back in the, you know, in the system. But what's interesting, though, J-Cal is that as bad as 2020 was, the total exit value, about 70 billion, that's not completely too far off, you know, if you look at

2013, 2013, 2014, 15, it's typically around there. You know, it's just 21, you know, and 22 were complete anomalies. And also the 87% of all exits, this is the last 10 years worth of data, starting in 2013. 87% of all exits are less than $100 million. Right. It really is the power law at work. Correct. Most of the exits, you're just getting cash back or half cashback.

The preferred stack gets paid back. But nobody's really popping champagne corks here, except maybe pretty, pretty. receipt people who invested at $5 million, it exited at $100 million, $50 million. Yeah, maybe they got a 10x, 5x. It's okay. Yeah. But it's not a 50x or 100x, which is really, you know, we need to be hitting 50 and 100x hits, you know, in our portfolio. And this is one of the reasons why I think we have 20, you know, 20 odd firms that are 25 to, really, 50 to, you know, 110 million range. I just did some quick math.

If you're a billion dollar fund. and if you want to do 3x DPI net in 10 years that means you have to create about $4 billion worth of exit value in 10 years and that's about

14, 15% IRA that's not easy to do. It's double the stock market, so if you'd parked your money in QQQQ or whatever S&P Vanguard fund you would hit 7 or 8 historically. And so when you put that 4 billion, there. You got a $4 billion in exit value because a billion is going to be management fees and carry.

Correct. Then you got $3 billion left net to your LPs. To hit that, if the billion dollar fund had 50 bets of $20 million and that $20 million bought 15 percent, got diluted down to 10 percent, that means you have 50 companies you want 10 percent in. That means to hit the $4 million number, one of them has to hit $40 billion. So in the last 10 years, J-Cal, the number of exits above a billion are 300. That's it. Now do the number of exits above 10 billion. You can almost count them on one hand.

You got Snowflake, you got Uber, Dordash. Yeah, about $5 billion is like 55 in the last 10 years. So, I mean, they're incredibly rare. Very rare. And that's why it's really interesting, you know, venture sort of market. There is, you know, smaller firms that are still, So I'm somewhat doing traditional, you know, if you're a hundred, you know, again, math on a hundred million, you know, a hundred million dollar fund to do three X net,

you'll have to create total exit value roughly 400 million. I mean, that's, you know, I can see a number of paths to doing that. You don't have to, you know, you don't have to hit a billion dollar exit at all. Well, we could do the same math here. Let's say you on, on average, 5% in exit, not as much as the other firm's. Five percent at exit. If it's a billion dollars, that's 50 million. and so here if you were trying to, you know,

if you hit a company that hit $5 billion and you have 5% of it, okay, you know, now we're starting to talk about, you know, a decent return there. Well, the median exit is like $87 million. Yeah. Even if you had a few, I mean, you know, even if you had a few of those, I could see, you know, a $100 million fund getting to a 3X net

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And this is the math I have learned and studied. And so let's just pull up also the yearly chart here. And then you had a question for me about portfolio construction. I have an update on that. And I can get your feedback as an LP and a GP, which is, you know, one of the reasons I do this show is for me to get smarter. And, you know, having these conversations will make you smarter. There's that crazy peak, 2021. You got almost $2 trillion in exits. It's 800 billion. Yeah.

Almost 2,000 exits and what's the dollar amount there? Where's the dollar? 800 billion almost. 800 billion. It's incredible. When you think about 800 billion, like, whoa. Yeah. Now, it's important for people to understand this is not the total value of the companies.

This is the value of the equity owned by the venture firms. Correct. The majority of the equity, you would think, 50%, 40%, actually, maybe it's, you know, a large chunk is owned by the founders and the team. That's right. That's right. So, lest anybody. think, oh, there's a $100 billion IPO for Airbnb or Uber, oh, the $100 billion goes

directly to these numbers? No, about half of it goes to these numbers in all likelihood. And then it just plummets, which is just incredible to show you what happens. We went down 90% in terms of the exit value. The number of exits went down 25%. Right. 2,000 to 1400, so the 30% or so. And then it's gone down. I think the exit values, yeah, I think the exit values are down, but I think you're right. The reason that number looks high, like higher than 2017, there's a lot of seed and pre-seed, you know, stage exits. They didn't really return a whole lot of money.

Aquires in some cases. And this is what people don't understand. Maybe you could explain an aquire the dirty little secret of those transactions. Yeah, definitely. A team, you know, you quickly decide that they, you know, there's no viable path and a Facebook or, you know, meta, Google or, you know, you know, Apple, you know, you know, someone acquires them just for the talent. And then if there was 20 million put into that company, let's say the company gets bought

typically for? 17, maybe. If you're lucky, maybe. Or it might get bought for 5 million, you know? And, you know, that 5 million might get carved out, 2 million to the employees, 3 million to the preft staff, which means whoever the latest investor was who put in $5 million gets there, 3 million, gets all of it, everybody else gets washed out. That's right.

And these are incredibly frustrating sometimes. But it's part of like, understanding what happens in Ventures. You got to just keep it classy. Let the aqua hires happen. Nobody's really getting rich. Although I do get a little perturbed sometimes. I don't know if you've seen this. And Zuckerberg was the master of this. He said at one point to Chris Saka, one of his startups, he told the founders, like, screw your investors. We'll give you guys like five million dollars in equity over the next four years. And we'll give nothing to your, you know, investors. We'll give you 500K. This is five million into the company. They get 10% of their dollars

back, but we'll just give you all the equity, which if you were the acquirer, do you want to give money to the VCs or do you want to get money to the employees? Yeah, they motivate them to work for them. So I have a simple standard. When these aquilers happen, I just say, give us the total value of the employee, the founder buyouts and the, you know, preferred stack. Just keep it like 50-50. I don't know.

Something like in that range. And, you know, it's like sometimes we'll see, you know, four million and one million. I just say maybe three and two, three million to the founders, two million to the investors. Can we just keep it somewhere in the 50-50 range? Not that it matters, but I just think it's better hygiene. I agree. This is where, I think, having Republicans in office, not to make this political, but when Republicans come back in office, which seems like it's a decent possibility, for anybody who's terrified by the concept of another Trump presidency, I might be one of them, like how chaotic it's going to be, the one. the one silver lining for venture investors is M&A might open up again, and they might tell

Lena Kahn to hit the road. And hey, M&A needs to come back because this anti-capitalistic approach is really frozen the market. We need to get billion dollar to 20 billion dollar exits with the big companies, medium-sized companies buying them. What's your thoughts on keeping the market competitive while allowing M&A? Is there any solution here? No, I think you're right. You know, So I think there's got to be some, I think the pendulum looks like, you know, swung too far. Like Amazon buying a robot, you know, vacuum cleaner. I don't really, I don't know what interest, consumer interests are protected by that. You're right.

I think one of the, you know, speaking about, you know, comparative advantage, you know, our country is innovation and that cycle of people starting business and businesses and then getting, you know, liquidity off of that and then doing it again and again and again, And that flywheel, no one does it better than us. I think in the long run, if we lose that, that asset class, I mean, we just talked about how difficult it is to start a company, to invest in a startup and underwrite that and, you know, seeing that through all the way to the exit, it's really difficult. And that's, you know, sort of a key driver of our growth.

And if we disrupt that, you know, I don't know that that's a, that's in the long term best interest in our country. But I'm not, you know, I'm not saying there's, there's. there aren't legitimate competitive issues, but it looks like the pendulum has swung, like too far. The competitive issues were probably both manifested by a series of three acquisitions, YouTube by Google, Instagram and WhatsApp by meta, aka Facebook. If you look at all three of those, none of those would have occurred under Lena Khan. Right.

Hard, they would have been stopped. Now, if you double click on those, I think YouTube probably would have failed. I think they would have gone out of business. They were unfundable. They had a multi-billion dollar wizard. significant chance YouTube would not exist if it had not been bought. Instagram and WhatsApp, Instagram bought for a billion, WhatsApp for 19 billion, I believe, for the two-no. So if you look at those two, I think there's a good chance that Instagram would have been worth 25 billion at IPO, and today would be sitting at $500 billion, $250 to $500.

I think the distribution proved to be really more valuable in that case, both Google and Facebook's case, you know, than the product. and you're absolutely right. To argue sort of the other side of that, I think as a result of that, I think we have three, four, five, sort of, you know, I think the five largest companies in the world are American, you know,

their tech companies. And do we want that as a nation? I think we do. Yeah. Do we want the, you know, Chinese companies to have that? Or American companies that, you know, for American companies, I think there has to be some balance.

It seems to me that the balance is not quite there. Yeah, I mean, if you look at the top 25 companies, the companies that are not American on that list by market cap, LVMH, French, Aramco, Saudi, obviously. And then you got a handful of the Alibaba's and Taiwan Semiconductor, which would be Chinese or Taiwanese, you know, and I guess bite dance is still claiming there. He's claiming there's Singapore, maybe, I don't know, where they claim to be domicab. think we all know. Right. So in one way, the Instagram founders, the Instagram founders and the Instagram investors would have been better served if Lina Con had blocked it. And I know because Ruloff did that deal at Sequoia. Man, that would have been incredible. So let's start at the top here. Oh, Berkshire. I heard, I forgot about it. Yeah. So Microsoft Apple, Nvidia, Saudi Aramco,

two trillion. Eli Lilly. So, no, Eli Lilly has raced up the charts because of Zamp. He won, yeah. So number four, number nine, and number 10. Yeah, those two raced up. Yeah, Visa Tesla, JPMorgan, yeah. It really is a challenge, actually, when you think about it, because it would have been really nice to see Instagram beating Facebook in the market now. And that would have been stopped by Lina-Con.

So, you know, it goes both ways. I think for LPs and VCs, if Uber had been bought or Airbnb had been bought, you'd be sitting here with probably a $10 billion, $20 billion exit as opposed to whatever they're trading at now, $150 billion. This is the thing about being patient. I made more money on Uber, even after I had sold a bunch of my shares early in, you know, secondary transactions at $34 a share. And that took 10, what if you, 10, 12 years?

11 years, I think, from C to exit to public. And then if you look at the public four years, I made much more money off of the last a couple of years as a public company going from, you know, 20 to $8 a share, then I did in the first one. So those last doublings can be very, very material. I'm hoping that's the same for Robin Hood, which I've held on to my 100% of my Robin Hood shares. I'm hoping that works out. Let's talk about portfolio architecture and how you, what have you seen that works really well? And when you're evaluating this portfolio construction, what are you looking for at the seed stage? Series A and late stage.

And explain portfolio construction generally because I think it is a evolving science slash art, maybe a bit of alchemy. I think it's a bit of both. Yeah. So let's call it this alchemy of portfolio construction. Everybody's got their own views on it. What are your views? Yeah.

So from where we sit, so let me first sort of address sort of the fund of funds, you know, people that invest in funds primarily. I think what's been one thing that's sort of different, you know, it feels different this time around, sort of overhang from ZERP is fund sizes have gotten bigger. I mean, some of them have come down a little bit, but not really. There is, it occurs to me that there is two different products in the market today. There is the mega funds and there's sort of the smaller funds. I put the smaller anything under a billion.

I mean, even under a billion, there's a seed that are smaller. But it occurs to me that they're really, at this point, they're really creative for different kind of LPs. These megafuns really are for people that are, to your point earlier, as long as you're getting 500, 600 basis points on top of, you know, what an S&P 500, you know, a 7% return. It gives them a different kind of exposure, different stage, you know, different class of companies. And they're not really, you know, nobody has said this to me directly. but my inference is that they're not really trying to do the multiples scheme. They're not trying to do a 3X net. It's more of an absolute dollar return as long as they're not going to lose money.

And they're probably not going to underperform the SMP. They're going to be, you know, you know. So they literally might be going for that, you know, 7, 8, 9, 10%, and then hoping, hey, well, maybe I get a lottery taken on top of it and I do 15. There may be, you know, a data, you know, or, you know, an Uber, you know, once in a while. and that might put them to 15% IRA, but it's really, you know, if I have to guess on a 12,

you know, now that J. Curve is back, it's going to take 10 to 12 years for the funds to resolve themselves. It's a 12 to 14% IRA game, and that may be okay for a certain class of LPs. But, you know, I think LPs are trying to figure this out.

And if you're, you know, like us, we care about multiples. You know, we try to, you know, hit at least three to five, X net, not all of them will do. Cash in, cash out. I put a dollar in. I want three, four, or five back after all the fees, after all the carry expenses.

I give you one. I got to get three back. Would be amazing to get four or five in ten years, twelve years, whatever it wants. Let's say ten years, five backs is 18 percent. I are. And that's hard to do just with funds. So you have to do a little bit of direct investing, sort of like I was describing earlier. You got to put some additional.

money into some winners, then you can target 18, you know, reasonable to get 18%. And that's what, you know, I think, you know, a certain class of helpies you're trying to do. And because of that, I think we're focused on finding smaller managers seed and pre-seed, where we can figure out a way to underwrite them, which is not easy. When we think about portfolio construction, let's go to the seed. Most seed, when I got into the business, you know, $10 million fund, $100K, 100 investments. hope you hit a unicorn. Luckily in my first one,

I did 109 names, hit four unicorns, worked out well, 5x on paper, 1.X already DPI. I think somewhere between those two numbers is where we wind up, or maybe things grow.

Maybe it becomes six or seven, who knows. Right. We still got time. So let's talk about then the critique of seed funds is, hey, they don't have reserves, et cetera.

We did a little analysis on my first fund for unicorns in the, that fun, Robin Hood, superhuman, density, and calm. We looked back on it. We knew three of them were unicorns. It was just obvious from...

When did you know? Series A, series B. It was just... It was obvious that they were the winners in the portfolio. There would be a big outcome. You don't know how big, but you know that they're going to be large companies. Exactly. It was very clear based upon certain signals, mainly growth of the business,

you know, actual fundamental growth of revenue and users. With density, it wasn't as clear because they were in the product. It was a hardware product, so they were deep in product discovery mode. But, you know, it was pretty clear with those three. We didn't place a second bet. If we had placed a second bet on any one of them, we'd be a 15x fund. 10, 15x fund. If we had done two, it would have been a 2025x fund.

That's informed everything I do now. Same thing with my Sequoia Scouts, I did about 650K deployed, returned to 120 million, hit three unicorns in about 18 investments, one every six. Never going to happen again. but, you know, got lucky. And so I guess how do you think about how much should a GP, how much should have fund, keeping reserves to make those second and third bets at the seed state?

Yeah, so I've talked a lot about this with our managers. One thing that I've sort of learned to appreciate in venture, you know, seed preceding, doesn't matter where, is there's a number of ways to get to, there's a number of paths to get to 3 to 5x, but it's hard for me to see how you can, do that if you didn't put in more money into your winners. I mean, you know, we can debate whether you're going to be consistently, be able to identify those, you know, those winners

or not. That's more probably art than science. I think, I don't know who said this, probably Adam Fisher at Bessemer. Most of the value in a company is created in the last like 18 months before exit. Yep. And, you know, some people are confident that they, you know, like you in your case, you kind of, you know, you don't know how big, but you knew they were big and you knew enough to put more money into those companies. We intuitively think that makes sense, but there are some that are adamant that there shouldn't be any deserves at all. Big mistake.

Big mistake. So, I think now, based on being, you know, I'm deploying out of our fourth fund right now, I have architected it now, and obviously this is subject to change based on what happens in the fund, 50% in reserves. is my best estimate. Now, it could be 30 or 40. Yeah, I can see, it's not going to be more than 50,

but I think I want to have the flexibility for 50. And so you asked like how we're doing. It's actually interesting. Now, based on portfolio construction, I have the investment team, aware of the portfolio construction on the front lines, you know, running the programs, Found University Pre-Seat Accelerator,

and then our actual accelerator. I have explained to them, hey, we need to hit 10% ownership in, you know, like at least a two, dozen likely winners. Yeah. And then we want to get to 15% ownership in five definitive winners. So I've really focused on this language, likely definitive winners.

The mentality. I think you've got to have that mentality in, you know, we agree. And as you've heard me say, we like to do the same thing. We like to layer an additional capital in the winners where we're able to do that. Yeah. And so I had them give me the numbers. Yeah. So I'll just share them with your broad strokes here.

It's kind of interesting. because every, I mean, we're deploying about a million a month, right? And we've already put about 11 million into 102 investments. So on average, it's 110. 35 accelerator. Those are the 125. 38, Founding University, those are 25 K checks. 18.

And it looks like about another 20 direct investment. So, you know, it's kind of where I thought it would be. But the more interesting thing I've been asking them is how many of these, Did we make a second investment in? And then how many of these are getting up rounds from investors who aren't us? And I don't have that last piece of data. But I do have a number of these companies where we have ownership. I'm just looking at one, two, three, four, five, six, seven, eight, yeah, nine, ten.

So it looks like at about ten percent of the companies. Wow, very interesting. In ten percent of the companies, we made a second investment already. And this is ten percent. And so we did. and in those companies, just ballpark looking at them, our ownership percentages are 11, 12, 8.5, 8.5, 8.5, 8.5, 8.5, 8.5.1, 11, 14%, and 14%, and then 5% and 7%. So, you know, we've really done a great job of getting to that 8.5 to 12% number in what I think are the likely winners.

And then we would get diluted down if we don't take another pro rata to see. six or seven percent, six or seven percent on exit, $100 million exit, six or seven million, $50 million fund, hey, we start returning 10 percent of the fund with those, what we would call singles and doubles, yeah? No, I think that you got to have those, you know, you know, base hits, you know, whatever you want to call. Otherwise, I don't know that you can get to, you may be able to get to two X without it, but I don't think you can get three to five, you know, four or five X, you know,

without, you know, what you're, I mean, you may discover that it may be, maybe you need 50 percent, maybe it's 40, maybe it's 30. But, you know, I absolutely agree with you. Unless I see something different evidence to the contrary, I think that's a good strategy. What I like about this doubling down strategy is it makes you a better full life cycle investor. I started doing this J-trading. If you go to jatrating.com, I sort of publicly trading some equities. I had a couple of million dollars in a like an account that was just like an index fund.

And I just started to actively trade, just that like one and a half, two million and shared the trades. I might think of it on this very podcast, because I wanted to be better at understanding the public market comes because I'm frequently faced now with exits where I personally have to make a decision, do I sell or keep my shares in Square or New Bank or DoorDash or Uber, Robin Hood? So I got to make a decision personally. Do you have to become a public market investor, whether you like it or not? You have to start making, and also you have to make that decision for your LPs.

Do we hold Rumble? We have shares in Rumble. Do we hold them? Do we distribute the cash? What do we do? Boom. And so this is, you know, it's not a perfect science. What do you think?

We, yeah, we like, in our case, you know, we want, we're paying you to be a private market investor. So the J-curve expectations, as well as sort of what we're hiring you for is to be private market investors, we prefer, we tell our managers, we prefer that as soon as your lockups over distribute. the shares, and we usually do not hold it either. Because my mandate is not a public, you know, I don't have the skills to be a public market investor,

so we immediately liquidate. Yeah, so that's, I think, the key is understanding your LP base and what they want. Yeah, I think we're in the, distribute the equities if we can. It turns out distributing equities to a large number of LPs is super complicated. It's not easy. It's not easy. And in a lot of cases, you just have to sell the shares, especially if there's like,

people are getting three shares of something. The cost of sending the three shares is more. More. Yeah. It is. More than the cost of the, or the value of the shares. So it's challenging.

There's no easy solutions. This to me seems like the setup for what I think will be the best vintage of our lifetime, perhaps, or maybe second only to the, the beginning of the Zerp era boom when Uber, Airbnb, Coinbase, and that cohort got funded. What do you think,

the next couple of years is going to look like, and how do you think about it from an LP perspective? Yeah, I think the reason I think, you know, so this vintage and next and maybe next two to three, four years is interesting, is AI seems to be real. The technology seems, you know, the advanced seems to be real. You know, venture industry is back to sort of normal, you know, the right way of doing ventures, more boutique, you know, way of investing.

And there's pent up demand. For IPOs and MNA, the dam's got a break at some point. So there's definitely going to be liquidity, you know, coming our way. I think the only thing that I can't figure out yet is there's going to be with AI. There's going to be a period of disillusionment because people, you know, are overestimating the impact of AI in the short term. One of the things that we do that people told me that that's still different as an LP is,

I used to write software. I grew up in a corporate, you know, setting. And I talked to a lot of CIOs, and they can, you know, CISOs. And they, you know, they have a lot of top-down pressure to do something with AI. But it's not clear. What should they be doing? What should they be doing? You know, can they measure when the CFO comes calling?

Can they show ROI? Those questions are going to be asked. Yeah. Do the tools work? Are they proof of concept or are they ready for prime time? Like, if you look at like writing blog post or creating video, creating images, like maybe it gets you 50% of the way there, 60, 70% of the way there, but it's not 100%. Now, in some pursuits, like writing a blog post, yeah, maybe 60% is really great because

you can't polish it. You know, yeah, maybe, yeah. But, you know, if you're making an image, it's either it's done or it's not done. Right. You can't take the image of the video 60, 70% of the way there in my experience. You might as well just start from scratch. So I think that's part of the challenge here. And it also seems to be that it's helping incumbents with distribution and making their

products better in the short term. And there's going to be use cases where there's not any clear incumbents and we're going to find those. But the sense that I get is that we're probably two, three, maybe four years away from sort of critical mass of new value being created. So that tells me that maybe there's next three, four, five vintages that might be good. So we're, oh, that's actually really an interesting way to look at it is, yeah, hey, we're in this 23,

24, 24, 25, vintage, but then there'll be a 25, 26, 27 vintage. Maybe that's the one that actually hits it. If you're Microsoft and Nvidia, you know, or even snowflakes of the world, you know, you might be better position in the next two to three years where incumbents products are a little better. Well, you know, it's interesting you say that. There was this expression, somebody told me early in my career in the dot com era, the first first guy up the hill takes the arrows, you know, and the next guy kind of like walks over their back. There's no arrows left to be shot at you.

And that actually, I watched that happen with Web 2. You know, there was a cohort of delicious, my company, Weblogs, In, Friendster, MySpace. They all kind of ran up the hill, 30 million, 100 million, $600 million exits. But Facebook and Airbnb and Uber, you know, they ran over all those carcasses and they built the truly lasting $100 billion, trillion. companies in the space, yeah? Yeah, if you're a fund that, you know, a seed fund and you're a $100 million seed fund and you have, I don't know, 10 companies that on your portfolio and the median entry

price is $25 million at seed, we'll see if those are too early and they'll be lapped by new technology, maybe by Open AI, maybe a new class of companies, maybe it's time before, you know, post the value of disappointment before we come back. So the, but it's definitely an interesting time to be an investor and to be deploying capital. This is where time dispersion is super important. Maybe you could explain this concept and what LPs expect from GPs and why GPs sometimes go too fast and they should probably pace themselves. Yeah, no, that's important. So especially for seed and precede, you know, it's a key point of underwriting for us.

you know, how have you deployed, you know, in, you know, 20, 21, 22, you know, for, for listeners, I think time diversification is when you deploy a fund, typically venture capital funds, you know, you raise the money and you deploy it in about three to four year timeframe. You know, that's been typical. In 21 and 22, that changed. Some of them, you know, deployed 12 months and, you know, 18 months and 24 months. When you do that, what you're missing is you're going to miss economic. cycles. You're going to miss technology maturation cycles, and you're going to miss incumbents, you know, either failing or advancing, so you're going to miss a lot of these variables that get you exposure to different class of companies. And that's really important in venture for especially early stage funds. And the way we underwrite, you know, see stage funds is tell me what you've been doing in 21 and 22. What was your entry prices? what were questions you were asking when they raised the next round, you're doing your prorata? Why did you write that check?

On what new information did you get new cards revealed to you? Or were you just piling on because everybody else is? And those are really important questions that were definitely asking. That makes a lot of sense for me. I'm just taking a note from my team to look at how many deals we're doing per month. I have the investment dollar. And that can range from 500K and $100,000. month who looks like 1.2. But on average, it looks like we're doing about, yeah, just over a million

a month. No, just under a million a month, 7.50 or so. And so I think this is really important to when you, when you have a fund, you should look at your monthly numbers quarterly and yearly. Now, you may happen to see this month twice as many great companies. And it's, you know, there's just some randomness there. And you got to make, you know, 10 investments this month. And then next month you make two. you can't kind of control these things. So you have to be super thoughtful about it and you really have to be looking over your three-year strategy.

I think three years is a good number, 36 months for the primary investments. If you're doing, in our case, you know, five or six a month, you know, over 36 months, you get to 150 names in the portfolio, doing seven or eight, you get into 200 names in the portfolio.

I think for seed stage funds, if you have an accelerated, if you can get to 200 names and then invest, you know, meaningfully in the top 20 of that, It feels like one in ten is a really good way to do it. And then it's just really a matter of communicating, right? That's the math.

You'll get better and better at picking those 10 or 20, you know, as you, you know, as you go, you know, through vintages. In our portfolio, on the one extreme, we have, you know, we're a large LP and KOSLA, they've done sort of quite well and they sort of stuck to what they said they'll do, you know, in terms of sectors and pacing and sort of. of getting the market, you know, technology cycles right. And then the other, you know, we have a fund that nobody ever heard of here in Dallas called Dallas Venture Capital, a small $80 million fund.

And they did the same thing. They sort of go in at a million dollars in ARR and they worked their ass off and they helped them get contracts with Fortune 500 companies and they get them to 10 million and they handed off to, you know, growth investments and they move on. And they've done that. very disciplined entry prices, discipline on technology sectors, and, you know, deal sizes and and kind of what they do on the board. And, you know, they both have credible path to, you know, atop, you know, quartile returns. And that's kind of what we try to look at.

I think it's really wise. And how do you think about secondary sales and clearing your positions? I have my own thoughts. Hard learn lessons here. But we've seen companies go to zero that were worth billions and just disappear overnight. FTX comes to mind. Other ones come to mind. And then, you know, sometimes you have something like Airbnb where if you sold too early,

man, if you sold your whole position, you'd feel really terrible. So how do you think about secondary and working with your GPs? Yeah. Yeah. I've heard different LPs sort of have different opinions on this. And I have some that are adamant that they want their GPs to write it all the way.

They don't want them, I have a sort of a different opinion on that. It's hard to time the market and all that. I'll grant people that it's really hard to know when the top is. But when you have liquidity, I think this podcast, I think is the series of liquidity podcast. So liquidity is what the flywheel that, you know, what turns to fly, you know, we'll venture on that, you know, let's LPs, you know, plow the money back into the ecosystem. So we encourage our GPs. we don't dictate how they do it, but we encourage your GPs to think about liquidity.

You know, this is very common in private equity, right? So they think about sort of the return experience and liquidity from day one. You know, that may not be appropriate for a seed stage investment, but they have to think about liquidity and set expectations with the founders. If you're sitting on a few companies in your portfolio, you think they're winners, but it's okay to sell 10, 15, 20%, you know, take some chips off the table, create liquidity for your LPs and maybe for yourself. And that's a great way to get to, you know, shorten the, you know, the J curve a little bit. I like it. I like that exact strategy. I always tell people 10% two or three

times is a great way. Then if you go public and you own 70, 80 or 90% of your original holdings, but you've paired it 10, 20 or 30%. You know, you could have an LP who's like, oh, you know, this 30%, you would have been at a 18x instead of a 14x. for fund and you'd be like, yeah, or if it had gone to zero, at least we locked in the first two X for everybody. I call it idiot insurance, you know, and like, yeah, just selling 10% 20% if you are at, we had, you know, we locked in like maybe with Palm where, you know, we didn't have to sell, but we saw 10% twice. I mean, we locked in, I think, a 12 or 14x for those investors, you know, who were in that specific SPV and then, you know, for the fund,

you know, some, some nice returns. Maybe it was half the fund got returned. I think it was maybe half the fun got return. Well, we try not to be dogmatic. I think we try not to tell our GPs how to do their jobs. I mean, as long as they're doing what, you know, what they're, what they said they'll do. Yeah. And their return sort of back up, you know, you know, the promises. Then we try not to be activist. We're active, but we're not activist. I think it's smart. You want to have a dialogue. You want to trust them. You're paying them for their ability to deploy capital and to understand those companies better than you do and return them. The only thing that happens, I do think, is sometimes people don't want to, you know,

send, make the founders feel bad that you're selling shares. Yeah. The good news now is it's almost always a situation where the founders are coming to us saying, hey, is it okay if you sell 10% of our positions? And we're like, sure, we're parry, pursue with you. We'll send 10%. Well, as long as that's not to buy an airplane or, you know, whatever. Yeah. There's an upper bound. Yeah. They want to buy a house. I always tell people 10 million or less, no problem in the Bay Area because you pay your taxes. You got six. seven million left. Yeah.

It's really, you're not buying a second home or a plane. You're not even getting a jet card. So let's be realistic about it. It takes the edge off, but it, as crazy as it sounds to people who maybe are listening to this, who don't have the ability to sell $10 million in shares and something or, you have six or seven million in proceeds from a sale after taxes, it's still like, it's not a giant number here in the Bay Area or New York or L.A. It's a nice number.

It takes the edge off. I like taking the edge off for founders. Agreed. After six, seven, eight years, I think it's great because then they go long. And they have any insurance. And they come back and they start new companies. Exactly. Exactly.

I mean, it's one of the great things. All right, Roger, this has been amazing and we'll see you all next time. Bye, bye.