This Week in Startups - Michael Kim, Jason Calacanis, and David Weisburd on VC marks, Rabois leaving FF for Khosla, and more | E1879

Episode Date: January 12, 2024

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And I was the bad guy for even bringing it up, you know, because it's not founder friendly. This is in the past, though. I don't think a lot of that's happening now, right? Oh, zero. None of it's happening now. Yeah. Right. But that, that did happen so that everyone knows in the past five, six years.

I mean, that was, I wouldn't say it was common, but it was happening. And that's how later stage firms were competing. And they're making their best offer and they're appealing to some of the short-term thinking of the founders. If you wanted to be generous, you could say short-term thinking. It's not a criticism of the founders because they're just acting rationally. right? It's an offer. We have multiple offers and we pick the one that's best for us.

Yeah. So you don't blame it, but it's bad hygiene, I think. For sure. As Michael saying, it doesn't exist anymore. But yeah. Wow, that's a good first topic. We went deep on some inside information on how things work in Silicon Valley. This weekend startups is brought to you by Northwest Registered Agent will form your company fast, give you the documents you need to open a business bank account and more.

Visit northwest registered agent.com slash twist to get a 60% discount on your next LLC. Dev Squad. 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. And Open Phone brings your team's business calls, texts, and contacts into one delightful app that works anywhere. Get 20% off your first six months at openphone.com slash twist. All right, everybody, welcome to this week and startups and the first episode of liquidity. This is a podcast where I'm trying to put together a little bit of a mix of GPs and LPs. And David Wisebird is going to help me moderate because I, as a GP, want to contribute.

And David has done such an excellent job moderating. So, David, why don't you kick us off? Welcome to this week in startups. This week we have a very exciting episode. We have, of course, the world's greatest moderator, Jason Kalakannis, and a special guest, Michael Kim from Sandana Capital, one of the top LPs on the planet. Guys, welcome to the podcast.

Thank you. Great to be here. Thanks for having me on my podcast, David. Great job moderating last week. No pressure. No pressure. No pressure. And it's great to see both of you on together.

Yeah, we're doing a bunch of experimentation over here at this week in startups, trying to get some new faces involved in some new formats. So here we go, a roundtable with an LP and a GP. All right, excellent. Well, thank you, Jason. Let's get started. The Wall Street Journal reported this week that LPs are doubting venture fund startup marks. Teresa Hager from Cambridge Associates, which advises over half a trillion in institutional capital,

stated in the article that whether LPs can trust valuations from VCs today is a very relevant question. Michael, why don't you start by giving a quick bio on yourself to the audience? Sure. I'm the founder of Sundana Capital. I started about 12 years ago. We have about $2 billion under management, and we focus solely on seed and precede funds. So we as an LP are making commitments to these funds. We view ourselves as the lead investor, not only by check size.

We do write $10 to $25 million checks, but also because we work so closely with our fund managers and ultimately want to be their trusted advisors. So I think we have a pretty good perspective on how our fund managers are thinking and what they're seeing. And this is globally. So we invest predominantly in the U.S. but also outside as well. Tell me about this Wall Street Journal article. Do you think that this is commonplace? Is this a one-off? How commonplace is it for GPs to overstate their marks? I think it's not so much overstating it, but rather perhaps being a little bit slow on the draw in terms of marking things down. I would say that, you know, we talk about this a lot with our fund managers.

And for the most part, I'd say that they're, they're quite good at marking things down. Some better than others. And, you know, in terms of actual the marked downs that came over the past two years, the bulk of it actually came by Q3 of 2022 because that's when, you know, the NASDAIC was going down 33%. And especially the later stage companies, I think, are fund. did a really good job of actually sort of marking to market and doing sort of comparables analysis and saying, oh, this $10 billion company that got valued in 2021 at 100x revenue multiples,

that's just unrealistic and it's closer to like 10 times, maybe 20 times. So we saw the bulk of our markdowns come in the second half of 2022. And yeah, I'm getting confused by the years. I know it's January. It's going fast right now, isn't it? Yeah, it's 2024 now, Michael. Okay, got it. And interestingly, over the past four quarters, there's been sort of low single-digit markdowns. And in fact, there are newer funds, we've actually had mark-ups because, you know, these seed stage companies actually doing the series A, that brings you a markup. And so the punchline is, you know, I think the bulk of the marks came, markdowns came in 2022. But to answer your question more specifically, you know, do LPs worry about this? Absolutely.

And in the context, actually, of their asset allocation. So you might have heard about the denominator effect. What that really means is if you're a university endowment and you have a big pool of public equities and that went down, you know, 40% in 2021, suddenly your private portfolio is over allocated. And so, you know, what generally happens is the private markets, in private markets, you know, P.E. In venture, the, the marks start coming down, but so there's a lag time. And it's sort of that, that trough or that, that period of time where the private marks haven't really caught up to the public marks that LPs get all twisted up. So I think we're actually past that. And, you know, I think it's very rare to have a fund manager that has, you know, a deck of corn in their portfolio that hasn't, at least been looked at in terms of current marks. Let's get to brass tax on that. Let's say you have a fund manager and they're marking up their book, you know,

or they're not marking down their book. Would this preclude you from investing in them? Is this like, you know, a deal breaker? I think it's a red flag, maybe a yellow flag, but perhaps even a red flag. You know, it's either that they're not on top of things. They're not sophisticated enough to know that, you know, they should be looking at the valuations that they're carrying at. Just one easy example is that, you know, does the fund manager mark their safe up to,

you know, for example, none of our fund managers do that. But, you know, you see that on occasion. But it is at least a yellow flag. And where we actually have the benefit of sort of our little perch is that, you know, we might have three fund managers in a specific company. And then we can actually see where each one's carrying them. And then we'll actually proactively talk to each one saying, hey, these guys, are carrying it at 50%

a markdown, why are you carrying it at the last round? So we have an active discussion and we don't see it that often. I would say that in general, our fund manager has been pretty good about marking things down.

But it is something that writ large, the venture capital community really needs to keep a better eye on. And I think that's, I think that's why the LPs are sort of on top of it for them. And Jason,

you're an LP in 20 funds. So you both have the GP hat, but also the LP hat. What are your thoughts on this? When I'm an LP in funds, I'm a very simple individual investor as an LP. I don't answer to an investment committee. I'm the investment committee. I don't have a CIO or a family office set up as such. So, you know, I'm just looking at the moik, you know, the multiple of my invested capital, the two numbers. How much did I put in? I put $100,000 into this fund. And ultimately, how much did I get out? Now, of course, you can back into the IRA and everything. And, you know, I was kind of shocked as I became a fund manager, Michael, over time and started seeing reports. back from the people I was LPing, just that there was no standard here. There really is not a standard on valuations and people were doing all kinds of cute things like, oh, somebody paid, you know, in a secondary market for shares of a company. So I invested in the shares were worth 10, but there was a secondary transaction that occurred at 15. So where do you mark that company, right? Should you take the high water mark of, you know, some secondary transaction that occurred? who knows who's buying those shares, how sophisticated they are.

Do you take the public market comps that you hear Brad Gersner talk about all the time for SaaS companies and then apply them for private market companies? Well, the private companies might have different growth rates and the amount of cash they have in the bank. All this matters. And so there doesn't seem to be a gold standard of how to do this. I'm just always in favor of being as intellectually honest and rigorous as possible. And focusing on the DPI, eventually, what do we do?

distribute in terms of cash. That's what's going to matter. And I had all these funds. It was very interesting. I'm sure you had this app and Michael as well. During this ZERP environment, 2019, 2020, 2020, 2021, some of them hit crypto, you know, lotteries. And you just, people would be like, oh, yeah, we're, we're six-x fund. And I'm like, okay, sell all the shares and close. Right. Shop, like, we're done here. And they're like, oh, yeah, there's no ability to do that. There's nobody buying these crypto assets at that price. You know, two years into the fund and they're 6x. If you were two years into your fund, Michael, and the fund was 6x, the correct thing to do would be start liquidating, right? Or start thinking about it at least. Yeah. And, you know,

there's obviously a discount for private securities, right? And especially with tokens and actual crypto positions, you know, the market in a lot of them weren't deep enough so that they can actually unload. And so the proper thing there probably should have been to carry it at some sort of discount, right? Just to play devil's advocate, I've had multiple LPs. I won't state them, but I've had multiple LPs basically telling me that there is incentive for them for the marks to be held higher. You know, Mike, at a lot of the top LPs, there's revolving doors. There's institutions where every two years there's a new team and many LPs actually pay a bonus based on the marks. So it's not only an issue, it's an issue of incentives.

Do you not see that in some of your peers? Yeah, absolutely. I mean, I know of different LP entities where the annual bonus is actually based on IRR, which I think is, doesn't make sense to me because that IRR, especially if you have a young portfolio, it can change so drastically, right? And I think I, at least for us, we don't really look at IRAs until something's, you know, we might look at something that might be 10 years old. And then that gives you a useful metric to compare against other asset classes.

But to look at an IRA right now of even, let's say, just use an extreme example of a secondaries fund, right? A secondary fund is buying something, let's say, at 50% discount. on their books, they will market back up to what the nav is. And so right there you have, you know, 1,000% IRAs. Now, obviously that comes down over time. But, you know, using IRAs for a young portfolio doesn't make sense to me. There's tons of incentives here.

And I always try to think about, do we actually understand our portfolio? This is something I've worked on as, you know, my organization has grown. We're on our fourth fund now. got 21 people, just making sure we actually understand what's happening at our companies. That's the bigger issue in many cases. So, sure, you might have one GP getting cute and marking things up, another GP being super pessimistic and conservative. Most are probably doing something in between the two.

But the more important thing is, are you on top of these companies and you know where they're headed? Because I've been, you know, I've had friends who have very large positions in a billion-dollar company that suddenly goes to zero. And they read about it in the press. And they didn't even know what was going wrong with that. I think we saw Envision get blown out recently, right? And that was a company that was worth a couple of billion.

I'm sure, Michael, some of your funds might have had exposure to it. And then all of a sudden, some top-tier firm is now in the, one, from the first quartile to the fourth. And they didn't actually know what was happening. And I'm really examining myself as a fund manager and thinking, did I liquidate enough of these shares early? Because as a seed fund, we sometimes have opportunities to liquidate at $500 million a billion. And did we do the right thing in terms of money?

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follow up with entrepreneurs? We're building software to do it, actually. So we did two things that are unique. It's a great question. Number one, we put into our side letters that we expect 10 updates a year from founders. Most founders do five. We then put in our firm the past year a primary and a secondary contact for every single startup. We then have every single startup in a Slack room. And we have in our database, there are cell phone numbers. If we don't get an update, we've also started to build software for this. And so this year we started deploying the software. Very simple. We asked people to answer five questions if they don't send updates. Number one, how many employees do you have currently, you know, on January 1st? What's the cash balance on January 1st? What was your spend

in December? What was your revenue in December? And then answer a question, when are you planning to raise money next? We're raising money? We're not planning to raise money. Three months, six months, next year. And when we just get the answers to like those five questions, we can do a lot of math. And we can look at over time, how many employees does this company have? And what's the burn and what's the growth rate, et cetera? And once we get compliance on that, it works out pretty well. And so it might take us five contacts with the founder to get an update. And we just tell them, hey, just give us these, answer these five questions. And then I'll call them on the phone. I'll text them. Or can you imagine like, I call somebody on the phone and it's a, you know,

a startup? And I'm like, hey, it's Jake Hal. And they're like, oh, this is the first time you ever called me on my phone. And I'm like, yeah, hey, we sell like five emails. I know. I know. you're super busy. I don't want to be a pest. I know what it's like to run a company. But sometimes when people don't respond, it's because they're really struggling with something. We're here to help. So are you struggling with something? Is there anything we can help with? And man, people open right up. Right. They open right up. Ah, yeah, you know, we lost our salesperson. I lost my ops person. I lost my co-founder. We lost my co-founder. We lost his big client. Everything's a disaster. We're thinking about shutting down. And we can just have an honest conversation. Right.

And I think that's kind of the best practice I've come to in my second decade, which is just giving founders permission to speak freely and not and then build a little software around it to scale it. It's a great question. It's a two-sided relationship. If you want founders to be honest with you, you have to be willing to take their honesty and to be productive and helpful. Michael, you were going to say something about this approach. Yeah. Well, yeah. I mean, I think that's a very smart approach. And we do some of that as well. You know, we structurally, we have monthly calls with each one of our fund managers. They're 30 minutes. There are no agenda. It's not a portfolio review. So, you know, we let the fund manager talk about what they're thinking about, what they're seeing in the market. VCs being VCs, they want to talk about their best companies. So we get a lot of qualitative information around that, you know, new hires, new contracts, what the revenue is tracking to. We actually have a rolling list of companies that are coming up for funding over the next quarter or two. And so, you know, and we have actually a Salesforce base database. So we use that and we capture a lot of qualitative data that way. But I think that discipline of doing.

monthly or by monthly calls is important for us to stay on top of where our fund managers are and actually where all the portfolio companies are, at least the value drivers. Yeah. There was another company, pitch.com, I think, that was in the news this past week. And I hate to pick specific companies and, you know, beat up on whatever. But the co-founder and the founder were sort of talking publicly about it. But they had, they were valued at a big number, raised, you know, somebody. And I think, you know, a small amount of money left.

And, you know, sometimes these things look really great on paper. And then when you dig under the hood and you're looking at the reality of it, you know, somebody got really frisky with that last valuation and they didn't grow into it. And you just have to sort of accept that. And man, it sucks when you have to mark things down or remove things from the portfolio. But we're in a power law game. So once you accept, this is a power law, you're going to hit, you know, two or three winners in your fund. And they're going to represent what, Michael, 99% of the returns?

Yeah, vast majority. Yeah. So you just, you have to understand. the game that's being played on the field and manipulating these numbers or tweaking them, massaging them. It's just, it's short-term thinking. Yeah. I mean, David, to just bring it back to your original question, I think it buys a lot of goodwill for fund managers to err on the side of conservatism, being proactive in marking things down, and being transparent to their LPs. I think LPs really appreciate it when the fund manager is telling them that we proactively mark this

down and hear the reasons why. That is an order and magnitude better position to be in an order of magnitude better dynamic than the LP having to look at a statement of investments and say, hey, what's this mark? And then calling that GP up and saying, how come we didn't mark this down? What are you thinking? The other point I'd want to make is that none of our fund managers mark things up unless it's a new round led by an outside lead. you can argue that companies that raised in 2018 or 19 and they just are doing so well that you haven't needed to mark up

and now they're doing 500 million of revenue and they're profitable but they're being held at 200 million valuation you could argue that maybe you should mark that up what are you doing that situation? Yeah, I haven't seen that happen too often. We've seen it in just basically two companies out of 4,000 that we were in

and we told the fund manager that they should talk to their accounting firm and get their thoughts on whether they should actually mark to market. But, you know, our fund managers actually ended up not marking things up. So, yeah, I appreciate that. We had that happen withcom.com that we invested at $4.5 million. We bought 6% of the company. And they just kept going up into the right, but they were so capital efficient.

They didn't need to raise money. The second round was $250 million. So between those two moments in time, we had it at $4.5 million on the books. and three or four years, maybe it was four years later, boom, all of a sudden they had his $250 million round where we were able to sell some shares. A modest amount, but we locked in like a 5X for our investors selling 10% at 250. It was quite nice. Yeah. But yeah, we never came across our minds to market up.

We're always just focused on helping the companies and not playing any games with the marks. How do you look at that, Michael? You mentioned over 4,000 underlying portfolio companies. what do you want your GPs ideally to do when it comes to secondary? That's a really interesting question because historically, our fund managers have been pretty active with secondaries. And we were thinking about what's kind of like the right framework for this. Is it like, are you a 10x MOIC on your original investment or on your total investment,

including the follow-ons? Or is it a percentage of the fund that it'll return? Where the games can start creeping in is where, They're very close to being 1X DPI and they can get into carry by selling some shares of a company. Then we actually have to worry about are they selling too early? But in general, I think our fund manager has been pretty good about actively thinking about how to get liquidity. And I would say that at minimum, they would start considering selling a portion, not all of it, but a portion at least a 10x. And, you know, in general, it's returned sort of 10 to 20% of their fund, perhaps.

I think that's pretty good numbers. We look to pair our position when we're 10, 20, 30, 40x by just 10%. And we did that with Calm at 250 and then I think a billion in change. And on that $376, $378,000 investment, you always remember the winning numbers. 378 in a, you know, we wound up selling 20% of our position. I think it wound up being about 12 or 13 million in total between those two transactions, like a million at the first one and 12 of the second. And I remember having a conversation with one LP, Michael, and they said,

oh my God, this is the best investment I ever had. I'm like, congratulations or whatever. And I said, yeah, we still have 80% of our shares. And they said, oh, I don't understand. And I said, we just sold a portion of our position. And they're like, I still don't understand. What do you mean? I'm like, okay, we have this many shares, 100,000 shares, let's say, a million shares.

He sold 200,000. We still have the, he's like, what? you're telling us we could do five times that? And I was like, yeah. It just, it kind of broke the LPs brain that we, you know, had this happen. And it happened with, you know, another SaaS company we had in Peak Zerp. They went through our accelerator, became a unicorn. I think we're able to clear a 16 or 17 million on a million dollar cost basis by selling 14 or 15% of our position.

Amazing. You really have to take advantage of those moments. And I kick myself with Robin Hood. we had so many opportunities, you know, at $30 and $40 before they went public. I really believe in that team. I still do. I've personally held all my shares. But when we distributed, I think we wound up distributing between, you know, maybe at $15 or $20 or something in that range. And it did go to 60 or 70 when it was public. And so it's very hard to time the markets. And, you know, you do the best you can.

The other advice I would always give our fund managers is don't sell your entire position. So we've had two cases where our fund managers, one of them sold their entire position at a $300 million valuation, you know, high fives all around. But then we were thinking, uh-oh, why did they sell their entire position? No, but they're currently, their last round was at $9 billion, and they are filing to go public.

This would have made a 20x fund into a 100x fund. Which never happens. Yeah, it's, that would have been very rarefied territory. We have another fund manager who was basically the co-founder of a company. He sold his entire position at a billion five. The company's most recent round was done at $25 billion. You could argue that maybe it's the true value is somewhere between six and eight. But again, he missed out on multiple turns of DPI.

So you got to have Schmuck insurance. You can't sell your whole position. Just to talk personally about my personal Uber position, I still have a large portion of it. It's trading today. It broke a record. But I sold a little bit back to the company. years before the Moss around at $32 a share. Then I sold a little bit to Moss at, I think, $40 a share.

You know, so I was able to pair the position, take care of my family, buy a home, you know, and do all that important stuff. Awesome. Right. And still have so much skin in the game. And I don't know that I'll ever sell another share of Uber. I just had Dara on the pod. And I just have so much faith in that company that I, and I was talking to Freiburg about

Google. And I was like, what if you held onto your entire position or Shemoff? with he held on to his entire Facebook position. You know, it's, you have to think these things through, you know, keep some portion of your position because it's so rare to be on a rocket ship, right? Going from an idea sketched on the back of a napkin to a robust, stable product requires a wide range of skills. You can spend ages looking for a one in a million developer who can do it all, or you can quickly ramp up an entire product team to help you build and launch your product with our partner, Dev Squad. DevSquod provides an entire development team packed with top talent from Latin America. Your Elite Squad will include two to six full stack developers, a technical product manager,

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That's devsquad.com slash twist. Well, so David, what I'd point out is one way we think about our fund managers is are they sort of like starry-eyed, you know, looking to save the world, just dreamers? finding great founders? Or are they also, and I'm saying also, are they also hardcore investors? Are they actually thinking about making money? And you know, you would think that VCs are all in it for that, but they're actually not. There are people who are just like in love with companies and what they're doing and the mission, you know, sort of the stereotype. But we specifically look for investors, someone who's actively thinking, how am I going to make money? Does it make sense to

actually think about a secondary here. You know, like J-Cald described, that's ideal. You know, you always want someone to be thinking, when is the right time to exit, perhaps not the entire position, but, you know, some portion of it and actually make money. There are contemporaries of mine who I've had conversations with who have said, I don't want to sell in the secondary around. And I said, why, I'm selling, you know, whatever position. And they said, well, I don't want to make the founders feel bad.

And I don't want them to think I don't have faith in them. And to Michael's point, like, there are big, hearted folks in VC who he's, you know, what he's describing is not like a rare case. I think a lot of people feel the sense of loyalty. And when we had a group of founders say to us, hey, we're selling in secondary, will you pass on selling in secondary so that we can sell more? What did you say to that? And I talked to my team and I said, let me get back to on that.

I talked to a couple of my mentors, you know, very high profile VCs who've been in it for multiple decades. and they said, well, you also work for the LPs. And so the language I came up with was, listen, we're pari-parsew with you. Whatever percentage you sell will sell. It's really in your best interest is what I told them for the community, for me to be able to liquidate so I can raise future funds so that I can help the next group of entrepreneurs. So I have to take advantage of this opportunity for my LPs. Just so, you know, for the ecosystem, it's good.

And the founders like, oh, we totally get it. No problem. But, you know, the founders took a shot. They went to all their investors and said, please don't. please decline selling secondary. And they put a little pressure, not a lot. And I think, you know, probably worked with half the investors and the other half were like, hmm, the LPs need to get a taste here too.

They trusted us with those early investments and took the risk. So you have to be thoughtful. And JCal, secondary has been controversial subject for decades in Silicon Valley, founders secondary. Is there a specific amount of money that you think is good for founders to take off? Like, you know, I would feel very uncomfortable if they were taking, large positions off. Give an exact number, Michael.

Yeah, give the exact number. Two founders, what could they take off each without you being worried? I have a number in mind. I want to hear Michael's first, though. I think that if a founder would take, say, $2 million off the table, by the time companies sort of at the series B stage,

that makes sense. I think a secondary at Series A is utterly crazy. That's nice. And so generally you see founder secondaries, it's sort of series B, maybe, but typically even later stage, series C or later. I mean, ultimately, what you want to avoid is demotivating that founder. They have to maintain that hustle.

And suddenly, if they have $100 million in their bank account, they may not wake up every morning worried about the company. They may not go to bed every night worried about the company. And I think there is, to Jason and Jason's point, and to David, your question, There is probably a number and depends perhaps even on geography, but let's just say Bay Area. I would say that, you know, two to maybe three million maybe helps reduce your mortgage payment or eliminates it, helps ensure that you're comfortable that you can cover your kids' schools and your living expenses.

But, you know, double-digit millions is just ridiculous. Yeah, my upper bound is 10 million because after taxes is, you know, seven, six and a half, whatever it winds up being to pay. Again, it really does, based on geography, as Michael correctly pointed out, that was exactly what I thought of. What is your primary residence going to cost? If it's a family, if it's in the Bay Area, it's $2 to $5 million for a home. I know that sounds crazy to some people who are living outside of New York, L.A. and the Bay Area, when you start talking about private aviation or a second home, that's when a founder's

completely, completely off the reservation. They've jumped the fence. They're distracted. Because I can tell you, you know, and I'm 50, now. When I got my second home at the age of 50 and I had a ski house, my life became like super complex. Oh, there's a second house. And I have not caught in private aviation. I literally have, and I, you know, I've been sitting there with the jet card in my email box, ready to sign and just didn't do it because I was like, you know what? I just want to stay focused and be normal.

Once I start taking private jets, I'm just disconnected. I kind of like meeting people at the airport. The fact that I can fly business class is a big enough win for me. You know, it's like delightful to be in United or American Airlines business or first. Good enough for me as a kid from Brooklyn. So, and I can tell you the number that was crazy was, I don't know if you had anybody with exposure, Michael, to the Hoppin founder, which my friend, Dr. Gersner had access to, he took $200 million off during COVID.

Great move on his part. That was insane. And then there was Bird. And I think the Bird founder, somebody whispered to me that they may have taken $50 million off the table of the scooter company. He got a nice place in Miami. There's your point. Like, how focused?

are you going to be as a 30-year-old person with a mansion or two? Yeah. Well, you know, the other thing that was driving this, at least in the ZERP era, was the late stage guys as a way of competing, we're saying, hey, let's do a founder secondary. We'll buy the shares. And then post money, post-close, we will give you more options. So to be honest, in a way, that's bribery. And that's actually how some firms were competing in order to win a competitive deal at the late stage. and you know who gets screwed in that

is the early stage investors, right? My question is a good point, and this is like the dark underbelly, and we fought it. And I, you know, that now you put me in a really weird position. I'm trying to protect my LPs as a seed investor in the company. We own 10%. You come in and say, hey, we're going to give the founders this offer to win the deal. So we'll put in

$100 million and we're going to buy $25 million of their shares. And we're only going to buy the founder's shares, not the other employee shares. And then who is the founder going to say they want as their new partner at the board meeting? Exactly. firm A or B. Well, B is offering me $25 million, and they said, we'll re-up you in the option pool.

So that's a bribe. It's literally a bribe. I was in a board meeting, Michael, saying, hey, guys, we should fork this conversation. Let's make a pure fundraising decision for all shareholders and then make the secondary decision and the re-ups for founders at the first board meeting after we closed that. And you know what happened? I lost. Oh, yeah. And I was the bad guy for even bringing it up, you know, because it's not founder friendly. Yeah. That's, this is in the past, though.

I don't think a lot of that's happening now, right? Oh, zero. None of it's happening now. Yeah. Right. But that, that did happen so that everyone knows in the past five, six years. I mean, that was, I wouldn't say it was common, but it was happening. And that's how later stage firms were competing.

And, you know, they're making their best offer and, you know, they're appealing to some of the short-term thinking of the founders. If you want to be generous, you could say short-term thinking. It's not a criticism of the founders because they're just acting rationally, right? It's an offer. We have multiple offers and we pick the one that's best for us. Yeah. So you don't blame it, but it's bad hygiene, I think.

For sure. As Michael's saying, it doesn't exist anymore. But, yeah. Wow, that's a good first topic. We went deep on some inside information on how things work in Silicon Valley. Are you still using your personal number for business? Well, stop. Such a common mistake that founders make, but you never have to make that mistake again because of open phone.

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open phone at no extra cost. So here again is the offer. Go to openphone.com slash twist and get this all organized. Get the 20% off as well. Openphone.com slash TWIST. Speaking of inside information, no longer inside information. In a move that's done the VC community, Keither Boy is leaving Founders Fund and going to Kosova as a managing director. Keith was previously at Kosta for six years prior to moving to Founders Fund in 2019,

where he was a partner for five years. The announcement of Keither Boy returning came shortly after Kosa announced their $3.1 billion fundraise across their main, their seat, and their opportunity fund. So Keith will have a lot of capital, to play with. When asked about the change, Keith stated that Coasla's culture of weekly partner meetings, which included debate, and Cozla's hands-on investing approach and founder mentorship was a better

fit for him than Founders Fund's more individualistic approach. Jason, are you buying this? Is this the reason Keith moved to Cozla? Well, so there's two things occurring here that I think are of note. Number one, this is secession planning. I didn't see anybody mentioned that. But Kosla, is in his 70s. He's spry. He was at the Allens Summit. He is sharp as attack. But, you know, he's in his 70s. And so I think this will be Kosovoi as a firm very soon.

And I think whenever Kosovoix Rerbaugh's firm. Number two, there is something to Keith about debate. You see him on podcast. You see him on Twitter. He made a funny comment on this podcast. you know, well, I was on the internet and somebody said something that was incorrect, so I felt the need to correct them. Like, literally, that's how he's wired.

If somebody on the internet says something that's incorrect, he will correct them. And, you know, feel like this. Your action's wrong. That's a big burden. Well, with, you know, four or five billion people on the internet, it's a full-time job. But, you know, Vinod loves Keith because they're both candid and they're both, like, debaters. Now, you go to Founders Fund. And you'd think about Peter Thiel, and obviously Peter and Keith and Sacks all went to Stanford

together, Stanford Review, all that kind of stuff. They're all part of the same click. But there does need to be a recognition of the culture at a firm. How does this firm make decisions? And that's something I've learned being an LP and 20 funds. I always ask about that. And then I've really worked on it at launch. How do we make decisions?

We have deal flow locked in. We don't have to compete for deals because I have a good profile and I act at the seed stage. this generally, it's not as cutthroat, is passing the hat a lot. So then what's left? Really, two things I have to really solve for. Do we make great decisions? And do we double down,

which is also a decision? And that's what I've obsessed with. And I think at Founders Fund, Brian Singerman's approach has been hire really smart people, make bets that they have conviction on, or let them start their own companies, and then in every fund,

put a third or some crazy number, he's told me, into one giant bet. And, you know, that's a different culture than, say, Kostas going for. And so I think it's great to have that recognition that different cultures work. There's consensus-based cultures. There's solo freelancing kind of based cultures. And my question for Michael Kim is, do you have a preference for the decision-making culture,

or do you see one win more than others? Yeah, I mean, a lot of the platform firms, you can say, are more siloed. Partners are more siloed, and they have the authority to go ahead. head and make a decision. Founders Fund clearly absolutely top-tier firm. And they've done very, very well with their model. One example, to just to amplify what Jason was saying, you know, when they raised Founders Fund 3, they immediately put a quarter of that into Palantir. And that was a brilliant move. Wow. And in Founders Fund 2, you know, they actually sold Well, so Yammer was in there, David Sachs's prior company.

They took the proceeds from that. And then Peter went and, you know, basically took cash capital out of the different funds that he had. And he put it all into Airbnb. And that was a brilliant move. They recycled. Yeah. Yeah, they recycled it. And, you know, I think that kind of decision making and non-consensus thinking and high conviction,

non-social proof investing is brilliant, but it's not for everybody. And the typical VC firm does have their Monday meetings where they sit around and argue about specific companies. And that works well too because there's that sort of pushback that a particular partner might have on a company that he or she might be in love with. And in getting that feedback on additional diligence or why it won't work, I think is important. So it really depends on the type of people and how they're making the decision as opposed to this is the all, you know, it's one size fit all kind of decision making. It also depends on,

to your point, I think, Michael, is, is this firm, you know, nurturing and developing talent, which our firm is doing, with teaching people the skill of being a VC, because we're small. We can't afford to compete for, you know, with Sequoia for partners, given the scale. of their fund. So, you know, we're training up talent. So we need to have more meetings. We need to have more debate. That's how people get good at the job. They put out their deal memo. They say, hey, this is, we were having an argument today, a non-consensus argument. I want to put $25,000, which is our founding university bet, you know, first check into a company to help them form the company for 2.5%. And there was like a nice debate going on about this company. And I just came in and

I said, okay, the person who wants to make this bet owns it. We're making the 25K bet. We don't have to over debated, but I love the debate. Great debate. And the debate was so good in our organization, and we have such a high volume of companies as an accelerator and a pre-accelerator. We instituted two investment team meetings week. Every Tuesday, every Thursday, we do an investment team meeting. And 1.30 till 3.30, you know, this is not a short amount of time, four hours of it a week. We now record it, transcribe it, and summarize it. That's like crazy veil. But I want to have on tape the discussions and the transcript so we can go do a post-mortem.

Right. We didn't invest in Airbnb. What was the discussion? Who is the loudest person in the room saying, don't do it? Who is the loudest person in the room saying we have to do it? And so I'm very keyed into this as I go into my second decade

and I try to build a firm. Like, I'm trying to build a firm right now, right? It's a different thing than just be great individually. But I think, you know, I don't know Keith personally, but my immediate thought was when I read the news, Kosla must have offered him some sort of assurance, if not an agreement, that he would be taking over the firm. Yes, 100%.

And I think if you even go further back, KSla was at KP back in the heyday, right? Yep. And if you read Sebastian Malaby's book, Power Law, each chapter is about different firms. The KP chapter really talks about how in the early 2000s, you know, there are, there are, KP's sort of on Mount Olympus. and then they started hiring old guys and, you know, like Al Gore or like Colin Powell, whereas in the chapter on Sequoia makes it crystal clear that they were very focused on generational transitions. Alfred Lynn, bringing Alford and how the senior partners like Doug Leone would specifically put them on high profile boards and mentor them and giving them more airtime, giving them more decision-making.

and basically building their gravitas. And I think those two chapters really stand out. So my point here is that, you know, obviously, Kosal left KP. And I think he probably is a very wise observer of venture capital funds. And so he must be thinking about succession. I would also argue that he's probably a very young 70. I don't know his exact age, but let's say he's 70.

He probably has another 10 years ago. So I don't think it's, an imminent kind of thing. But it shows a lot of foresight. With all the longevity investments he's making, I think he's going to be around for a while. He also reported in the same article that he didn't want to start his own fund due to the operational intensity. How do you look at that, Michael? What are the pros and cons if Keith was to leave and start his own firm? I mean, clearly he could do it. How much do you think he'd be able to raise as a spinout? You know, Lee Fixel left Tiger and raised billion dollar funds every year almost. So, you know,

I think Keith is in that league or even above that and or certainly peers. And, you know, Keith could raise that kind of capital. I don't, I have no doubt about that. The question is, what kind of investing does he want to do? And what, you know, ultimately, what's the appropriate fund size, right? If he wants to have a barbell strategy where he's investing in a bunch of early stage companies and then perhaps selectively late stage companies where he can write $100 million checks. So it really depends on the type of investing that he really likes. My sense is that he likes to be hands-on and really work with founders.

And that suggests to me early-stage investing. So, you know, a $3 to $500 million series A fund out the gate with some seed exposure. And the question is, you know, when you become a fund manager and you start raising larger funds, I'm experiencing that in the last six months. I have to go to the Middle East. I have to go to New York. I've got to go to Europe. I got to, you know, do phone calls at 10 p.m. I have to do relationship calls, you know, and maintenance calls. So when you have to take over that function, I think that's a 12-month ramp up. So then does Keith, at his age, want to spend a year raising that fund? Even if he did it extraordinarily quickly in six months, it's possible. It's just not probable. And the environment right now is really challenged. Even if he wanted to go raise that fund, there are people who are pencils down right now. I mean, Michael's active, but that's true, too.

I can tell you three out of five, maybe LPs in the United States, are pencils down. 60, 70% are like, can wend your closing date because we're done for this year, right? And that was 2023. And we're going to open up two slots in 2024. And we'll see what happens from there if we get striped distributions from bike tens distributions, etc. So, you know, it's kind of decide how much of that overhead. And then starting a firm, you have to do all this back office stuff. You got to hire operations people.

Like this is, it's not de minimis. It is significant. And you have to do it right. And we had some missteps as a firm. We, you know, with back office stuff. And man, I had to do cleanup. And, you know, if your numbers aren't clean and you go to somebody like Michael or, you know, let's say the next tier up, the cowpers of the world or, you know, etc. It could just be a no based on you not having your package and your data room correct, right?

Like a venture fund. And oftentimes they won't even tell you why. They'll just say thank you very much. Yeah. One thing I'd point out, and J.com makes an excellent point about where LPs are today. You know, I think with someone special starting a new firm, then you might get some FOMO, and it's almost like fuel gauges. The fuel gauge might read empty, but I read somewhere that there's probably another 40 to 60 miles of range.

And so I think LPs would be able to find the capital to make a commitment to someone special. And I think Keith would probably be in that capital. category. Yeah, I would agree with that. They would, but it would still take three meetings and it would take a champion and it would take somebody saying to the investment board and the investment committee, hey, here's why we're making this exception, right? And I'm sure Keith, you know, he just loves to invest. He likes to hang out with. I get the sense that he probably doesn't all due respect to Michael. He's delightful to hang out with. But Keith might not want to hang out with, you know, a bunch of LPs all the time. It might not be his back. He might just want to, at this point in his career, so successful, he just might want to invest in the next company. Absolutely. And I don't think it's a huge loss for founders fund. I think they're going to do great no matter what. That's one of the things. When you have that many great partners, you can afford to lose one, right?

It's like being a team with a stack group of all stars, right? They'll be fine too. Yeah, I mean, Kevin Hartz was there, right? And for a couple years. And he moved on, started A Star, you know, nothing against any of these groups. But, you know, that's actually the mark of a resilient firm, a very strong firm. you lose a star partner or someone who's very promising, you'll continue on. And I think Sequoia is a very good example of that.

Yeah, absolutely. Great. And next up, Bill Ackman, everyone's favorite modern-day conqueror, has decided to go after business insider after business insider went after his wife Neri. According to the timeline of events, business insider sent Bill Ackman's wife Nary a 12-page email on January 5.19 p.m. Eastern. Business Insider then gave Nary only one and a half hours to respond to a 12-page email before publishing their allegations. Jason, what do you think of this? Was Business Insider within its rights to go after Bill Ackman's wife?

There's kind of a rule like in the mafia and in other, you know, areas where respect is important. You know, you don't go after wives and kids. Like you would never do that. It's not appropriate. In this case, because Bill was going after other people for plagiarism and his wife happened to be an academia. Academia, it feels like it's fair game in a way. But I think that broading the discussion out here for this podcast, you have some very vocal fund managers out there.

And some of them have gotten very addicted, I would say, to social media and being heard. The All In podcast, you know, has become a bit of a joke to some people like, oh my God, what are we going to think about what's happening in this area of the world, this conflict, this crazy thing. Oh, I know we have to ask some VCs.

Like, I can imagine being an LP in Ackman's fund, you know, or anybody else's fund who's taking on these really charged issues and wondering, are they focused on their fund and their companies and their trades or are they focused on, you know, DEI at Harvard in this battle. So I think, you know, while I appreciate him defending his wife and fighting the good fight and everything like that, I do wonder, I don't know, Michael, if watching, you know, GPs be spicy on social media or their podcasts, etc. Does that factor into the public personas and chippiness and elbows and craziness your decision

making or how you partner with folks or you're just part of being successful? It's part of being human. And I think, you know, people might have larger platforms than other people. And if they can use that for good, which I think Bill Ackman is doing, I'm all in favor of that. And, you know, the thing about Bill Ackman and his firm, Pershing, they're activist investors, right? So by definition, Bill is someone who's going to lead a crusade. And, you know, I think overall his funds have done well. I mean, I think there are some notable problem childs like valiant, for example, but in Herbalife. But as a person, I think it also,

October 7th, you know, a light bulb went on. And the testimony that the three presidents had in front of Congress, that was another light bulb. And then he started digging in because it's clear that he's intellectually curious and, oh, by the way, a crusader. And, you know, so that's how he got on to that. And then to your point, Jason, you know, they went after his wife, you know, B.I. went after his wife. And that's verboten. You can't do that. And to people's families.

So he went after, he's on a, he's on a war path. And Michael, if you turn the tables, limited partners, obviously there was Harvard, MIT, and Penn involved. on the other end with the presidents. Could limited partners in what people call an access class? Could limited partners hurt themselves on their end? I think so. I mean, I think, you know, certain firms that really have, that, that, you know, really have no issue raising their next, their next funds, you know, sort of the absolute

top tier BC firms, let's just focus on BC. You know, they can pick and choose who their LPs are. And if there is a strong belief that, you know, just to pick on Harvard, that Harvard now is completely overrun by a 200-person DEI department. And it's insidious and it's permeating through all of the hiring that they're doing, the areas, the areas of study that they focus on and the courses that they offer their students. An absolute top tier firm who does not believe in that could say, why am I funding this?

Because the fact is a large chunk of a university's operating budget comes from the proceeds of an endowment. It has to be 5% a year, right? Like they have to distribute. But I know universities where it's like half or 40% annually. And so the VC returns, the distributions that I'm happily sending back to my LPs, then there's this epiphany that, well, some of that is actually ultimately funding these programs that I don't believe in.

So who am I going to work for? Right? And I think when you become elite at this job, it's such a good point. You made two really good points. Number one, Mackman's an activist. Like, what do we expect him to do when he sees something that he perceives as unjust in the world? But number two, such a good point.

You know, when I, as a founder, would go to Sequoia's, they would have a CEO dinner. It was kind of like a deal thing, but they would have all the CEOs come to the golf course over there. And Michael Moritz would come up and say, oh, just would like to tell you what you're working for. and the great returns we had, the returns from Google helped in Ford Foundation do the following. And they'd show what the Ford Foundation was working on. And here's an email we got from this foundation. Here's what they're doing in Africa, you know, with, you know, malaria, whatever. And he would walk the CEOs, skipping the LPs, right?

This is just GP to CEO. Your hard work, lets us make money and give it back to these incredible causes. And you were just like, wow, capitalism is awesome. And those same people, as Michael's pointing out, they may not want to give to these endowments anymore, and they might not want to make money for them anymore. So they could lose two sources of revenue. The donations and, oh, I want to have my name on a building. Right. And number two, I want to take the, what are they? They're usually typically 15% in VC, 10, 15%. Yeah. Some of them have gotten up to 20, 25% like Yale and I think. There's certainly like 30 plus percent for private

markets, right, including PE. Including PE. So I mean, it's a double. That's, that's why I think this is like an important thing to discuss here is who are you making money for? And are you motivated to make money for those people? It's a really nuanced point, but an important one. Yeah. But then also sort of a related topic is, and I'll mention it since Jason, you mentioned the Middle East, you know, how do you decide which authoritarian countries endowment or sovereign wealth fund that you feel comfortable enough taking, you know?

And, you know, there's kind of a danger in getting on a moral high horse, to be honest. And we don't have capital from any sovereign wealth funds, but I would say that, you know, I hear amongst LPs and USLPs and also U.S. fund managers, some debate about should I take money from an authoritarian country's, you know, sovereign wealth fund. So there's, I think there's a debate about that, too. And I've been very public that I've been spending time there. I don't have any announcements of efforts we have in the region, but I did meet with everybody. And I was doing it more to get educated, to be totally honest, I felt when we would have these conversations on All In, and, you know, I'm kind of thrust into this position of, you know, needing to have an opinion or be at least educated, but it hadn't been to Saudi.

I hadn't been to Dubai. Hadn't been to Doa. And, you know, having spent time there now, two trips in the last year, basically in the spring and the fall, I feel really educated. And my first job was working at Amnesty International. Most people don't know that, but I'm very passionate about human rights. Okay. Yeah.

When I was in college in New York, I just felt passionate about because I had seen Peter Gabriel and Bruce Springsteen play at the Human Rights Now concert. And I was like, wow, I really care about human rights. I just spoke to me as an 18, 19 year old in college when I was at Fordham. And I was an IT specialist there. And now I'm an adult and I'm in a position of power or, you know, writing checks. And, you know, people are knocking on the door and I've met with them. And I've come to the conclusion, and people can come to different conclusions that I respect it,

that this group of the monarch states, right, they want to have a seat at the table, they're investing, they're LPing, and they're going to be on the same boards of the companies we're all investing in. They've decided in the next 30 years, and they've said this to them explicitly, we can sell oil for 30 more years, is our projections. And in that time, we're going to convert our economies to tourism, real estate, private equity, alternative fuel and venture capital. And venture capital is one of their favorite assets. Private equity, not so much. They did that game. They really like company formation. They have a large amount of capital and they're very smart. And these are multi-generational folks who've been educated

in the West. This is the other thing I learned when I was there, all the people who are our contemporaries, they went to Oxford. They went to Michigan State. They went to Georgetown. They went to Fordham. They went to NYU because they were all on these scholarships that were set up for the nationals there. they're very westernized and the countries are making massive progress on personal freedoms and economic freedoms. Now they're not democracies,

but they've made progress. And so then the question is, you have to ask yourself, do I want to participate with a group of people who are making massive progress and bending towards, you know,

a better world? Or do I not want to participate and then have them work with Putin and Xi Jinping? Because if you just take a look at what's happening in the region as well, Xi Jinping and Putin are spending a lot of time there as well. And I think we're at this very interesting moment

in time where either that region is going to tip one way or the other, and it's their choice. And so if we don't participate and build companies with them, well, then they're going to build them with Xi Jinping and Putin. That's not a better scenario for humanity either. And they really want to reform. You go to Dubai now. It reminds me of New York in the 90s. I went to Riyadh, and, you know, it has. changed more in the last three years than in 30. And I'm pretty enthusiastic about the entrepreneurial scene there as well. People from Hong Kong, Singapore, India, they're all moving their companies to Doha, Abu Dhabi, Dubai, and Riyadh, because there's angel investors and seed

funds there and programs there. And golden visas will give you a visa for 10 years. So they're going to be a player. The question is, do we want to participate, Mike, or not? And, you know, I think I'm coming to the conclusion that if you build startups together and you build businesses together, that's pretty good for the world, I think. Absolutely. One person's belief. I totally agree. Absolutely.

It's an important topic. I'll probably make an announcement later this year that we might be doing something there in relation to the things I'm known for. I'll leave it at that. Okay, great. Spicy. Well, Michael, I really appreciate you jumping, jumping on the podcast and discussing these topics and I hope to see you soon.

Absolutely. Yeah, great job, Michael. Really appreciate it. Nice to see you guys. Take care. All right, David, great job. You've done two great episodes with me. I really appreciate it.

And if you don't know about the liquidity podcast, I used to call it the Angel podcast, but because our conference and what I do is expanding beyond just angel investors to include LPs and GPs, decided to rebrand. So the Angel Summit we do in June will be called liquidity. And we're spinning out this content. in having this liquidity podcast, which is a niche, niche broadcast for LPs and GPs. David, he did a great job today. Awesome. Thank you, Jason. Thank you for mentorship and for being a great model for moderation.

Oh, thank you. And where can people follow you on social media? Are you on the social media, X.com? For sure. You could follow me on X, D. Weisberg, D-W-E-I-S-B-U-R-D. And you could also follow me on my podcast where I interview limited partners, including Michael Kim. And I even had J-Cal on the episode called The Limited Partner. So check it out. And you just had Freedberg on. I did have Freedberg. Did you talk about All In at all?

I looked in the chapter head. We did not. We talked about his life as an investment banker. Did you know that? I heard about that. No All In talk. I thought for sure you were going to ask him about All In. No, I tried to vary it up a little bit.

Keep it interesting. Very good. All right. We'll see. Oh, and so if you have any chance, if you get on the liquidity feed or your search for liquidity podcast and your podcast player, subscribe there. probably once a weekish.

And you get information about the event in June. It'll be June, second, third, and fourth, I believe in Napa for LPs and GPs only, and Angel Investors High Net Worth individuals who participate in the space. And we have a YouTube channel. Search for Liquidity Podcast on there.

You'll probably find it. And LiquidityPod.com has all the links. So if you have a chance and you like this, subscribe to it or rate it, that would be helpful because this is episode zero. And the handle everywhere, Instagram, TikTok, YouTube, everywhere. Twitter

X is liquidity pod. Liquidity P-O-D, and we got a nice beautiful logo for you. All right, we'll see you next time.