This Week in Startups - Top 5 VC funds raise big $, venture capital DPI is back, and Sequoia’s offer to LP’s | E1981

Episode Date: July 17, 2024

This Week in Startups is brought to you by… OpenPhone. Create business phone numbers for you and your team that work through an app on your smartphone or desktop. TWiST listeners can get an extra 20% off any plan for your first 6 months at https://www.openphone.com/twist AssemblyAI. Get maximum value from voice data with AssemblyAI. Build powerful products and features for your end users on the industry’s leading speech-to-text models. Get 100 free hours to start building at https://www.assemblyai.com/twist CommandBar. Seamlessly integrate an AI-powered guide into your software, making navigation intuitive and interactive. Visit https://commandbar.com/twist⁠ to get a custom live demo. * Todays show: David Weisburd hosts Jamie Rhode, Matthew Mulvey, and Jason Calacanis to discuss DPI coming to Silicon Valley (2:11), demographic data on the backgrounds of Unicorn founders (26:55), and trends for limited partners (36:10), and more! * Timestamps: (0:00) David Weisburd intros Jamie Rhode, Matthew Mulvey, and Jason Calacanis (2:11) DPI, Wiz acquisition, and economic impacts on distributions (5:48) Consistent vintage exposure and proactive DPI management strategies (8:55) OpenPhone - Get 20% off your first six months at https://www.openphone.com/twist (10:22) Sequoia's liquidity approach and LP needs in venture capital (17:13) The role of emerging managers and secondary markets in VC (25:44) AssemblyAI - Get 100 free hours to start building at https://www.assemblyai.com/twist (26:55) Unicorn founder demographics and underdog success (35:05) CommandBar. Visit https://commandbar.com/twist⁠ to get a custom live demo. (36:10) LP preferences, the challenges for emerging managers, and democratizing venture investments (50:54) The decline of first-time funds, motivations for fund creation, and innovations in fundraising (51:56) Venture portfolio management with AI and technology adoption parallels * Subscribe to the TWiST500 newsletter: https://ticker.thisweekinstartups.com/ Check out the TWIST500: https://twist500.com * Subscribe to This Week in Startups on Apple: https://rb.gy/v19fcp * Mentioned on the show: https://www.axios.com/2024/07/15/sequoia-capital-stripe https://techcrunch.com/2024/03/27/unicorn-founders https://x.com/Samirkaji/status/1801351637895942243?utm_campaign=OpenLP+newsletter&utm_medium=email&_hsenc=p2ANqtz-8j6WSVjgGUZXegAo58QYJgSmqd90ozahWmHQWU0Qsnyk_KaXsIldVB7mrcruCafZe_JukeEs-r0fC78VCzJ0kOU7Ppog&_hsmi=313664446&utm_content=313664446&utm_source=hs_email&mx=2 * Follow Jamie: LinkedIn: https://www.linkedin.com/in/jerrcfa Check out: https://www.screendoor.co/ * Follow Matthew: LinkedIn: https://www.linkedin.com/in/mattmulvey/ Check out: https://www.liquid2.vc/ * Follow David: X: ⁠⁠https://twitter.com/DWeisburd⁠⁠ LinkedIn: ⁠⁠https://www.linkedin.com/in/dweisburd⁠⁠ Check out: ⁠⁠https://10xcapital.com * Follow Jason: X: https://twitter.com/Jason LinkedIn: https://www.linkedin.com/in/jasoncalacanis * Thank you to our partners: (8:55) OpenPhone - Get 20% off your first six months at https://www.openphone.com/twist (25:44) AssemblyAI - Get 100 free hours to start building at https://www.assemblyai.com/twist (35:05) CommandBar. Visit https://commandbar.com/twist to get a custom live demo. * Great TWIST interviews: Will Guidara, Eoghan McCabe, Steve Huffman, Brian Chesky, Bob Moesta, Aaron Levie, Sophia Amoruso, Reid Hoffman, Frank Slootman, Billy McFarland * Check out Jason’s suite of newsletters: https://substack.com/@calacanis * Follow TWiST: Twitter: https://twitter.com/TWiStartups YouTube: https://www.youtube.com/thisweekin Instagram: https://www.instagram.com/thisweekinstartups TikTok: https://www.tiktok.com/@thisweekinstartups Substack: https://twistartups.substack.com * Subscribe to the Founder University Podcast: https://www.youtube.com/@founderuniversity1916

certain percentage of the fund needs to be accredited or qualified purchasers or even institutional capital, meaning that non-acred investors just get to co-investst alongside real institutional capital. I've never heard anybody. Is that your idea? Is that idea been floated before? I think I've read that somewhere, but yeah, it's a pretty, pretty straightforward. I'm pretty well read on this. And I've never heard anybody say the percentage of the fund should be, let's say, 50% non-accredited investors. And then the rest could be equal. I mean, that actually Well, no, I think it's a good David rule because what it does is it says if half the fund is sophisticated, the other half can be unsophisticate is what you're saying. If half the fund's already

rich, the other half could be wanting to be rich. This week in startups is brought to you by Open Phone. Create business phone numbers for you and your team that work through an app on your smartphone or desktop. Twist listeners can get an extra 20% off any plan for your first six months at openphone.com slash twist. Assembly AI. Get maximum value from voice data with assembly AI. Build powerful products and features for your end users on the industry's leading speech to text models.

Get 100 free hours to start building at assemblyaI.com slash twist. And Command Bar. Seamlessly integrate an AI powered guide into your software, making navigation intuitive and interactive. Visit commandbar.com slash twist to get a custom live demo. Welcome back to this week's liquidity podcast. With me today, I have Matt Mulvey from Liquid 2. Next, we have Jamie Road from Screen Door.

Of course, we have Jason Caliganus from the launch fund. I'm your moderator, David Weisberg, co-founder of 10X Capital. We have a busy schedule today. DPI is coming back to Silicon Valley, a return of capital back to LPs. A new report breaks down demographic data on the backgrounds of Unicorn Founders, and there's several surprising results. And we dissect the trends for limited partners and how they are allocating to VC funds today

and whether we expect that to continue in the latter half of 2024. Let's dive right in. After months of LPs asking for returns, their prayers have finally been answered. One acquisition is WIS, the AI company, that is, rumored to be acquired by Google for $23 billion, leading to significant DPI or distributed paid in capital, or returned back to limited partners, with funds such as Sequoia returning 153.3x

on the original investment of $21 million. Other firms also distributing capital back to LPs include Insight, Index, Green Oaks, Lifespeed A16Z, Andresen Horowitz, Thrive and others. On the heels of that distribution, Sequoia is also reporting that they're going to be acquiring back shares of Stripe from LPs that request liquidity. In an unusual move for venture capitals, where venture capital firm is itself buying shares back from limited partners, this is another.

form of capital that's coming back to VCs. Jason, what do you think about A, is DPI back, and B, are we going to see novel ways that venture capital firms are going to be distributing capital back to LPs? Yeah, so good to be back. I think this is like an incredible week for Silicon Valley and the LPs and GPs in the wider industry because we have been waiting for distributions and for the last two or three years, a lot of LPs have been saying, hey, we can choose some DPI here because you guys keep raising funds.

We want to get you, you know, we want to hit our capital calls, but you've got to send some money back here. And this two or three year pause that we had since Silicon COVID and Silicon Valley Bank went under and then, you know, all of this high interest rate environment

put the cabash on exits. And then, of course, you have Lena Khan in this administration, not wanting any eminent. A, well, here we go. Sequoia Capital has their fingerprints on both of these. Fantastic, good leadership from them. I think looking at the WIS acquisition first, I think, is a good way to do this.

This is a four-year-old company, as best I can tell. And Sequoia made this investment in 2020. So they have 153 acts according to this report or so. Maybe it's less, maybe it's more. Who knows what the dilution is and the preference act. But let's just say it's well over 100 X. in four years. So let that sink in.

This isn't in 10 or 12, and Stripe is now, you know, a pretty old company. I'm not sure what year they're in, but they're well over 10 years since the original investment. It's at 14 now.

So this is an incredibly juicy return in a short period of time. Even the IRR for people who invested in May is going to be a 2X in four months. Or, you know, whenever this closes, in under a year. So you're looking at like 100% plus IRR, right?

The rate of return there. So this is incredible. And so I think maybe we should tackle the whiz story first with our panel. And then we'll go to the Sequoia Stripe secondary purchase because that is very complicated and has a whole other series of talks. But I guess Jamie as an LP and watching all this happen, this is the outlier of the power law, isn't it? It is. I mean, this is validation as to why you need consistent vintage year exposure in venture. And everyone claimed those prior years were FOMO investing or a fake bull market,

but it shows that you can't really predict or market time. Typically, it's a long feedback loop cycle. Sometimes you get very, very lucky, and maybe it's only four years. I think it also goes to show that, you know, entry valuation that Sukoy went into was $150 million, which is pretty pricey for a seed, but it goes back to the conversation of it's the first institutional round. It's the cheapest entry point into the life cycle of a company. So sometimes valuations can be very frothy, or that's what you think. But when you think about the exit potential and the expected value of exits, that can make you adjust your thinking and make the investment worthwhile. I think that's an incredible point, Jamie, that this occurred in the vintage. Everybody said is going to be like the

DOA vintage. Don't expect much from those four years and here we are. Yeah. It's why from an allocator standpoint, market timing is really really challenging. I mean, there's multiple studies out there that show about 90% of your return is driven by your asset allocation. And so it's really, really important if you're going to do venture to make sure that you have exposure to every vintage year, because if you missed out on the whiz, who knows what that 2020 return would be? Matthew, you're the last? Yeah, I think obviously this is why we play the game of venture capital, right? I was surprised to see the company.

It was founded in 2020, but I think it's incredible. It's a testament to obviously the founding team there, but also the opportunity that they were going after and the market size and the problems that they were going after. I also love the Sequoia. I think Sequo is being extremely creative. It's not the first time they've been creative with DPI, but I think as managers,

you have to be proactive with DPI. And over the last 18 months, two years, that was a wake-up call. And so I love seeing that. I think they have set the standard for being proactive and always changing and thinking about how they can be the best. And so I thought that was extremely innovative in the fact that they're not taking care at interest, or at least that's what I read on that portion of the 800 million or so that

they're going to buy back, I think aligns extremely well with limited partners and is maybe something even uniquely a Sequoia can do. And so I thought that was well done. I have to tell you, coming from a multi-asset class background, reading that, that reminded me a buyout. I mean, that happens a lot of times in private equity land where newer funds by, you know, older portfolio companies so the existing LPs and the older vehicles can get DPI. Agreed that I think it's positive that they're not taking carry on it. It's just a parallel that I've seen in other asset classes. If you use multiple devices and apps to run your business, you need Open Phone.

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Yeah, and we'll pull up the letter here. This was sort of a breaking news story, but I was a little bit aware of it because I covered it on a previous episode. But essentially what's happening here is there are people who are investors in Stripe from Sequoia at a, you know, in a time period, I think maybe 2010-ish, and it's obviously 14 years later. They've been sitting for 14 years on this investment and they were told

they had the best company after Uber and before Airbnb of that vintage, yet they, you know, haven't had a ton of liquidity. So it looks like Sequoia with some of their other vehicles, which might very much want to buy shares of Stripe pre-IPO. And I think this signals an IPO is coming. And that was my big insight here is I think this is a bit of a tell. But Sequoia Capital from their heritage foundation, from their heritage fund and from their growth fund, a couple of their different funds they actually mentioned here.

Let me put on my serial killer glasses. So we know that each of you has different goals for liquidity and portfolio management. We are contemplating a transaction. action where new purchasers, including the expansion fund, Sequoia Capital Fund, Sequoia Heritage, that's their family office fund, and Sequoia Capital Global Equities will commit to buying up to $861 million of Stripe shares held in Sequoia funds raised between 2009 and 2012, that what they're calling legacy funds here at the most recent July 2024, 409A valuation. We explicitly focused on these legacy funds, which were organized over a decade, oh, given the normal 10-year

like of the funds. So this is, I think, the other key point to this, David, is there's massive amounts of qualifiers in this offer. They're saying they're contemplating this. They're fully disclosing who the buyers are. They're doing the most clear, concise way to value the shares, a 409A valuation, very, you know, legally accounting binding. And they're doing it with the oldest funds with a very explicit purpose. They're past their 10-year life span. And the final paragraph if we page down there, David, I think is worth reading as well. Limited partners of the legacy funds will have the option to hold or sell or portions of their stripe shares. So you have the choice, if you're one of these legacy LPs, to participate in this or not. So you have choice. You have to

get educated as the LPs if you want to do this or not, because the people buying it are expecting probably a 50% pop, I would say, by the time they exit and this thing goes public in a year. or so. They say, we are pleased to offer this liquidity option to you as limited partners in the legacy funds.

As each of the legacy funds, Sequoia Capital Fund, expansion fund heritage, and SCGER funds that are sponsored and managed by Sequoia for its affiliates, we are also seeking your consent to proceed with the transaction

and to make certain amendments to the governing documents of the legacy funds that are required to affect the transaction. Please completely return this. And it also says it is important to highlight that Sequoia personnel and associated persons will not be offered the option to sell Shripe shares previously received as carried interest distributions from the legacy funds. No care of interest will be payable to the sellers in connection with this transaction.

I think that piece is smart too, not letting kind of the personnel sell. Again, aligns how bullish they are and how continued bullish they are in the company. So I think they did a great job on both sides. aligning with LPs, not taking carried interest, but also signaling, hey, this is a small percentage of our overall holdings. This is not a fire cell. This is not something that we're trying to, you know, do behind your backs. We're doing it right in front of you.

We're giving you all the facts. And our personnel are not selling as part of this transaction. We are still bullish. I think there's a couple aspects here. If you think of venture capital as a product and LPS as customers, Sequoia is being very responsive to their customers. So customers are saying, we want DPI, we want DPI.

And instead of saying we can't do that or there's different restrictions and all these, they've kind of come together with a pretty novel solution, but has a couple of aspects. One is the 409A valuation. So they've decided to use this 409A valuations. As you guys know, 498 valuations are typically a depressed valuation. That's where employees typically exercise their options. So they're typically, it has an embedded discount there. But they're also, they're not being coy and they're not taking it.

advantage of their limited partners. They're not forcing people. They're not double-dipping. So they're doing in a way essentially saying, look, we hear what you need around DPI and we want to accommodate you if you're willing to do that. If you don't, that's totally fine as well. We're not, we're not being opportunistic around your DPI needs. So I think overall this is a positive thing. I wonder Matt and Jamie, whether you know, you think other venture funds will follow and whether this might be a template for other venture funds to solve around the DPI issue? Well, I think it's the reality of our industry right now. The public markets are no longer a fundraising event. They're a liquidity event in a lot of ways, right? And so the world of Amazon going public at a $500 million market cap and, you know,

the value expansion taking place in the public markets has kind of flipped. That's why my old firm, KOTU went into the private markets in the first place, right? And so I think it's a reality. Will it look like this? I'm not sure. Maybe a lot of the larger funds. I mean, for us as an emerging manager, smaller funds, smaller checks at the precedence seed, and seed, you know, we like to work with our management teams when the company gets to this pre-IPO or right before they go public. If there, you know, if some early investors are taking money off the table, we'll try and take a portion off, still be kind of leveraged and bullish on the business and keep the majority of our shares in. But look at it in partnership with

the management team and partnership with the other early stage investors to help our LPs get DPI and what has been a really difficult environment over the last 24 months. So I think you have to be proactive is the underlying rule now. I wonder, Jamie, you mentioned you referenced different asset classes like private equity and buyout. And there, if you think about it from a first principles basis, private equity funds are selling their positions to other private equity funds, which are selling to other private equity funds. So you have the same private asset, you know, getting liquidity every three years, but over, you know, three times over nine years, do you think maybe there might be an evolution where, you know,

secondary becomes almost part of the process rather than this obscure kind of solution for somebody's liquidity needs? Does venture capital in general need to have a different liquidity profile in order to expand, you know, the amount of people are interested in investing? I'd say, you know, Sookoya has the benefit of a structure that allows them to execute this type of strategy. And to Matt's point, there's probably larger firms out there that can also leverage their structure to take advantage of these situations. I think a lot of firms out there do not have this structure and need to find alternatives. But the benefit of investing in emerging

managers or pre-seed and seed is when you've gotten to a valuation of potentially $100 billion in the private markets. Taking some money off the table via a secondary is a great way to provide DPI to your underlying LPs while also still keeping, you know, capital in the ground compounding at a high rate, you know, playing the optionality upside that venture still offers. I think that when you look at venture, there's innovation and creativity everywhere. So I imagine that there's going to be more creative and innovative solutions coming out there where, you know, potentially a different structure of a secondary fund or, you know, some type of private equity style player that's adjacent to venture that comes in and buys up.

because, you know, as LPs start to get desperate, they're willing to potentially go off their first principles and, you know, go for, go for the capital, even though potentially keeping in the ground for another three to five years could be very advantageous from a multiple standpoint. There's an opportunity cost to, you know, putting your dollars to work. Yeah, and the cleanest way to do this is part of a primary round, right? It's, it's, I haven't seen something, you know, too familiar to what Sequo's doing, but usually you see secondary purchases for fund like to myself, when people are excited, there's a big valuation. You're, you know, we already have 100x out of our seed fund and so we want to take a little bit off

the table, but you have ready buyers. If you're going to try and sell in just the, as you were saying, David, kind of this wild, wild west of the secondary markets outside of a primary round, you could have somebody who's willing to give you par. You could have somebody who's willing to give you a 70% discount. You know, the, the company, um, bylaws and what they actually permit, it's a lot messier. And that's where you get a ton of inefficiencies and these forward contracts and really kind of the wild, wild west. But I think if you're tying it to a primary transaction,

it can be much cleaner. I do think this is going to become part of our toolkit here in venture capital land. You're already seeing we had Dave McClure on. He's doing these strip funds, trying to buy LP interests to provide this liquidity to LP's. You've got industry ventures doing it as well. It seems to be, you know, that capital finds away, you know, that Jurassic Parkline, life finds away. Like, capital finds away.

And if M&A is taken off the table, as I pointed out earlier, well, what is Microsoft going to do? They're going to just buy the assets of the company, the team, and leave the shell, and they're just going to rip, you know, the meat off the bone and just leave this like dismembered, you know, corporate entity for Lena Khan to, you know, get to wave some victory flag that it wasn't acquired. Meanwhile, all the value was ripped out of the company. And this is a similar kind of situation. If we can't do mid-market M&A, if we can't get companies public, if there's some resistance or headwinds to that, you know, and Adobe can't do their $20 million transaction. Well, there's other ways.

And capital finds a way. Life finds a way. And here we go. Capital has found a way. The great irony of this is I think that this is occurring, you know, probably six months or a year or less. when the IPO is going to occur. So to your point, Jamie, you know, you have to make a really thoughtful decision here as an LP.

And how do you make that decision is an important question because your career could be on the line. If you're in an endowment or sovereign wealth fund, a high, you know, family office, if you make the wrong decision here. So you've got to make a very thoughtful decision. Are you selling before a triple up and this thing goes parabolic? Are you, and that could have been the best investment your firm ever made? Or are you pairing your position and this thing goes down 30% in the market? And it's an Instacart kind of situation. So, you know, sharpening your pencils, LPs, and shareholders here.

And I don't think you can go wrong selling 10 or 20%. Nobody's going to blame you. But when you start selling larger portions of your position, you do need to be very, very thoughtful. But I'm glad that there's more options here. And I was starting to get the sense that, you know, half the. people in our industry did not believe in our industry anymore. Now I think it's down to 47% of of people in our industry don't believe in our industry. There's a large number of people in our industry who are just like, I don't think this is ever going to work. And that's kind of what,

and I'm talking about LPs and downwards are like, is this going to work or not? You know, it seems like a crazy plan. We're waiting for whiz and stripe and these power laws. It's going to work, folks. The power law is always going to be there. Calm down. Just pace yourself, deploy your capital over four years, not 18 months, you'll be fine. I think sometimes it's hard as an LP to just sit and be comfortable with your portfolio. You're making investments if you have a great group of curated managers that you feel comfortable re-upping in like a liquid two that doesn't change their fund size very much. So it's kind of steady state.

And it's hard sometimes to just sit there and be like, I'm actually happy with my portfolio and I'm going to do nothing. You want to start to make tactical decisions. You want to start, you know, making changes to a portfolio. So you feel like you're significantly adding value, but sometimes patience is the best value you can add. So, so well said, Jamie. And I think when you read the letter from Sequoia,

it just instills in you like, okay, these are adults. They know what they're doing. They've done it before. And they're making very thoughtful decisions in terms of capital allocation and portfolio management been in strategy. So I just A plus plus on the leadership from Sequoia here. And I think it's just fantastic for the industry. Lots of lessons. I do wonder a bit of a contrarian point, but of course we want a healthy M&A market and we want private companies being able to transact with private

companies. But what would happen if some of these M&A deals had not been consummated historically? What if PayPal had not sold for one and a half billion? What if YouTube had not sold for 1.65 billion? what if Instagram hadn't sold for a billion dollars? Are there power laws there? Would Instagram be a half trillion dollar company? And what would be the total returns of venture? I don't think anyone's really run the numbers on that. But maybe most of, yeah, yeah.

I have. I mean, if you look at the YouTube, I would tell you, because I was there. And I know Chad and Ruloff, you know, had just invested in Mahalo right after he did YouTube. And I remember reading his deal memo when he was in his first year or two at Sequoia. and I believe YouTube would have gone out of business. No venture back company ever survived a lawsuit of that scale in history.

And so I don't, I believe Google made like the asymmetric risk bet of all time with that one. With Instagram, yeah, that one would have gone, you know, 100x from the billion dollar valuation. That was a huge mistake. And everybody knew it at the time. every single person knew it at the time, including Sequoia, which had just put money in, I believe at 500

and doubled their money in three months. I believe the back channel I heard was they begged them not to sell. Begged them. And so that's Instacart, wait, that's a, and then PayPal,

you know, that was a different era. The concept of secondary at that period of time. And then they were also under the sort of Damocles, I think they call it. Like,

you know, like, you're about to get beheaded because of fraud. And I don't think, you know, it's not like, like Elon and Peter Thiel and those folks had a lot of cash in their bank accounts to fight that fight.

And it just shows you having partners with deep pockets who can weather storms and have been through it before actually matters. So if you're a founder listening to this, pick your partners wisely because founders who get a little skittish. I'm sorry, partners who get skittish and founders who have 99.999% of their net worth and a company leads to a bad outcome long term. That's the playbook that I've seen work really well. Don't sell. Sell 20% of your company to us via secondary. We'll back you and let's roll the dice. Oh my Lord, podcasts, audiobooks, virtual meetings, endless videos.

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And join over 200,000 developers who are building amazing apps with voice data. Go to assemblyaI.com slash twist head day. Moving on, a new study by Defiance Capital titled The Unicorn Founder DNA Report. showed that 70% of founders are underdog founders defined as immigrants, women, or people of color. Diving deeper into the numbers, we find that only 53% had degrees from top 10 universities. Only 49% or less than half of CEOs have STEM degrees. And surprisingly, outside of SV Angel YC and Liquid 2 from this podcast, not a single venture fund has invested in over 3% of unicorns.

Jamie, I know you've done a lot of research on this on underdog founders and managers and you invest in them. Tell me about what you've seen in the data. Yeah, I'd say I think this unicorn report does a great job of showing how diverse founders create winners and why it's so crucial to find managers that are willing to back these kind of founders. So no plan B, a chip on the shoulder, unlimited self-belief is key. and it's really why Screen Door was started in 2021 by Saty and Hunter at Homebrew. They recruited eight other GPs with diverse perspectives who used to be emerging managers that are now established brands and pretty access constrained.

You can think of Kiersen Green from Forerunner, Charles Hudson from Recurcer, Leah Sullivan from Fuel, and they really started Screen Door because they wish they had an LP like Screen Door to invest in them when they were just starting out. And what I would say, you know, not just from myself, or my two other colleagues that have been allocators their whole careers, but from the 14 GP advisors that we work with, is that the winners and venture come out of the tails. And I know this group absolutely knows it.

I've chatted with all of you about it. The winners really come out of the tails or the edges. And to get that power law return, it's really, really important to be embracing non-consensus investing. You need to find GPs that have had journeys that provide them with perspective to be able to pick out that non-consensus founder from the crowd. To really think and invest differently than everyone else in the room, they need to embody what that report showed is that grit,

that chip on the shoulder, unlimited self-belief, you know, those obvious networks and geographies, you know, a lot of the multi-stage firms, they pile into those early-stage rounds or they try to get in as quickly as possible. But when you think about it, Hot rounds or those high-flying founders that everyone wants to get access to, you know, that means you're actually consensus or technically part of the crowd.

You know, but to win and venture, you need to be non-consensus and right. So kind of following the crowd, following, you know, those big brand names into the hot founders is not actually the way to potentially be producing those outlier style returns. One of my favorite founders on the planet is Tracy Young from Plangrid. and actually my wife was there, was there head of people at Planned Grid helped them scale to 20 through 450 people. She had a $900 million exit

to almost a uticorn company and has now founded Tiger Eye and almost half of her company are underdogs at Tiger Eye. Is that because you know, they're underdogs? No, it's because they're fantastic technologists that happen to be underdogs, right? And so I thought that

the research was fantastic. I think we're going to see more diversity, which is a positive. In this data, I do think the one that's worth looking at is it's actually based upon desperation. And I think people who are already wealthy or who have safety nets behave differently in the world. And I know I certainly did. I had a, you know, different kind of drive than the people I met when I first came to Manhattan who were trust fund kids, you know, and who had their apartments paid for and their apologies paid for. And I didn't have those

things. And so I just had a chip on my shoulder that was very different because I had to fight to meet everybody and they had knew everybody from Dary in Connecticut and the Hamptons. And I didn't. You will see that a lot in terms of immigrant founders, which is why I pushed former President Trump and future President Trump apparently on the issue when he was on all end of green cards and recruiting the best talent to come here. We want to win on a global basis. recruiting immigrants is the greatest thing you can do. There are many more smart people outside the U.S. than inside the U.S. statistically.

There's nothing to do with any judgment on any particular, you know, society or country or culture. There's just 300 million people here and 7 billion people out there. Therefore, every person here, there's 20 people out there. I think what this report also highlights is that you can succeed when you come from a different background. And I think that's an important thing that people are aware. 70% are underdogs.

53% don't go to top 10 schools. You mentioned, Jason, you know, you didn't go to Stanford. A lot of people think that if they didn't go to Stanford, they didn't go to Harvard, they don't have a chance. So I think it's important that this information is out there, that there are different ways to get to success, which in this case is defined as a billion-dollar-plus company. It's true success at its highest form. So I think that should be exciting to many people.

And networks, right, maybe a little bit outside of the diversity component, it's networks, right? I mean, Ron has been an OG of Silicon Valley, was one of the first Super Angels, you know, ever, right? You look at Y Combinator had over 20,000 applications for that. They're only getting stronger and stronger. The two people that put us in business, or the three people were Jessica Livingston and Paul Graham from YC and Ron Conway from SVangel. So it's almost like a little SV angel, YC, look with two mafia there at the top, similar strategies. Jason, similar to your strategy. So I think some of these network-based strategies where you have these pockets of great people are so diverse and everywhere to where if you're

just a vertical-specific fund or just focused on, you know, people coming out of Google or Facebook or just focused on people coming out of Stanford, you're missing, you know, a large portion of great founders. So that was the other takeaway I had, obviously, as a network-based fun, especially with those top three names, is you have to be everywhere now in venture to capture the outliers. The report also says most had a personal story of feeling unfairly treated or feeling limited in their native environment. And this study observed these traits and communities left behind for generations.

And so I think from a diversity angle, you know, that backing GPs that have diverse perspectives or have had differentiated journeys to get to venture, because I see. still think there's a level set basic requirement to be a venture capitalist, but they can provide access to those communities that have been left behind. And it also creates a huge opportunity to find founders that can, you know, create companies that meet the needs of those types of communities. And it wasn't long ago, David, that, you know, we would be sitting here in Silicon Valley. I remember when I came into the industry 25 years ago as a journalist covering Silicon alley here in New York and

you know Asian and Indian entrepreneurs or just even rank and file workers at startups you know work were not considered leadership quality they were you know great developers they were kind of put in a box over here and you had to be a white dude from Stanford to run the company

and then these were great people to have on your team and then you look across Silicon Valley and I've watched it happen in my career you know the age of you have to be a white guy to be CEO is like long over, Microsoft, Google, like, go down the list, like, find a straight white male running a tech company at scale. There might actually be, you know, the minority of numbers. I haven't actually run those numbers of the top 10 market tech companies, but it's certainly

very different than it was in the 80s and 90s. Founders, I know a lot of you listening to this podcast, you build software for a living, right? We love doing it, but we all know it's hard. You know the pain of trying to onboard new users and get them up to speak quickly. Worse, most chatbots and guides built for the task are annoying as heck. Users tune them out because we all hate random pop-ups. Thankfully, there's one company that uses generative AI to help users onboard without annoying them, and it's called Command Bar.

It has a chatbot that gives personalized responses to user questions instead of a basic Q&A, and it shows users around your product like a live guide, cursor included, Even more, CommandBar can detect when a user needs a nudge, giving them a product hint or special offer to close that important sale. CommandBar is used by unicorns you know, HashyCorp, Gusto, 6Sense, Angelist, and others. So here's a simple call to action. You've got to check out this product. Integrate an AI Power Guide into your software so your customers can navigate your product intuitively and quickly. Visit commandbar.com slash twist to get a custom live demo. let's move on.

In a tweet storm, a friend of the pods, Samir Khadji of Allocate, highlighted the tale of two cities and venture capital detailing how limited partners focus on blue chip managers has come as a serious expense of newer venture funds, also called emerging managers. Nearly 45%, nearly half of all LP capital in 2024, has went into only five VC funds out of thousands of venture funds. Matt, this is quite a statistic and it's gone up two and a half times from 2023 to 24. What's driving this desire to pile into the same five funds in Silicon Valley?

Well, I think one of the factors is we're a little bit, it's a, it's a sickness of our own success almost, right, to where a lot of these limited partners have made a tremendous amount of capital with through venture capital, right? and you look at some of the largest pension funds, some of the largest endowments, billions and billions and billions of dollars, I run a fund that's an $80 million seed fund and a $60 million growth fund.

I can't really target Ontario of teachers pension that necessarily doesn't want to, I don't know if they do or not, but I imagine they want to write larger checks. And so I think part of it is the industry has been incredibly successful if you look at the past couple of decades. There's more people that want to, come in and invest behind this trend and invest in this industry, and they need to write larger

checks. And I think what you have is those top largest firms look more like asset managers than they do look true venture funds. They have, you give them $100 million and you're put in seven different funds, even though you really just want the seed or pre-seed fund. And, you know, I don't think there's a lot of incentives for those large funds to shrink. They make an incredible amount of money on, you know, management fees. Sometimes we look at ourselves in the office with great performance. We could raise a lot more money. Every fund's over-subscribed. We keep them small, and we think, are we the dumbest guys in the room? But we're staying true to our sassy, Jamie, not here. She likes her 10x funds. But we stay true to it. But we do see, you know, a lot of

these Elkis need to write larger checks. If you're new to the industry, you want to go with a great brand, you know, and Drison Horowitz is well known. My old firm, Code 2 when I started was 350 million of AUM. When I left was 10 billion of AUM just six years later. And so they're happy to take your money as well. And they've got good places to use it. But I think it's a byproduct of the success to some degree. I'd also say some of those larger brands,

you're just getting a completely different product. And you're also getting a completely different return. I mean, in the beginning of this discussion, when we talked about, you know, Sequoia and their structure and their ability to, you know, essentially buy out their earlier funds, you know, shares in Stripe. And so I think with the multi-stage firms or those larger brand firms, you're getting, you know, especially if it's late-stage venture exposure, you're getting returns that look a lot more like buyout and growth equity. I think that late-stage venture can absolutely provide diversification benefits to an asset allocation. But if you're looking for

you know, the power law style returns, or you're looking for the extreme compounding that venture can offer. You unfortunately, and this is where the friction and the challenges come in the marketplace with those larger check writers, the Ontario state pension, or country, you know,

pensions, sovereign wealth funds, things like that. By the way, I love them. If they want to invest, they can invest. I know. We're calling one person out, but for the larger check writers of the world, we should say, you know, there is friction and there is challenge.

into getting access to those emerging managers. You know, at Liquid 2, you guys kept your fund size small with all the emerging managers that we see at Screen Door in our existing portfolio. Most of these funds are not really changing their fund sizes. I'd say it's 5 to 15% incremental changes from, you know, fund 1 to fund 2 and then fund 2 to fund 3, especially in this market environment.

Most are just keeping their fund sizes the same. And so we saw it before the seed return that you can get, you know, in a WIS style acquisition. And so, you know, early stage venture is highly attractive. It's just actually access constrained for the large check writers of the world. And so there's a lot of friction out there. It's why I joined Screen Door to kind of help alleviate a lot of that friction and complexity out there, but, you know, recognize the challenges that are in the ecosystem today.

Yeah, it's really the number of relationships an individual can maintain, especially important ones with a lot at stake. is small. I know this because we have over 400 portfolio companies. We do 100 new investments a year. We are a high-scale investor with 21 people on our team, which is huge for the size of our funds, which is, you know, which is $50 million. Now, we write a lot of 25K checks with our founding university pre-accelerated. We're a lot of 125K with launch accelerator, which is kind of like a YC contemporary or a tech star's contemporary. But, you know, I can no longer maintain relationships with all the founders. Therefore, each of the 12 members of the investment team and the rest of support

and podcasting side, they each have 40 relationships each to manage. And then we have to come together as a group and put these into, you know, and scaling this is very hard. Why Combinator has scale issues and challenges. And you really have to level set with the founders. We have to level set with the founders. Hey, we are in making a lot of investments. And here's the determinants for us making that second other investment. So now you go to an LP. and how many GP relationships can they manage? And I'm guessing, you know, one LP can manage 10 or 20 with such a high-stakes relationship,

which is to say, how many people can you talk to every week and have a thoughtful discussion? And if you're an LP in a fund, you're putting a $25 million check in, you know, maybe you've got to talk to that GP once a month, twice a month. I'm not sure what the right cadence is. Some people, Michael Kim, you know, from Sundana,

it tells me he's in a he's on chat with his uh gp's like every week or every other week and i was like you know i just want to have that relationship with you put a dollar in my fund so i can just have that relationship with you because i would love to have an lpa relationship like that but time is so he does do that yeah he does i mean i i mean it must be amazing for you to have somebody care enough to have that phone call and that's really the issue is how do you scale that and you know when you're dealing with the sovereign wealth fund that's trying to put a a billion dollars to work or an endowment trying to put two billion dollars to work, whatever it is in venture, they got to write 50 million dollar checks for each fund,

25 million dollars checks for each fund. They can't be writing 50, I'm sorry, $105 million checks. And it's just too crazy. And we even have a challenge with it. But to Jamie's research on, you know, having a very large spread of bets and then doubling, and in my case, we call it tripling, we're trying to triple down on the winners. And so we have two stages of winning likely and definitive. We try to do two bets and we make maybe per fund 10% get the second bet and then 5% get the third bet.

We're really trying to be thoughtful about that portfolio management. So I just think there's two different businesses going on here. I'd say classic VC is 400 million or smaller fund sizes. That's the classic venture industry. And then there's Andresen Horowitz, light speed, IVP, whatever, Sequoia, doing full lifespan and everything from, you know, everything from, you know, what heritage. each fund is doing at Sequoia, et cetera, all the way down to their scouts program. So it's just two different industries have emerged. And some of them are going for the beta.

They're just going for the average. And the average is pretty darn good, right? If you could get the average, I mean, that's what you're doing. Isn't it, Jamie? You're trying to hit the average of emerging seed. And seed, the average of seed is great. So the average of seed with the optionality of exceeding the average is extraordinary. It is.

I mean, the average return of emerging managers and early stage venture is, significant. And if you can, you know, select a bucket of managers that can get you above the average or get you alpha in venture, that's insane. And that type of return is really, I think, why everyone wants to invest in venture. It's just really challenging to get because only a small number of startups, you know, turn into the big winners and only 20% of venture funds, you know, produce 80% of all the returns. And so it's really, really hard to, you know, pick those managers and sometimes to even access it as we've talked about the $50 million checkwriters, there's no way you're able to access pre-seed and see it.

It's a, the average fund size at Green Door is about $40 million. Jason, that relationship piece is pretty important. And I'm going to brag and pump up Jamie here is one of my favorite LPs of all time. But as you know, our fund was started by Joe Montana. Thank God he did not play for like the Detroit Lions or else we'd be like an automotive of fund or something like that. And I would not be there, but he played in Silicon Valley. But Jamie's flying out to see us.

We're going to a very public restaurant in Calhallow, Rose's Cafe, packed restaurant. Jamie walks in in full Eagles gear into the restaurant to have lunch with us with Joe and our team at Liquid 2. And so that's about his personal, about as personal of a relationship as it gets and is talking smack to Joe over email leading up to the game. You are one of the best, my friend. Thank you. Thank you. How many LP relationships do you have, Jamie?

And what do you think the upper bound is for you? I'd say that spanning across my entire career, it has to be north of 50. I mean, I sub 100 north of 50. I haven't done the full math there. But I think that, you know, my lesson learned is always be a learn at all. definitely don't be a know at all. Jason, I don't know how you view this, but we have a significant portion of family offices,

our A's, is our LPs. And the reason we do that is we love families that have operating businesses. You invest in a lot of companies. We invest in a lot of companies. It helps us. So I think that is actually nice in terms of helping manage LP relationships

when you're reaching out saying, hey, can you be a customer of one of our companies as opposed to just reporting on the, you know, the fiduciary and the financials of the fund? that's how we've been able to extend it a little bit larger. One of the largest chemical families in Taiwan, you know, one of the largest sports franchises, a bunch of manufacturing families, logistics,

just for touch points. I mean, if you were running a $50 million fund like I am, and you think you can put 200 names into that fund and, you know, have concentration on the top 10, you know, that come out of it, the top 5%. You really don't need institutional LPs. And so I think, you know, for people who are doing the boutique VC, classic VC business I'm talking about and aiming for Alpha, you know, it's kind of nice when you have, you know, hundreds of LPs. And I do think, you know, with the changes in the administration and maybe a more fluid capital allocation support system with Trump's and J.D. Vance involved. And, you know, listen, I hate politics. I'm a moderate and I like building companies and products and services. And I hate politics.

But the truth is M&A has a big impact. And the rules around the SEC and capital formation do. And I believe there is a unique opportunity. I'm not announcing who I'm voting for you. I'm undecided. I'm going to wait to see who the Democrats run. But I would like to see capital formation evolve to the point at which the majority of the country, perhaps the whole country, could make a bet in a venture firm.

And so if I could have for my $50 million funds and, you know, just literally, have, I don't know, 500,000 people putting in $100 or 50,000 people putting in $1,000, I would absolutely, absolutely run towards that opportunity to give people like my parents,

blue-collar people, salt for the earth people, the ability to have access to this asset class. And that seems profoundly fair to me and would give people the ability to go and maybe move their station up in life through this incredible innovation going on.

And right now we've limited it to 6% of the population in the United States, which seems incredibly unfair. And qualified purchasers are even smaller portion of that 6% of this. It is interesting because you can put significant guardrails on this to make it so that non-accredit investors, for example, a certain percentage of the fund needs to be accredited or qualified purchasers or even institutional capital, meaning that non-acred investors just get to co-invest alongside real institutional capital. I've never heard anybody, is that your idea? Is that idea I've been floated before? I think I've read that somewhere, but yeah, it's a pretty straightforward.

I'm pretty well read on this, and I've never heard anybody say the percentage of the fund, the fund should be, let's say, 50% non-accredited investors. And then the rest could be qualified. I mean, that actually does. Well, no, I think it's a good, David rule, because what it does is it says, if half the fund is sophisticated, the other half can be unsophisticate, is what you're saying. Or if half the fund's already rich, the other half could, be wanting to be rich. That is actually a very brilliant solution that the SEC should understand,

and we should clip this and send it to our friends over at the SEC because the advantage the United States has is not its weaponry. And I think our weapons are becoming less of an advantage as time goes on. And we have asymmetric warfare, nukes, hypersonics, etc. Our weapon is our ability to build great products and services and companies. So if you want to have a secure America and a secure planet and democracy, build more companies, feel more great products and service. Jason Kyle Canaanis. I'd like to have your vote this November, this November 2032. The incremental weaponry does come from entrepreneurship and from taxes from new venture

creation. So there is unfortunately a correlation there. And just in case it is the weaponry, we invested in Andrew O'KLas in biofire. So just in case, just we want to make sure that. Tell Palmer, I'm a huge fan, let bygones be bygones, and do not drop anything ordinance over my horse ranch, please. I'm on his side. I'm on his side. One thing I did want to show, this is part of the tweet storm.

This is, speaking of weaponry, this is the decimation of first-time funds. Last year, which was down from half from 2021, went down another 90% in terms of first-time funds fundraise. So only 28 funds so far in 2024 have raised 1.6 billion. So we are seeing pretty significant, you know, tale, tale of two cities to use Samir's language. Just to pause on this, you know, so the people who are listening, in 2021, 428 new first-time funds raised, what is the right there? 23 billion.

And then you see this drop down to 348 in 2022, 149 in 2023 and 28 in the first half of 2024 for 1.6 billion. Yeah, that's incredible. And the problem with that is most of these first-time funds are really going in early. These are these micro funds that are putting in the pre-seat capital that are actually taking funding the incremental startup, the startup that a top fund might not fund because they just have too much capital to deploy. So this is a real issue in the innovation economy for the U.S.

And this is somewhere where, to your point, Jason, public policy could certainly help spur the economy. And this is, you know, really important to think about, I think Jamie, you're probably looking at this because your ability to select new managers is based on this number. Now, one of the great things about this is I think we had venture tourism. I think a lot of people wanted to play the role of venture capital and live the lifestyle. successful venture capitalists. And they thought the lifestyle was fucking off and taking 12 weeks vacation and going to Aspen.

I was going to say, Jason, what is that lifestyle? I have not experienced that lifestyle. I am waking up in a cold sweat thinking about DPI and what the last 10 investments we made and making these decisions. So that's the great, I think, news here is there were probably two thirds of these funds

were people who should never have started funds. So maybe we're balancing out all these. people who just wanted to live the venture lifestyle and got to do it for five years. And now they're not going to raise their second or third fund. But yeah, if you can raise a fund in this market, and I'm invested in two of those 28, invested in typically one fund a year, I did two, I think, in that period. So I think those people are very brave.

And they are kind of like the dogged founders we were talking about earlier, Jamie, like to start a fund in this insanity when nobody believes in venture and everybody's like, oh, there's never going to be another exit. there'll never be another IPO. This is the end. One of the core questions I ask is, why are you doing this? And asking that question now versus a couple years ago, you're getting more real answers, more genuine answers that you're in it to build the firm. I think to your point, you were seeing a lot of tourists.

And I think one of the key questions that I've learned over my career is to really understand, does this GP know how to go from investor to fund manager? because those are two totally different things. If you're just raising $15, $20 million to invest in all your buddies that are leaving some top growth firm and you have a great network today, that's wonderful. That's probably one-time opportunity. But if you're in it to build a firm and to capitalize on your experiences in your life and your diverse backgrounds and your new perspectives and you're going to evolve and adapt over time, you know, that's a totally different answer. and I think it's really important to have the mindset and the framework to know that raising a venture fund means you're probably spending 50% of your time not investing.

There's a lot of operational headaches that go into raising an institutional venture fund. And I think a lot of the managers that I'm seeing today are really in it for the long haul. Yeah, nobody told me when I left KOTU I wouldn't have a nine-person IR team. You know, I'm definitely missing those folks or the first. folks at Eclipse, Angela, I think, does the best job in the business. I need one of those nine folks. Can you send them over? Yeah, I'm trying to. You're looking at one, I guess. Yeah. I mean, yeah, it's, it is a full-time job, I think, to do this investor relations thing.

I need somebody to do that. You know, as a small fund, it's like becoming a more important function. And so I've been trying to figure out, do I build that person internally or do I hire that person? I think I need to find somebody great at IR and then find out who their number two person I need their number two person come work for me. So if you're that person, if you're a boss is never leaving your front and you've hit the ceiling, come work for me

and let's break the ceiling. I need somebody for IR. For emerging managers, it feels like the two biggest roles to get leverage on investing is head of finance, head of IR. That's what I need. I need somebody who can do both of those things for me because I'll be honest, when I have to do those things, it's less time with

the founders. And, you know, it's fine, but, I mean, there's also the chance, you know, I've been thinking about it to our earlier conversation of instead of doing a $50 million fund, you know, every four years, five, whatever it is, you know, deploying over four years, it's pop up a $25 million fund every two years and just do it by email and just say, if you want it and fill out this forum and we're done. So, you know, I've been talking to my internal team about that a lot of like, you know, maybe we need to innovate a little bit and just never do a road show again,

never do meetings with LPs again, you know, we're a known quantity. here's our strategy. Here's the companies. Full disclosure, take a look. Here's the list of the companies we invested in this fund. Here's the ones that pulled through. If you think we're good at what we do, here's a form fill it out. You want to put in 250K, $2.5 million, whatever it is, put it in, first come, first serve.

Fund closes, we're on to the next one. And just $25 million, $25 million, $125 company funds and just rinse and repeat and just do it every 30 months or something. I don't know. I've been thinking a lot about that. But of course, by the time you think about that, we're going to be in a hot market again. We're people going to be dumping money on our heads and not this like 18 months to raise a fund kind of situation. Play the game on the field. This was a good quartet, I have to say.

This is a good, spicy quartet. Lots of strong feelings, lots of knowledge. I like this quartet. We've got to do this one again. Why don't we just book these guys for like eight weeks from now and just do it one more time and run it back? We'll do it. I was off on a paraphrie. You should see mine.

I've got, we've got 800 companies. We could have done the whole thing just on our, between you and I, Jason, just in our company. I mean, it is like just to go overtime here, keep recording. I mean, the AI, the impact AI is having on our portfolio is super profound, not just in the great ideas and products and services being built, but how the companies are being built. And I'm as excited about the latter as I'm platform. Are you seeing as well? Yeah, I think, I mean, one of the questions that we were going to talk through was like,

you know, the CIOs are getting hounded for, for, for. tangible results. What they're looking for, right, is ROI, a return on investment. And from what we've seen, I'm sure you're seeing a similar trade is some of the, in our lifecycle, or in the cycle of AI right now,

it's mostly automation of repetitive tasks are showing great initial, almost immediate ROI, and mostly cost savings, right? You know, we've got some companies that are also doing revenue generation, but if you think about like Jasper AI, which we're in the seat of, helping to automate the writing process for marketers, or overjet helping to automate the claims adjudication in the dental space,

folks like Patlittics who are doing automation of patents by looking at all the research and 50 million public patents that are already published. But I think the more interesting thing than just the kind of workflow automation are these enabling technologies, companies like Applied Intuition, that are creating even new use cases or allowing companies to bring to market autonomous systems in the field of construction or logistics or automotive, some of the most, or in defense, some of the most legacy industries on the planet, that's where the thousand Xers, I think, are going to come from, are those enabling technologies.

It's just such a no-brainer to apply this technology into verticals to save people time and money. It reminds me, because I'm here in New York, I'm kind of reminiscing about my time as an IT executive and I would put in document management systems and computer systems for law firms like big ones, Sherman Sterling, Cahill Gordon, etc. And Kelly Dry Warren, when we put them in, you know, the expense was about $10,000 an attorney and then probably, you know, another $10,000 for their assistant. So you had this discussion. Is this worth doing? Getting a PC for $5,000, networking it for $2,000, putting a network card and getting servers, building a server room for $250,000 inside the office space. running the cabling, running Cisco routers,

all of this $2 million, $3 million install for 200 attorneys, it was like a big debate. Should we be doing this or not? And it was like a really stupid debate because it was like, well, obviously this is the future. If you're an attorney and you're not using document management, what are you doing? Oh, you're sending documents down to the typing pool

in the photocopy room in the library to produce documents. And so it's the same thing with AI. Like, people are just trying to understand why it's worth spending this million or two million dollars. It's like, can you, if it replaces the entire customer support team or 80% of their calls, can you not squint a little bit and look around the corner and just assume that it's going to do these other four jobs? Like, you can. I think you can. Okay.

This was a great episode. David, great job. You always get the best gas and build the best docket. Well done, David. It's been another great episode of the liquidity podcast for Matt Mulvey. Jamie Rowe, Jason Calacanus. This is your host, David Weisberg. Thanks for listening.