The $97 Billion VC Panel | E1987

David Weisburd intros Dana Johns, Tom Loverro, and Jason Calacanis (0s)

• David Weisburd introduces the panelists: Tom Loverro from IVP, Dana Johns, head of private equity at the State of New Jersey Division of Investment, and Jason Calacanis from Launch Fund.
• Weisburd emphasizes the importance of succession planning for venture capital funds, especially for long-term funds.
• The episode will discuss topics such as secondary pricing, VC leverage, the NVCA Monitor, and a new hot sector in the startup ecosystem.

Secondary pricing signaling a potential VC recovery (2m37s)

• Secondary market activity is signaling a potential VC recovery. The median price for company secondaries has increased from a 46% discount to a 31% discount in just 7 months, indicating a rebound in valuations. This is further supported by the recent activity of large secondary funds, such as Industry Ventures, Stepstone, and Blackstone.
• The secondary market offers a valuable opportunity for investors to allocate capital. With limited time and bandwidth, investors are increasingly looking to the secondary market to find value in known entities with established management teams and functioning boards. This shift in focus is a positive sign for the VC market as it indicates a return to a more rational valuation environment.
• The secondary market is becoming more attractive for venture capital investors. The increasing liquidity needs of limited partners (LPs) are creating more opportunities for investors to acquire high-quality venture portfolios. This is particularly appealing for investors seeking to diversify their portfolios, fill vintage year gaps, and shorten the duration of their investments.

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Timeframes, returns for secondary funds, and founders' secondary sales (11m2s)

• Secondary funds typically target a return window of 5 to 7 years, aiming for a 1.5x to 2.5x return on investment. This is similar to growth equity funds, and secondary funds rarely return less than 1x.
• The secondary market is driven by two main factors: price and information. Buyers with perfect information often bid higher, and there are two main types of buyers: existing investors on the cap table and secondary funds like Industry Ventures, Blackstone, and Lexington.
• The secondary market is becoming increasingly liquid, driven by factors like the rise of platforms like Forge, which allow retail investors to participate in secondary sales. This trend is also fueled by the desire of LPs to diversify their portfolios and the need for companies to manage their cap tables and information flow.

Increasing liquidity in private markets (15m32s)

• Increasing liquidity in private markets is a hot topic, with the potential to benefit retail investors, emerging managers, and companies themselves. The speaker highlights the growing interest from retail investors in accessing high-growth, high-risk venture assets, similar to the way crypto attracted retail participation. He believes that increased liquidity could benefit emerging managers and create more opportunities for them.
• Companies are exploring different ways to manage employee equity and provide liquidity. The speaker cites SpaceX's twice-yearly tender process as an example of a company taking control of employee stock sales. He also notes that companies like Nvidia and Google have a significant number of millionaire employees, which can create challenges in terms of employee motivation and retention.
• Founder secondaries are becoming more common and accepted, but there are still considerations around fairness and timing. The speaker acknowledges that founder secondaries can be beneficial for founders who need liquidity, but he emphasizes the importance of considering the company's stability, the timing of a potential liquidity event, and the fairness to other founders and employees. He believes that the current approach to founder secondaries is more rational than in the past, but there's still a need for careful consideration.
• Increased liquidity can help create a more diverse and sustainable ecosystem. The speaker argues that increased liquidity can lead to a more diverse group of companies, as founders who have achieved financial success are more likely to start new ventures. He also believes that it can help create more sustainable companies that are less likely to be acquired by large tech giants, which would be healthier for the overall ecosystem.

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• The speaker addresses a common request from founders: seeking investment and advice.
• The speaker highlights the Google for Startups Cloud Program, which offers technical training, business guidance, and significant Google Cloud credits (up to $350,000 for AI startups).
• The program is designed to support startups in building innovative products, even without substantial capital, and includes benefits like Google Workspace and Google Domains. The speaker encourages founders to apply quickly to access these resources and accelerate their startup journey.

VC leverage against startups is near an all time high (23m44s)

• VC leverage against startups is at an all-time high. This is indicated by the Investor Startup Index, which shows that VCs have more leverage over startups than they did in Q4 2021, when startups had more leverage.
• The market is volatile, and it's difficult to time the market. Dana, a long-term investor, emphasizes the importance of focusing on long-term trends and developing relationships with managers rather than trying to predict short-term market fluctuations.
• Venture capital is a tactical and strategic discipline. Dana compares it to poker, where you have partial information and must make decisions based on that information. It's important to focus on strategies, execution, and learning from data to adapt and evolve.

Venture capital strategies, succession planning, and valuation in the Goldilocks zone (29m34s)

• IVP's consistent strategy: IVP has maintained a consistent strategy for 23 years, focusing on investing in companies at the point of product-market fit, aiming for companies with the potential to go public. While the strategy remains the same, tactics have evolved, including opening a European office, increasing secondary investments, and adapting to changing revenue models.
• Succession planning: IVP emphasizes the importance of succession planning, particularly for long-term funds. They believe in transparency with investors regarding succession plans and have a strong track record in this area. In contrast, some fund managers lack clear succession plans, which IVP considers a significant concern.
• Navigating competition: The competitive landscape for investing in companies at product-market fit has intensified, with more funds entering the space. IVP addresses this by specializing in specific sectors and stages, focusing on high-touch investments with board seats, and leveraging their reputation and experience. This approach helps them stand out in a crowded market and maintain a competitive edge.

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• Brex is a financial platform designed specifically for startups, offering corporate cards and a comprehensive banking solution.
• Brex aims to help startups avoid common pitfalls like running out of cash by providing a banking experience that maximizes cash flow and extends runway.
• Brex's banking solution combines features like checking, treasury, and FDIC insurance, offering 20 times the standard FDIC protection, industry-leading yields on cash, and fast international money transfers.

Cybersecurity investments, IPO window, and M&A market dynamics (38m3s)

• Cybersecurity is a rapidly growing market: The panelists discuss the increasing importance of cybersecurity in the tech industry, citing the recent $23 billion acquisition offer for Wiz by Google and the CrowdStrike outage that affected numerous companies. They attribute this growth to factors like the shift to cloud computing, the complexity of software development, and the increasing surface area for attacks.
• The IPO window remains challenging: While the IPO market is not as open as it was in 2020, the panelists believe that high-quality companies with strong revenue, profitability, and growth prospects will still be able to go public. They suggest that companies should prioritize staying private until the market recovers and only consider an IPO as a last resort.
• M&A activity is impacted by regulatory scrutiny: The panelists express concern about the potential impact of increased regulatory scrutiny on M&A activity, particularly in the tech sector. They argue that the current regulatory environment is stifling innovation and hindering the growth of the American economy. They believe that regulators should focus on market share and consumer impact rather than targeting specific companies.

Lightning round on latest investments (51m28s)

• Tom, from IVP, discusses his recent investments, highlighting Cortex, a platform that helps developers find and manage software services, and Cribble, a data and log management platform. He also mentions a new security company investment that will be announced soon. Tom emphasizes the importance of having multiple partners involved in each investment at IVP.
• Tom shares his excitement about IVP's Founder University program, which provides early-stage funding and mentorship to aspiring entrepreneurs. He highlights the success of Chef's Reactions, a company founded by a participant in the program, which has seen significant growth in advertising revenue and merchandise sales.
• Tom also discusses IVP's investment in Layerpath, a company that simplifies the creation of product demos, and Master Tech, an AI-powered platform designed to assist mechanics. He believes that AI is revolutionizing entrepreneurship, enabling businesses to achieve significant revenue growth with fewer employees.
• Dana, from a large pension fund, explains how she invests in venture capital despite having a minimum check size of $100 million. She utilizes a combination of strategies, including investing in emerging managers, SMAs for seed and Series A investments, and secondary investments.
• Dana emphasizes the importance of building relationships with managers and developing conviction in their potential for success. She also highlights the challenges of finding managers who align with her investment strategy, particularly those focused on early-stage companies.
• The conversation concludes with a discussion about the importance of niche podcasts like "The $97 Billion VC Panel" in providing valuable insights and fostering dialogue within the venture capital community. Dana acknowledges the importance of educating a broader audience about the role and impact of venture capital.