210. Crisis Coverage w/ Chris Douvos – LP Lessons from ’01 and ’08, The Denominator Effect, Capital Calls & Fundraising in a Down Market

210. Crisis Coverage w/ Chris Douvos - LP Lessons from '01 and '08, The Denominator Effect, Capital Calls & Fundraising in a Down Market
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Chris Douvos of Ahoy Capital joins Nick on a special Crisis Coverage installment to discuss the LP Lessons from ’01 and ’08, The Denominator Effect, Capital Calls & Fundraising in a Down Market. In this episode, we cover:

  • What is the denominator problem/effect?
  • Why does it matter?
  • How do LPs react when they face the denominator problem?
  • How quickly do LPs tend to rebalance their investment portfolio?
  • What’s the implication to VCs?
  • How should VCs react when their investors face the denominator problem?
  • LPs lose access to future funds if sell position as secondary?
  • When VCs make capital calls at times like these, what’s the ripple effect down the line for these LPs?
  • What were some of the typical LP reactions you’ve seen from the dot com bubble and the 2008 crisis, that you expect to see again?
  • Can you talk more about the thought process of LPs during a crisis like this? Are they rushing to liquidate? Are they putting that money somewhere else?
  • VC capital calls – guidance?
  • What’s the impact on VCs that are fundraising?
  • What type of VCs have had success raising in a down market? 
  • What are some best practices/principles for managing LP relationships in a time like this?(Chris was in PE, as Co-head of PE Investing at the Investment Fund for Foundations in 2008 crisis)
  • What was the biggest lesson you’ve learned from previous crises in 2001 and 2008?
  • VC’s metrics are dependent on the market, like PME. What’s the impact of the current situation on the VCs performance metrics?
  • Is there some downward pressure for VCs to lower the Net Asset Value (i.e. the valuation of portfolio companies) to reflect the current market situation?
  • Can you explain the disconnect between VCs that want to actively invest (because of lower valuations) and the LPs who are rushing to liquidate?
  • What does this mean for later-stage startups that were thinking of IPO-ing in the near future?

Guest Links:

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

0:23
Chris Douvos is back on the program. Joining us today from Palo Alto, Chris founded ahoy capital in 2018. Tabak nonconformists in early stage VC. He’s long been a pioneer investor in the micro VC movement, having spent decades as an allocator with the CIA, the investment fund for for foundations and Princeton University’s endowment. Chris, welcome back.

0:43
Oh, great to be back. Thanks for having me.

0:46
Could you imagine a better time to be back on the program?

0:51
You know, I gotta tell you, we were shrugging off like, you know, multi 100 point moves in the Dow is just like intraday hiccups. I mean, it’s, it’s volatile, as I’ll get out, we’ve got, you know, kind of a pandemic unfolding. You know, I always feel like, you know, my alter ego super LP with a red t shirt, I feel like this is, you know, time for me to come in and rip my, you know, my mild mannered suit off and I have my red t shirt on display.

1:19
It’s time, it’s time to go in that phone booth and get your superhero powers out. But so Yeah, bring us up to speed quickly. So oh, boy capital, you found it in 2018. I don’t remember exactly when you’re on the program last, but you’re certainly at VA at the time. So can you give us kind of a brief intro as to what you’re doing with a boy?

1:42
Sure. So. So the genesis of boy actually starts with a little bit of a sad story, because my business partner at BIA passed away unexpectedly. And, and as we thought about what was best for VAs business, and, and what I, you know, built within BIA, it made a lot of sense for me to lift out the funds that I’d been managing, and drop them into a toy. And so specifically, you know, we were doing, you know, kind of hybrid, you know, fund to funds slash direct vehicles, probably in the ratio of two thirds 1/3. And just kind of continuing what, you know, what we had been doing, and, and you’re right, and kind of what you said in the intro, I love backing robust nonconformists with the courage of their convictions. In fact, I was actually just just on a call, catch up call with Adam Draper’s, a swell dude, and he used the phrase, which I love, and I want to pilfer, but I want to give him full credit. He says he loves investing in, in, you know, people are at the precipice of human Audacity. And, and I love that I just, you know, doubling down, especially as we’re seeing a lot of dislocation in the portfolio right now, and we’re, we’re doubling down on a bunch of a bunch of our CO investments is people doing really exciting, you know, dynamic, you know, kind of life changing stuff. You know, the, obviously, the digital stuff like zoom and slack and things like that, you know, done really well in the first stages here, this pandemic, you know, but as the world kind of settles out, so the other stuff in our portfolio we’re super excited about. And, and actually, now’s a great time to pick up some ownership when, when other stomal.

3:27
Got it? Have you made many new fun commitments since officially starting a boy.

3:33
So we, we started ahoy in mid 2018, and have deployed. Almost actually, at this point, the totality of the fund, we did commitments to 11 underlying managers, the vast majority of whom had been kind of long term relationships like first round and, and true and others. And there are a few that were kind of new to the program as well, like ubiquity, which is simulador garage. He’s awesome. And, and so and then we’ve done a bunch of we probably done at this point, I think, coming up on 20 co investments, five or six of which have been in the last last two weeks, which is actually super exciting. In fact, the thing that like makes me most happy is this one company that I’ve loved from afar for a long time and gotten to know the founder and whatnot. They’re in a great position, but they’re like, you know, we have you know, our cash out date is September, October, but we want to have like, an extra, you know, six months of runway, which could get us to cash flow, breakeven. And literally as we were on this, you know, in our chat, right now, an email came in, you know, confirming our allocation and this little, you know, extension route. So it’s stuff like that that’s happening, where you know, as long as the world doesn’t You know, as long as the world doesn’t, you know, kind of revert to a barbaric state, you know, we should we should be in really good, good place. A friend of mine said, he called me up as an aside two weeks ago or three weeks ago now this is, you know, kind of early March. And he started buying equities, right on the way down, he was, you know, he’s got this rule where he legs into the market at 20% 25 and 30%. Down, then he goes at 30% down, I’m all in because, you know, that should make money. And if it gets much worse than that, then the stocks, you know, the money I spent on stocks will be better spent on like ammunition and a wheat, a wheat mill for my flour mill for my basement. Okay, okay. prepper

5:46
crazy, crazy. Well, look at that, you know, you’re you’re actively cutting checks, everyone’s burying their head in the sand, and you guys are, are wiring money. So I applaud you for that.

5:58
I mean, it’s Warren Buffett, when I wouldn’t be, you know, be greedy when others are fearful and vice versa. And if you can be a provider of liquidity when liquidity is scarce, you know, now there’s a friend of mine, who as you say, there’s a fine line between being right and being early. All right. So who knows? We may be singing a different tune in six months? Well,

6:24
hopefully not. But, you know, I want to talk to you about sort of the allocator side of things. Sure. So, you know, first and foremost, we do see a number of allocators, you know, they have asset allocation targets, particularly for private equity and VC. And those targets are, are significantly thrown out of whack with a bear market of this sort, public bear market. Can you talk to us a bit about what the denominator effect is that you’ve witnessed how that works? Sure, sure. And

6:56
this is, you know, really classic challenge, I think, for for all allocators. And it’s been exacerbated by something that I call the numerator effect. But first I’ll describe the denominator effect. And basically, you know, if you have if you’re a billion dollar endowment, say, and in you have a 10% target to private equity, which includes venture so you know, kind of private as private assets. You know, that 10% targets suggest that you want to have 100 million in net asset value, right now, to get to that net asset value, you actually have to overcome it, because, you know, everybody’s listening knows, you’ve got, you know, you make commitments, and then the funds, draw those commitments down, invest in companies that grows in value over time, but you’ve got to be making those commitments. So, typically, not only will PTO our hypothetical billion dollar endowment have $100 million in net asset value at their 10% target. But they’ll also have anywhere between another 50 and 150 million and undrawn commitments. Now, what happens is, if the market goes down, you know, 30%, you know, or if your download value, actually, and I did some quick math, you know, for this for weeks following the high watermark of the Dow, I used the Vanguard Wellington fund as a proxy, because that’s a 6535 Balanced fund. And that one was down 30%. So you could say like, an endowment that’s like 65%, stock, or equity exposure and 35%, fixed income exposure will be down that much. And we, you know, we can get into debates about sale pricing, the privates and all that stuff. That’s a whole nother story. But just imagine that you had a billion dollars, now you have 700 million. That means, you know, you you’re not going to adjust typically, as an allocator, you’re not going to adjust the value of your, of your private assets that dynamically, you’re going to wait for quarter leads to come in. And by the way, those prices are going to be stale anyhow. Because, you know, people typically don’t remark their portfolios that aggressively. So that 100 million dollars is going to be stuck there. And it used to be 10% of your endowment. Now, it’s 14% of your endowment. And so now you’re like, holy smokes. Oh, and by the way, those capital calls keep coming in. So that’s the denominator effect is like your 10% just turned into 14%. Or whatever. One seven is just by

9:20
nature of the public and fixed holdings going down.

9:25
Exactly. That’s exactly right. And this is a particular problem for private assets because of the sale price problem, right? Like, if you had some way to mark these dynamically, on a day to day basis to the public markets, you might mark these down. But that’s actually part of you know, not only is private equity return enhancing, but it’s also diversifying. So it’s not actually clear from a theoretical standpoint that you want to even write

9:50
PMQs look, right, right.

9:51
Yeah, exactly. At least for now, right. So yeah, so now you got your you know, your 10% that’s become 14% of your downline Oh, and by the way, like all your private equity guys are including venture like, hey, we see lots of value. Let’s, let’s, you know, let’s, let’s draw some capital. And so now all of a sudden you’re like scarce on liquidity, right? Because the markets down, and now you got to sell something so you got to lock in a loss, that’s a really uncomfortable situation to be in. And that’s, you know, the phrase I use is, you know, the public market becomes the ATM for the private capital calls. And you know, that balance keeps getting lower and lower. And you’re like, you know, it’s like, it’s like, go to the ATM Sunday morning after a, you know, wild night out on Saturday. You’re just like, holy smokes, what happened to all my cash? So that’s the denominator effect. Is that Yeah. Is it typical

10:49
for the undrawn commitments? So I’ve made a commitment to a fund, let’s say 50% of that has been called the other 50%. Is it typical for that to be invested in Publix?

11:03
Yeah, that’s an interesting question. So the money that’s undrawn, it’s like, technically a liability, right? Like it’s sitting there people, people track it, but they don’t count it as part of their value, because there’s no value. And so the the question you’re asking is a really interesting one. And this is like, you know, a little bit of inside baseball, maybe even too theoretical, but the very short answer to the question is, like, the money’s got to come from somewhere. Right. Right. And so, so do you, you know, the reality is, most people take it out of their cash, you know, and fixed income portfolios. But then there’s an interesting question, because if you’re thinking about as a liability, this is where you get like kind of theoretical about it. If you think about as a liability, then you’re actually creating a drag, because it’s supposed to be an equity, like exposure. So if you’re some was some people do as a shift, you know, they incorporate the they increase their cash, and fixed income positions, to be able to meet capital calls, you know, over time as they make it, because they don’t want to be caught in the volatility of the public markets.

12:11
So the reality is dragged down on returns for that allocated dollars, even though it’s not marked that way.

12:18
Exactly. It’s like actually a non calculated cost of private equity if you do it that way. So, you know, I’ve thought in the past, like, Could you do something where, you know, to give people the full equity exposure? Could I do something instead of like raising a fund and drawing down over time? Could I just say, Okay, your commitment is $10 million, give me $10 million, and I’m going to equity ties a portion of that, like, maybe, maybe I keep, you know, 98% of it, and cash and buy, you know, kind of s&p calls or something to like, create some equity exposure. So you’re getting an equity return on these dollars, actually, I’m getting the equity return, and then passing that along to you. So there’s, you know, there’s less of that chance, but the reality is, most people don’t think about it that thoroughly or robustly. So you’re kind of just like, Alright, whatever. You know, but like the denominator affects a problem, what we’ve had in the last, you know, several years, there’s also a numerator problem, right, which is, like, you know, these venture funds have been coming back so frequently and raising larger funds. And that, you know, we people have been on this kind of treadmill, of, you know, of commitments. And by the way, and happily, the, you know, the the valuations have been ballooning, although it’s not entirely clear, you know, whether that was, you know, an accurate thing, or just a function of the money in the market. So, now, you’re sitting here, and actually, what your 10% target, you know, in our hypothetical endowment, your 10%, nav target, you know, every quarter you get, like, valuation increases, and that thing’s creeping up to 1012. And by the way, you’re committing, and people are drawing faster, and you might find yourself with a 10% target, sitting at 1415 16%. So you’re already over, you know, over, you know, target considerably, and then the market went down, applying the denominator effect. And now all of a sudden, you’re like, holy smokes, like, my private equity, you know, is is, you know, way out of whack. So, I’ll tell you, just anecdotally, you know, I’ve been talking to some of my investors who tend to be, you know, large, sorry, insurance, midsize kind of 500 million to 3 billion in assets, endowments and foundations, and a lot of them are like, you know, we just have thrown our you know, kind of commitment plan out the window for the moment because we’re already over, you know, over allocated and, and, you know, the markets down, we’re kind of, you know, we’re kind of in a tough spot we can’t really can’t really manage Uh, you know, this this private exposure, particularly, by the way, when they’re like potentially good bargains in the public markets, right? Right. And that’s one of those liquidity right now. Exactly right, the, the return to, you know, being a provider of liquidity just went way up.

15:20
So, on the numerator, numerator side, just so I understand this. So in the same portfolio, let’s say, you know, I’ve allocated 100 million to venture, but because of ballooning asset values in the venture market, right or wrong, if, if you’ve invested that 100 million, but the value of that portfolio is now 200 million, then you’re you’re extra overweighted is that, your,

15:49
that’s, that’s a fair way to describe it, and even peeling that onion a little bit further, right, like everybody is constantly doing, you know, kind of forecasts, multi year forecasts. And, and they, they take into account a certain pace of funds returning to market and capital calls and, and, you know, valuation increases. In fact, Seth Alexander and Dean Takahashi, when they’re in the Yale investment officer have a great paper about this about how to forecast, you know, your commitment pace and your value. And so basically, you’re like, planting a field, right, and hoping that when you know, harvest time comes, you know, you get the right amount of corn and the right amount of, you know, apples and the right amount of whatever, right. Right. But the problem is like, so you’ve rewind to like, 2012 2013, everybody’s like, Oh, you know, we’re gonna be committing to folks on a, you know, who are going to be coming back on a three year cycle. Right. Meanwhile, the venture world has kind of turned into like a two year fundraising cycle, which there’s a whole nother slew of problems with that. Because, you know, by the time to tell tales, like, you know, as an allocator, I’m sitting here and I’m like, you know, I need to, you know, you make a one fund commitment, it’s really a to fund commitment, because you won’t know enough, right? And as long as the strategy hasn’t changed, you’re going to go back into that fund.

17:20
And you’re by the time versity.

17:22
Well, you lose time diversity. Exactly. Now, you’re almost like making a three fund commitment before you have real information about how good these people are. Right. Right. And so, So anyhow, this the wheels been spinning faster, it’s, and on top of that we’ve had the happy, you know, kind of what you alluded to, is we’ve had the happy coincidence of these valuations ballooning. The problem is, if those valuations aren’t real, you know, then as an endowment, you’re spending, you know, real dollars based on paper profits. You know, and I know, by the way, one, one group that is, you know, when when we work, you know, blew up there, you know, they had over $100 million of exposure to we work, you know, that went to zero. Right? So, so that’s kind of crazy, right. But, you know, but for a long time, they were feeling pretty good about that, you know, 100 million dollars, right. And so, you know, but even that was like, you know, that would have thrown their, you know, their, their allocation out of whack. You know, while it was while it was active? Well,

18:34
maybe it helps with the numerator problem for them? Well,

18:38
it does. I mean, the two ways, sadly, the two ways you deal with a numerator problem are the happy way, which is distributions, right, the blue light and the cooler or the difficult way, which is stuff gets gets marked down. And that sucks.

18:51
Yeah, it almost feels like you can’t compare the value of private holdings in March of 2020, to the to public. Within a portfolio, it seems like there should be different time marks or something for different types of asset classes.

19:10
Well, I look, I think that’s true. I think, you know, the, the challenge is, you know, everybody who is in endowment management or, you know, even broadening you know, you know, institutional money management, you know, read David Swensons book, right. And even before that, it really started with the Harvard Business School case in 95. When basically the lessons were like Yale’s endowment, you know, outstanding endowment performance was a function of its, you know, illiquidity and idiosyncrasy. But particularly, you know, they can buy longer dated further out of the money options, you know, than anybody else. And, and a big part of that was going to privates, because they just have such a long horizon. And it’s interesting because I Teach the case every now and again at a couple of business schools. And I asked kids, what’s the lesson of the case they say, oh, you know, be illiquid have an equity bias. You know, all the all the lessons from the cases, actually, the real lesson here is don’t try this at home. Because Because this stuff’s really hard to do, like, executing it is just so hard to do. And then you get people like that just the portfolio construction, forget about the access and, you know, building your portfolio, but like, they’re like mechanics of the portfolio construction, all the stuff we’ve just been talking about for the past, you know, 10 minutes, is really, really hard. And you need to be really sophisticated at it. And a lot of people get skittish. And and, you know, I don’t know, there are a lot of really hard conversations, you know, kind of getting teed up right now.

20:49
Well, look at how many people have the David Swensen playbook and can’t apply it right. Takes remarkable knowledge and discipline. So So Chris, how have you seen LPS rebalance? investment portfolios, you know, what, what’s the reaction that you’ve seen in previous crises?

21:10
Well, so you know, I was around, I joined Princeton in mid Oh, one. And that was after the capitulation. And we saw you know, and it was a, it was a grinding downturn. I mean, that was what was crazy about a 102. Even in early Oh, three, it was like every single quarter, your portfolio’s even your best managers are down 20% quarter over quarter over quarter, you’re just like, oh, my gosh, it’s like water torture, right. And so. So, I mean, it was it was really tough and grinding. And so in a sense, that fix itself, because so many of the values went to, like we had like brand name funds, which today people would like, stab themselves to get into is sitting at like, point four x’s, right? So so the numerator kind of fix itself. But what happened is a lot of people sold, right. This was like the, the, you know, one of the real beginnings of the, you know, the first great flourishing of the secondary market. And there were a lot of great secondaries to be had, especially like less sophisticated investors. Interesting. It was it was, you know, just just left and right. In Oh, eight, it was interesting, because the downturn was very sharp, and then the recovery was very sharp, and people didn’t really capitulate. And so from a private equity standpoint, you know, it really, it really, you know, the global financial crisis was not as hard if it I mean, maybe more so in the buyout side, because he had some liquidity crunches. But on the venture side, it was it was Nbd, as the kids say, no big deal. But we did see, and actually, when I was at TIFF, we bought a few secondary, so people do some portfolio management secondaries. And we bought the portfolio of a part of the portfolio of a very prominent university. But I will tell you, that was not a you know, that was a new sheriff in town, and they were, you know, cleaning up the book, and they just wanted that stuff off. But famously, during that period, and this is reported in Bloomberg, so it’s all public. You know, Stanford tried very hard to sell their portfolio, what happens is that, you know, you have huge bid, ask spreads. And so it takes a while. So you have to see, you know, the initial stages, nothing’s really going to happen, then, like, if there’s a real downturn, like six, nine months from now, people start saying we have a problem over in the private side of our book. And then, and then, you know, kind of nine to 15 months out, people start sale processes, and there’s a lot of secondary capital out there, that’s actually underwritten to pretty, pretty low hurdle rates. High IRR is that low, multiple rates. And so you know, that’s how you can start seeing some trends. You know, transactions take place, but that’s like, 15 months out.

24:09
Interesting. When these secondary transactions happen, an institution, you know, sells off their position and funds. Often, I guess, it’s the changing of the guard, so maybe new portfolio manager and so totally different mindset. But is that institution also going to lose access to future funds by doing that?

24:30
Oh, yeah, it’s GPS just gets so pissed about it. Because, you know, if you’re like a premium GP, you’re, you know, you’re carefully curating, you know, to some degree or LP base. And now you’ve got, you know, you know, Bob’s College of knowledge, you know, just sold their steak to some secondary guy. All right, well, that sucks. You’re easy to screw Bob. I’m in. So I think once you sell your, your, you’re in the bad graces forever, there’s a real stigma around it. I think that’s a little bit less true today than than it was, but, but it’s still, I think a real thing.

25:13
I mean, it feels like that could be the big loss. Because if you need the liquidity for whatever reason, you need the liquidity, right. But if you if you’ve correctly identified, and that’s a huge assumption, but if you’ve correctly identified the emerging funds of the future, or you know, the new venture franchises of the future, you’ve just lost your option to invest in future funds.

25:41
You have, you absolutely have, I think, especially in, you know, kind of new leaders of the future. You know, I think people especially, either, the more likely they’re small managers, and either they are going to stay small, in which case, there’s no room for you to get back in, or they’re going to grow. And they’ll be pissed at all the people who didn’t treat them right. You know, as they were going on the way up. Now, I’ll flip that around a little bit. I do think that’s true. As my law school professor, friend always says, you know, don’t fight the hypo. But I’ll fight the hypothetical on this and a little bit like, you know, at some level, you know, we really overstate the persistence of returns in venture. I think there is persistence. I mean, it’s definitely, you know, I built a clear on that, and I’ve seen it in practice. But the persistence isn’t as strong as people kind of think it is, especially now in a world where, you know, there are 1000, for instance, you know, micro VCs, at some level, you know, that, if you tell me, the franchise of the future, I’m going to tell you like to name a franchise of the future, I’ll say, which one got the luckiest? Right, and, you know, I’m shocked by some of the funds that are doing well, and some that are, you know, that or not. And so, you know, you sell these things, and, you know, maybe they do well, maybe they don’t, but, you know, if you needed the money, you needed the money. Yeah,

27:15
so let’s talk more about sort of the fund manager side, and, you know, VCs that are trying to operate through this. First off, you know, what guidance would you provide to fund managers with regards to capital calls?

27:30
Yeah, so, again, back to this point about, you know, the money’s coming from somewhere at, you know, their LPs, and most often, it’s, it’s coming out of some, you know, now depreciated, you know, asset. And so capital calls are, are not, you know, not great, not terrifically well received, during, during downturns. And so I would tell people, you know, this is a tiny, the advice that we hear a lot of VCs giving their portfolio companies is tighten your belt, and make your cash last, you know, 18 months, two years, whatever. And I think that’s also true for funds, right, like, unless you’re seeing a screaming fat pitch, now is not the time we’ll be doing investments. And I think we’re starting to see that kind of filtered through the market a little bit, I think, look, the bar should always be high. You should also think about your LPs, the people who call on capital from our seeing, if they like to stock, you know, in in January, or early February or ahead of manager who like to stop, or typically, you know, that things now 40% off or 50% off. Right? That’s and by the way, you can you know, you can get some liquidity why, why are you asking people during the time when recruiting as the most scarce to like, give you capital so that you can then lock it up for another eight years. Right. Right, or whatever the liquidity horizons are today, right, like, you know, so So I think it’s, I think people really, you know, when they call capital, really need to be able to articulate how they’re seeing, you know, kind of, once a decade kind of deals.

29:14
It’s amazing how the Tesla bears finally got their day. Right. What would I mean, what about the counterpoint for the VCs? You know, the VCs that say, look, we got to stay in business, these are commitments, we can get value right now. You know,

29:33
what do you say? Yeah, that’s a great counterpoint. And, by the way, part of that counterpoint, and the one that I’m hearing, you know, on the daily is like, Oh, look at all these great companies that were built in, you know, oh, 809, right. Like, yeah, I you know, I hear you know, this, we this is a I think the agricultural world is fecundity. We live in a fecund, you know, kind of ecosystem here that continues to, you know, spit out You know, amazing products throughout all cycles. What I’d say though, is the thing that I heard the most in oh one was a time diversity was important, right. And this is on the heels of people going to, you know, even in 99, a lot of people raised like two funds in a one year event, right? They had like a January fund in December fund. And the wheel was spinning so fast, that, that you’d sit down and talk to people and kind of, oh, 203 they’re like time diversity is really important. And there’s nothing wrong with thinking about, you know, everybody’s in this a two year raise a new fund every two years mindset. There’s nothing wrong with raising a fund every four years, every five years. That’s how it used to be. Right? And so if somebody says to me, you know, we see value, I’m like, yeah, there’s value, there’s value, right? 20% off is still 80% off. Yeah, right. Right. I want like, you know, you got guys on the buyout side, you can buy 50 cent dollars, yep. They don’t tell me like, you know, and one of the deals I love, and I violated my own advice on this sort of deal I love that we did this week we just closed on yesterday, is a company in the year they started fundraising looking at, you know, A, B round at a 40 pri, and they cut it to 32 pri. And I’m like, hey, you know, that’s great, that’s great value, and especially with their customer base, they got a lot of government contracts and stuff, like great revenue profile, etc. But I, you know, I’m so excited about the company that I did it enthusiastically. But on the flip side, you know, these have to, you know, there are people elsewhere in your LPS portfolios, who are like, we are seeing not just like screaming deals, potentially, but like, you know, once, you know, once in, you know, once a year, once a year, once every five year kind of deals, so, I don’t know, we’ll see, we’ll see. But like, I don’t have much sympathy for GPS, who, by the way, you know, every startup I talk to, is everybody, you know, like I was just on the phone with a company that we’re not investors in. And they’re doing an across the board 20% pay cut, and in the CEO is taking zero salary until, until they raise the next round of financing. I don’t know. Right, exactly. I don’t know, a single GP who’s is cutting their own, you know, take home pay or management fee. And I’m not saying you know, I’m not like, you know, I’m not about to, you know, kind of join the Bernie Bros. But, you know, but GPUs have a pretty good if they have to, like wait another six or nine months to raise a fund because they’ve deployed flour,

32:44
I shed no tears. Well, you know, now, Chris.

32:49
I know. Okay,

32:50
so yeah. Let’s talk a bit about more about the fundraising for VCs. Who have you seen had success raising in down markets? Maybe not specific names, but you know, more? Who, who can win? And what are what’s the makeup of the the successful fund raisers in the down markets?

33:11
You know, so it’s interesting. It’s really relevant, because the call I was on yesterday, with a GP, whose fund was like, 3x oversubscribed, and these guys are, what I’d call like a, you know, there’s a tier which is probably like 15 funds, right? And then there’s like the, the a minus tier, which is probably like the next 50. And these guys are probably in the a minus tier. And they went from 3x oversubscribed, like, you know, seven tenths X oversubscribed or seven times X subscribed. Right? And for first close that’s imminent, and a big invert, like their big anchor tenant, who’s a very savvy investor, and very happy with you guys is like what? We’re out right now. Because we’re re underwriting everything in the portfolio. We’re like taking the endowment into war. And that’s a kind of scary talk. And it makes me think, you know, if we see the downturn continue, like, who knows, we’ve actually had a bull market since a bear market since the end of February, right, like, that’s what’s so crazy. And here we are in late March. You know, the markets at 20% off the bottom. That’s crazy. So, but it makes me think of, oh, 102 and what I reason I invoke those is like fundraising o One and o two was like, I think, you know, we could look it up I want to say it was like $0 I mean it wasn’t but like it was de minimis. And so who got razor in his hands. I remember there was like a big freeze. And then in like, early mid oh three Sequoia came out and Raise whatever fund that was, and that was 395 million, which seemed like seems like a lot of money and not not today, but like, like back then, you know, I think they had their lat their prior funded in a billion. And so they raised at 395. And basically, I was talking to like a sand hill, you know, bigwig type. And the guy said to me said, you know, sequoias throw down the gauntlet, like, who is going to raise more money than Sequoia Capital. And so that kind of kept the, you know, the size, right. And I remember the Greylock raised 400. And it yet to have like balls to raise, you know, more than 400. And that kind of rationalize the industry almost. But you know, but I look back and you know, a one or two were so quiet. And those three, we had like a decent normal year, like a 10 $20 billion a year. And then oh, four, you know, five, because good, good stuff. So who gets raise, it was like, you know, total flight to quality, everybody’s re underwriting their portfolios, which, by the way, then fast forward to, oh, 809 What was interesting is that some of the people, the market got really barbells that that time, and some people double down on, you know, big brand names, right. And other people, though, were looking for the shiny new Penny. So that was when we saw the first like, real explosion in micro VC. So at that time, I had already been, you know, I was like a fund ahead of that, or two ahead of that, you know, kind of timing, but like, we saw, you know, guys, like, you know, first round and floodgate and true really kind of flourish and come into their own. And then there are a lot of funds that, you know, kind of that established, baseline was also part of that first wave. They were raising, like during the financial crisis, IA out of New York, but then like, Oh, 910 11, we saw a lot of funds just pop up. And it was just a lot of people looking for the shiny new Penny. And because the downturn wasn’t so severe, they were able to, they had cash to deploy. So look, I, my guess, is if we end the year, like Dow 25,000, you know, anywhere between dow 21 and 25,000. You know, if you’ve got a competent track record, you’ll, you’ll, you know, be able to, you’ll be in the in the mix at your LPs. You know, it’ll be kind of business as usual. If we’re below 20, to 21,000, there’s gonna be a lot of hard conversations, right, and everybody’s gonna be focused on high grade in their portfolio. So what are they going to focus on, they’re going to focus on people who have, you know, some demonstrated sustainable competitive advantage. So you, as a GP have to figure out how to articulate that, we’re gonna focus on people who are really good at communicating throughout. So like, don’t forget your lpz, you can’t, you can’t be a pest during this time, like just just over communicate, they’re going to focus on people who were really honest with themselves, and did good portfolio triage. And they’re going to focus on people who have at least in espoused value, if not a value in action of generating liquidity, right? Like, they’re people who are, you know, these like, Go Go momentum, Let’s ride this bull until it dies, are we, you know, escaped the, you know, the Bull Ring, you know, you know, those kinds of people, like, I gotta tell you, I look askance at any of these, you know, we work investors and just kind of like, you know, at some point, especially the people are in early, like, at some point, you knew that this valuation was way ahead of itself. And if you didn’t sell at least some of your stake into that you’re not serious about, about liquidity. You’re just you’re just trying to, like, you know, ride your moon rocket.

38:54
Interesting. How important are the metrics for like, young funds? Like 1718? Vintage, you know, when do the or the, to the metrics always matter? Or is, is it a certain level of maturity on the vintage of the fund? Where

39:10
you really see Yeah, you know, it’s an interesting question, because, you know, there’s a certain amount of time during which the metric like first I think Cambridge doesn’t start reporting benchmarks until, you know, the third year of you know, a vintage and there’s a good reason for that because there’s so much management fee drag. And, and usually, you know, you’ve done one round of finance, you know, new round a financing company see that one round of markups or failures. So it doesn’t really matter that much. But the thing I’ve also found is, there’s actually like less value for me in numbers of late I have headline numbers like the Cambridge numbers. I call this you know, syndrome syndrome, right? Like, if you remember the movie, The Incredibles, like the the first one the bad guy was syndrome. And he says, you know, he wants to give everybody superpowers because he’s so resentful of the heroes. He says, you know, when everybody’s super, nobody will be. Right. And, you know, I literally every fun that crosses my transom has like a 30% IRR. And I’m just like, How does everybody have 30% IRR is it’s all bullshit, right? That’s so interesting. You know, I’m like, kind of over it, right? Like, what I really value are people who are investing in, you know, really differentiated companies, right? Like, they’re, it’s interesting, because when I say differentiate, that’s like such a throwaway term. What I mean is companies that are doing something novel, and right, and what I mean by that is Sunil swan. Yeah, exactly. Right. Yeah, that’s exactly right. Right. Like, somebody tweeted a while back, they said, you know, it used to be the venture was about finding people who had done something new and interesting. And then marketing the hell out of it. And it seems like too often now we’re skipping step one, and going straight to step two. Right? Yeah. And that’s crazy. It’s crazy stuff. And so short story long. I’m like, like, look, you know, it as I look at new funds, like, and I’ve known Sunil, I almost invested in this fund. And I’m sad. I didn’t, you know, as I was talking to him, you know, for fun, too. I’m like, Look, you’re doing really interesting stuff. You know, the companies that you’re, you know, you’re you’re working with, and by the way you talk to us entrepreneurs, people absolutely love his engagement. He spends a day a week coding, right, like, he’s there, you know, he’s finding novel things and helping them, you know, create value and help set the DNA, you know, in the earliest stages of the companies like, that’s the kind of stuff I get super excited about. You get some brogrammer out of Twitter who’s like, you know, I’m like one of the cool, cool San Francisco kids. That’s completely uninteresting, because you’re just that’s just a recipe for, you know, getting into bed up momentum details. Yep.

42:03
Well, good. Well, I think we covered most of what I wanted. Any any final thoughts for fund managers or thoughts on allocators at this at this time?

42:11
Yeah, you know, what I just hit a fund managers is, you know, back to just can’t bear enough repeating you know, communication is critical. You know, as the markets are volatile, even if you’re not hearing back from your LPs, as you’re sending out Mrs. Just keeping them up to date on on the, you know, the, the stuff that’s, you know, working well in your portfolio, which people need that dose of optimism, but also helping them understand, you know, realistically what, what’s not working right, like, you know, somebody tweeted the other day, you know, I just went through my pile of quarterly reports. And amazing all my venture funds are doing really well. Bs, there’s like a huge toll on people’s portfolios and huge human toll within their portfolios. And we need to be honest and forthright about that, without losing sight of the fact that we’re doing some of the most exciting and inspiring, you know, crafting of the future world in our ecosystem that you know, that deserves its own kind of praise and merit.

43:15
Well, whether it’s the allocators, the fund managers or the founders themselves, we’re we’re all going to be managing some tricky stuff, at least for the foreseeable future. But thanks to folks like you, hopefully, it’ll be a little easier. So Chris, thanks. Thanks a lot for the for joining us on short notice and helping us all you know through this tricky time.

43:33
My pleasure and best of luck to you and all your companies and all all your listeners courage out there.

43:39
Appreciate that, Chris. That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet dotnet and until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us