361. Valuation Inflation, the IPO Pause and What that Means for M&A, If Twitter is in Better Hands, and How to Construct a Successful Board (Eric Liaw)

Eric Liaw of IVP joins Nick to discuss Valuation Inflation, the IPO Pause and What that Means for M&A, If Twitter is in Better Hands, and How to Construct a Successful Board. In this episode we cover:

Parsing Out the IPO Process
Thoughts on Twitter’s Acquisition
Market Predictions
And more!

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Transcribed with AI:

0:00
Eric Liaw joins us today from San Francisco. He is the General Partner at IVP, where he focuses on growth stage investments in enterprise software, internet and mobile. Eric has led IVP investments in Datadog, UI path, GitHub, Klarna, Robin Hood, Whoop, Aiven, and MasterClass, amongst many others. He has been recognized by numerous publications from Business Insider to the New York Times as one of the top VC software investors. Eric, welcome to the show.
0:29
Nick, thank you for having me. And thank you for such a wonderful introduction. You’re making me blush.
0:34
It is an honor to have you, sir, you’ve had a big year. You know, take us back to the beginning. Can you kind of give us the two to three minutes of background? And you know, how that led to your career in VC?
0:48
Yeah, I mean, I’d say it’s kind of a confluence of events, like many things in life are, you know, some people say that they came out the womb and knew exactly what they wanted to do. That’s not me. When I was younger, and I guess I thinking in particular about applying to college, I thought I wanted to go into politics and study political science. That changed the summer before I showed up to college. In some ways, it was eye opening, because what I realized in a nutshell was the real world of politics is very different from what they teach you in a high school civics curriculum. And so coming into college, I was a blank slate. And that happened to be in at the risk of dating myself, but this is all true. And it’s available on the internet. Anyway, that was in the fall of 1996. And I had the good fortune to show up in Palo Alto at Stanford, right, really, in the middle of the internet bubble, I mean, things were starting to sort of percolate and really pick up speed. And it was kind of interesting to me, that being surrounded by technology, I didn’t actually know that much about it, and was really interested in, in studying it. And so I started to take some computer science classes. And for reference, I came from a family where I didn’t actually have a computer until two years before that. So that’s also kind of a little different. But I had some exposure, again, dating myself to dial up modems and hearing the crack, Crackle and whistle that you get you really excited because you’re about to link up with the rest of the world. But I started taking some CS classes, I realized fairly quickly that I was outclassed, and how and one of my friends who to this day, we were friends, I remember, he happened to grew up in Seattle, I’ve been working for Microsoft since he was 12. And I’m thinking oh my god, if this is the kind of competition, I’m gonna have to go up against to get a job, I’m going to be in real trouble. So I did want to stay engaged in technology, thought about getting involved there from a business perspective. And really, the first exposure I ever had to venture capital was in I think it was the fall of 98 when John Doerr came on campus, and he packed the engineering auditorium, which is Turman Auditorium on campus. And I see him and he was a little unkept, and, you know, kind of one shirts, one side of a shirt untucked, sticking out from underneath his his sweater, shoelaces, I think we’re half tied, if at all. But he was incredibly passionate talking about the future of Amazon, and how he’s going to change our lives. And remember, at the time, this is 98, Amazon was known for selling books, and maybe something that people also remember called CDs. And you, you sort of said, well, yeah, I get it, it’s a lot easier way to buy those things, but what he means is really gonna change my life. And fast forward, I think he was right, maybe not quite in the timeframe, because we sort of saw the after net aftermath of the internet bubble. But it was really the first time I sort of said, oh, you know, you can really be involved in in these great companies without being only the person writing the code. So I kind of filed that away. And when I, when I left, Stanford, I had the good fortune of going to work for Morgan Stanley in their technology banking group. And I went there thinking that would be a great way to learn a lot about different technology companies and business models in a relatively short period of time. And I did that, and it was actually there that I learned about the different stages of the venture capital market, which is, I think, increasingly become fragmented as the market has become larger. And I realize there that you know, there’s some people who do seed investing. And on the other end of the spectrum, there’s some people in some groups who invest right before companies go public. And I felt like, you know, I’d like to be involved a little earlier where the story is yet to be written. But if, if it’s so early, that there isn’t a lot to analyze, as a early 20 something year old, I don’t think I have a lot to bring to that table. And so I discovered that there was this world of sort of growth stage investing, where I felt like it’d be a good marriage of my training that I got from Morgan Stanley as well as interest in in technology, but learn the investment part of the business Uh, with companies that have little bit of traction substance to them. And that’s how I found my way into sort of the growth stage venture world, again, dating myself 19 years ago.
5:10
And it was with IVP at that point, Eric?
5:13
No, I was originally with a firm called TCV, Technology Crossover Ventures, joined them in 2003. And joined IVP in 2011.
5:21
Very good, very good. And tell us the thesis at IVP.
5:25
Yeah, we are a firm that’s been around for 42 years. And we’ve stayed very focused over the last 22 on focusing in information technology in particular, but also in companies that have demonstrated some product market fit and are really hitting the acceleration part of their growth curve. And that, to me, is a lot of fun. Again, it fits with what I’m interested in, there’s some product market fit. So we can, we can have opinions, but also verify those opinions and hypotheses with data. Some of that is financial data. And some of that is customer data. But it gives us the opportunity to be involved in helping to steer and shape the path down which a company will go and hopefully reach really great milestones. And that’s a lot of fun. I think there are others that prefer maybe a little bit less risk, and more buttoned up stories all the way to those who prefer sort of fixing things that have gone awry. Neither of those are really me. And so IBP is a great fit there. And we invest in about 15 companies per year, it’s a majority of our capital today is invested in series B’s and C’s, admittedly, the letter the alphabet is somewhat arbitrary these days. But that consistent theme of Product Market Fit big market and evidence of growth is what we look for. And, you know, we’re investors and partners with our companies, probably for four or five, six years, sometimes longer, sometimes shorter. And we do try to be really active partners. And we take board seats in about 75% of investments we make. And that’s not meant to dictate control or anything like that. But it’s to be in the flow, be in the flow. And available to be consulted and active active, you know, again, partners on this journey, and provide access to the resources the entire firm can bring to bear on behalf of one of our portfolio companies.
7:16
Very good. So 15 investments across the firm per year, how many investments are you doing, Eric?
7:24
That varies from year to year. I think actually in 2022, it’s likely to be zero new board seats that I’m taking on. And that’s a function of the market. I’m really excited about an investment that I’m working with one of my partners on RJ Bashi, hopefully, by the time that this is this airs, we can talk about it publicly, but we can’t just yet. And I’d say that’s another hallmark of our firm, we have two general partners at minimum on every investment that we ultimately invest in. Because we have a very team oriented culture. And that’s one of the reasons I came here as well, and I really enjoy it. But in terms of new investments this year, I think that might be the only one that I’m really that actively involved with. And I think, again, it’s a reflection of the market and where we sit cooling down. I think there’s probably a lot of correction is the word that is, you know, the euphemism that’s, that’s usually put out there when the market is in periods like this. That’s when we’re deflating is another word, I think it’s just maybe a bit of calming down. I think, you know, a lot of great companies raise capital at high at high prices and attractive terms of the last couple of years. They don’t need to now clearly I think is the macro environment in the equity, broader public equity markets or in broader capital markets are changing, that certainly has an impact on on on private markets as well. So I think there’s just a gap between what investors IVP included are willing to pay for companies and those who have ample capital, and don’t have to raise money now. Don’t like those prices or, you know, valuation multiples that are being offered. And so just seeing a big bit of a pause, which is fine. It’s not it’s natural. It’s actually what has been unnatural is that it’s been 14 years since the last time this happened.
9:14
Right. Right. So you would expect it at the IVP level as well for deployment to slow a bit in the coming year?
9:22
Well, I think it’s slowly. In our case, we really started slowing the second half of last year. I wish I could say that we are macro timers, we’re not trying to do that. That’s not our best trait. But I think what we observed was sort of a lot of micro timing that led us to be uncomfortable. And you know, in one situation, so we would not do something and then another one, and then you look back on it was clear, that was a pattern. And so a very common thing that was happening over the summer of 21. And into the fall would be you know, Company X would say on Monday. All right, I’m getting ready to raise we’ve had a great dialogue. Over the last multiple glass quarters years even. And so I’m opening up the data room today and Monday, we’ll take meetings and follow up meetings over the next two weeks. Expect to have term sheets, you know, two weeks from now it’s giving us plenty of time to work. So great, that’s fantastic. Really excited to hear that you’re ready at this point? You know, we’ve enjoyed getting to know you. Now we get some data to dig in on. And then what would probably happen is, you know, by Thursday or Friday of that first week, oh, sorry. And on Monday, they would say we’re looking to raise x at a valuation of, you know, roughly why and we’re going to take seven to 10% dilution, okay, great. By Thursday or Friday of that first week, we probably get a ping back from the CEO saying, you know, things are going really well feedback has been strong. So instead of raising x, we’re going to raise 50% more than x, we’re keep the same dilution as well, because that’s what the market is going to kick gonna bear. So basically, the valuation also went up by 50%. And, yeah, we’re actually asking for term sheets on Monday instead, so instead of two weeks gonna be weak. And so we’re trying to be thoughtful and be responsible stewards of our investor capital, because ultimately, that’s, that’s, that’s what we are. And so we would opt out of that kind of a conversation. And that kind of have started happening over and over again, particularly as the environment got hotter. And so while it was not, again, a macro call, we did start slowing down in the second half of last year. And that kind of persisted into into this year. And we feel in hindsight, good about that.
11:34
It looks prescient now, Eric, but at the time, how does one do that, as you see great opportunities getting away from the firm?
11:42
Yeah, it’s it was hard, honestly, I think, as individuals at our firm, and as a group, we are prone. And I think this is probably true for most people in this business, you’re prone to action and feel like you’re doing something. And yet, sometimes the best thing to do is to do nothing, yet, it’s sometimes the hardest thing to do. And that I think is true. In you know, if you’re an investor sometimes to do nothing, even when to do nothing, when things are going well is easy to do nothing, when things are going poorly, it’s hard. Even if you believe that it’s temporary, then that’s the right thing to do. And so we had a lot of those conversations and and I think we just had to get comfortable, ultimately asking yourselves, look, if this company and this investment round, suddenly we’re attracted, if this investment round in this company is being priced at 60x 100x, revenue multiple, how many years of doubling does it actually have to produce for us to feel good about just even breaking even on the investment we just made? I mean, of course, our job is not to breakeven on investments, it’s actually to make money and make multiples of in of our investment for our, for our LPs, how long is that going to take? Is that really possible? And we, we could come to the conclusion? No, you’re just sort of stretching the boundaries of plausibility, and, and we’re fortunate, we don’t have to make that investment today, there will be something else down the line. And it was, candidly as hard throughout the organization’s various points in time, but I give credit to the way we’re set up. Again, we were not in a hurry, you know, our fundraising cycles have been fairly steady. We, we sounds quaint at the time, so we kind of target, you know, deploying capital that a new fund over a 10 to 12 quarter period, and we’ve kind of stuck with that for last 15 years, 20 years or so. And I think it’s worked out well for us.
13:45
So, you know, current environment, valuations have come down quite a bit multiples have come down, which may suggest that that one should get more aggressive. However, it sounds like you guys are still, you know, a bit more methodical than then maybe you’ve been at other times. Does that, you know, suggest that you think we’re in a sustained downturn that’s going to persist for some time?
14:13
Yeah, I think that to give you the most precise answer, I’d probably want to parse different parts of the market, for example, I’d say on on one end, to me the the IPO market is closed for the rest of this year. Obviously, there’s not really that much time left in the year, you know, as we’re recording this, but I also don’t see a lot on the horizon that would suggest to me that would change dramatically, you know, even in q1 of next year. I also don’t feel like and I had this conversation with a few folks at Goldman Sachs at their private innovative company conference last week. Sort of it doesn’t it also feels like there’s a bit of a dearth of the sort of I must buy private companies that public investors are clamoring for, largely because a lot of them went public in 2020 and 2021. Sure. So I think there’s a bit of a, the backlog is a little bit emptier or lighter than it probably has been. And I think investor appetite is probably a little weaker than it has been, because of, you know, frankly, some of those investments from last year underperforming, but also, you know, this will be this will come out in the wash, but we’re pricing, it’s now not to say that there will not be any IPOs. That’s not really the business only predicting, but I don’t, I don’t really expect a lot of reversion or change although can happen quickly. And companies that want to go that route should be preparing for it. I do think what and so on the other end of the spectrum, which is I’m going to talk about a segment of the market where I don’t spend a lot of my time professionally. But you know, my hear anecdotally secondhand from friends who are seed investors is that the environment there has has changed pretty dramatically. And so it seems like actually the two extreme ends of the market sort of public and seed are probably the two fastest to have reset or sort of baked in a new valuation framework. And you see that in the public side with multiples and, and absolute market caps coming down significantly. And on the seed side, what I’ve been hearing a lot of is from again, investors and entrepreneurs, both, you know, maybe a round that would have come together a year or so or 18 months or so ago with kind of a unpriced note, but the cap would be 25 million, which is pretty high for seed at least dropped to 12 to 15 million. And so implicit in that is a 20 50% 40% reduction in the valuation, which is probably more consistent with with where the public markets are in between, you know, particularly I think for some of the series D plus type companies that did raise money, those companies are going to have to grow in evaluation, because I think the the multiple from last year isn’t on the table. And until revenue or whatever metric you’re using gross to match the lower multiple, you would presumably be done in a down round. But and companies don’t want to do that.
17:24
So Eric, this is probably a good time to talk about some of the companies that you took public in the past year, year and a half, I think there were six by my count seems like the the IPO window is closed, you know, the rest of the year and early next. You know, talk to us about you know, the companies that have gone public, you know, how do you coach your your existing portfolio that was kind of on the doorstep, so to speak. And, you know, what’s what’s the general advice that in in approach that you’re using with the portfolio given that, you know, a lot of the liquidity options have have, you know, been suspended?
18:05
Yeah, I think the important. So let me let me parse that too, because I think the world has changed a little bit, the historical answer would be to remember, and this is still true for IPOs. They’re generally not liquidity events, they are capital raising events with maybe a little bit of liquidity. If there’s a secondary component, obviously very different for direct listings. And we had a number of companies go through that last year. And I don’t think that this is, if I make the statement, it’s it’s a generalization. I think it’s generally accurate, I think, probably by volume, I’d bet 90% plus of companies that went public in some way shape, or form direct listing or IPO or below their either issue or first trade price today, I don’t think that’s an indictment on any specific company. I just think that’s the reality. And the reason I’m giving myself some wiggle room at 90%, which is probably a low and safe estimate, because I haven’t looked at it. But that seems to be the case. The takeaways for that as it as I would share with private companies, I mean, some of the stock market performance or stock price performance that’s been negative is market specific, overall multiples come down, someone whose company’s specific and companies didn’t deliver on their projections, or even if they had at one point in their public life, numbers have come down due to headwinds. And so the reality is, when you’re getting ready to go public, you should hopefully have a good handle on your business, then you can reliably predict out at least four quarters. Beyond that, of course, I think it’s very, it becomes increasingly difficult. But if your business isn’t mature enough, where you feel like you’ve got a good handle on on the top and bottom line for those next four quarters, you’re probably not mature enough to be a public company. Because the penalty for missing your guidance is pretty severe, even in a good market. And this isn’t Got that. So, actually, in general, the companies I’m working with that are still private today that are 100 million in revenue, and over where you can start thinking about being a public entity as a, perhaps more likely than not proposition. I mean, when we invest, we hope that it’s always a possibility, but we wouldn’t say it’s a probability above 100 million, you can probably say, it becomes more of a probability. The consistent guidance there is really thinking about being a mature company. And what does that mean, it’s knowing what are the drivers of your business and controlling them, and being able to react to market conditions, whether that’s, you know, more competition in the market for talent, whether that’s increasing cost of acquisition, because marketing spend is less efficient, whether that’s longer sales cycles, because your customers are feeling a little bit of budgetary pressure, being able to react to those things, and still manage to a range of outcomes is a key part of that. And if you’re both missing your projection 10% up or 10%, down with 10% Up is obviously far better. But it suggests the visibility and the tightness in the band of outcomes is not as strong as you might want it to be. So we’re encouraging companies to think about it that way. Certainly managing cash to be to be prudent with that, because, you know, for many businesses, my I’d rather have them assume that there’s no private capital coming, rather than build a model that’s completely reliant on it.
21:32
Eric, what do you think most companies or even investors get wrong in the IPO process?
21:38
I think the the hardest thing is to remember that that day is a very important day, it is the day you go public. And as a culmination of all the work that many many, many people have done across the company over the years, it’s a celebration of all that work. It’s a celebration of the potential that the company has going forward. In many ways, if you think about it, you’ve basically put a company in a position that and this is one of the great things about working with startups, you’re talking about a company that didn’t actually exist not that long ago. And now it’s in a position where you’re telling your story. And anybody who wants to can become a part owner of it, that’s actually a cool thing to think about. And you’ve done it on that day. But anyone that’s buying into the story in the stock in that day is doing so based on what you’re going to do in the future, not what you’ve done in the past. And I think that’s sometimes the mistake of just thinking like that it is it is a destination as opposed to I don’t mean to use that analogy, I’ll probably butcher because I’m not a downhill skier. But to me, it’s kind of like one of the gates that a downhill skier goes through on the way to the finish line. And I think we’re that analogy breaks down a little bit is that downhill skiing is over really quickly. But the finish line for a public company is is you know, in many cases, or in a few cases and aspirationally forever, right? You think about companies that have been public for decades, if not longer. Now, many companies will get acquired somewhere along the way. But if you think about, uh, you know, GE traces its roots back over 100 years. That’s right. So that’s, you know, whatever we think of GE today, that’s something that there’s something to be said for that.
23:30
100%, what’s your expectation of m&a activity? Will we see an uptick there? And if so, where?
23:38
I think the answer is yes. And that’s probably been the one thing that was a little surprising to me, sir, during my call to the last stages of the bull market. I do think the biggest tech companies, you know, the Amazon, Facebook, Flash, meta, Google, Apple, are kind of hard pressed to buy things. So unfortunately, while they are some of the biggest companies, I think they you know, face the most scrutiny, I’ll let your listeners decide whether that scrutiny is fair or not, because the reality is, I think they do. And therefore, it’s gonna be a lot more difficult for them to make larger acquisitions. And actually, the funny thing is, Microsoft used to be the, the boogeyman for the FTC, and now they’re probably considered not so it’s funny how things can change. But I think the, you know, the, on the on the enterprise side of things, there are a number of, you know, large companies out there that have the capability to make acquisitions. And that have done so, you know, that have done so, but generally sparingly. I think, obviously, Salesforce and slack was a really big deal. Adobe, and figma, which is pending in we’re small investors in figma, and that’s exciting potential partnership. Those are big deals, but you’ve got a lot of Have other sort of software companies north of 30 billion plus in market cap that I think and start thinking about making, making acquisitions. And I think that many of them are cash rich, many of them probably didn’t make acquisitions in sort of the 2020 21 timeframe, because I think the asking prices for the private companies were probably too high. I think the private company multiples and expectations have probably come down, or will come down to a level where I think the buyers may have interest and they can make the math work for their show hook shareholders, but at that point in time, will probably come and pick up as time goes on, because the the question a private company, or smaller company will ask themselves is, you know, we’re kind of at a crossroads, we either go out and try and raise more capital. And we don’t know what that price will be. And we keep going it alone, or, you know, if it, if this is the right point in time for us to maybe join forces with a bigger company, take advantage of their customer base and Salesforce and global distribution, they like the product we’ve built, maybe that’s the right time, but I do think that’s likely to start picking up. But it has to get it has to get to the point in time where a company is asking that sort of semi existential question a company need support,
26:18
When should we expect that from a quarter standpoint?
26:23
Rough guesses that those conversations probably start taking place? Well, let’s think about this way, we’re going to q3 has been a little weaker, for certainly big tech, and probably going to see that same weakness on the private side. A lot of I think the expectations for q4 will probably come in IE be lowered. Companies are going to go through a budgeting process, you know, in about a month from now heading into 23. If my generic guidance as a as a board member to management teams, thinking about what the budget is, you know, be conservative on both top and bottom line, so you maintain your operational flexibility. But that means you know, that you’re probably looking at slower growth rates in 23. And for those businesses that weren’t big enough to get to profitability, or didn’t have a path there, you know, they’re probably going to have some conversations around, you know, is the plan to keep going solo alone in 2023? Are we building something, and, you know, do we also start putting feelers out there, because I think a if you’re, if you’re on a company’s board, that is likely to want to pursue a sale, you know, the, the best outcomes are, are not one where you sort of hang a shingle on the on the, or you put a for sale, sign up on your lawn, and right, we’re gonna want to cultivate some of these relationships and having and have discussions before your money runs out. And those can take six to nine months. And so you want some of that to happen in 23, you’re probably gonna start having that conversation beginning of 23, q1 or 23. And so I would, I wouldn’t be surprised if you start to see some of that. I wouldn’t be surprised some of these commentators are having now. They probably should be for writing companies. And therefore you may see things happen as early as q1 End of q1, I would think. And in the maybe q2, and potentially q3, I think also a lot depends on the core business of what these of what acquirers are looking how those are looking whether they’re healthy or not, because public shareholders generally hate it when a management team sort of makes an acquisition as a way to sort of obfuscate weakness in their core business, which is like it’s the old. Yeah, our core wasn’t great. But forget about that. Look at this new shiny thing. We bought that earnings call it does not usually go well.
28:54
You got to separate the inorganic metrics from the organic. See where your growth and your lip are coming from.
29:04
Sleight of Hand does not really work that well.
29:06
Right. Eric, what do you make of Elon Musk’s purchase of Twitter from a business standpoint not as a you know, consumer or or viewer of the process?
29:20
Well, I mean, it’s it was a fascinating journey to watch in terms of how they wound up at closing, I think it’s fair to say to for the Twitter shareholders to get the price 5420 A shares a pretty good price. So they should be feeling good about that. I reason I, my answer to your question with that is because I’m thinking about it from a business perspective. That just means the bar is higher. You know, the his starting point, new ownership starting point is hired to try and generate their turn for their shareholders, which of course, is a lot of Elon Musk’s capital, but you know, there are significant outside equity investors yours, as well as the debt investors who don’t necessarily need to see return the equity but do want to get get paid back. I think that they will have a lot more flexibility to operate and experiment with the business model. The business model really hasn’t evolved much at all since the company, for starters first started turning monetization on and that’s a decade ago. So I know they’re kicking around ideas, like subscription for verified profiles, as probably pretty interesting. I haven’t spent that much time thinking about it. But you know, it would be I the only thing I wonder about that idea. And now that we’re just riffing on it is, I think people would pay for it. But I think the the reason that the blue checkmark was interesting was because it wasn’t something either by So then how do you? How do you square that circle? I don’t I don’t really know. But I think that they clearly there’s a very valuable and strategic business asset there. Again, taking aside all of the the impact that Twitter can have their is, you know, a valuable asset and company there. And I think they can be creative with it now that they really don’t have to answer to but one director and majority owner for the time being, and they can probably move more quickly, which is a lot of the reasons that I think, you know, public companies often will go private or that, you know, private companies do have an advantage of times over public companies in terms of their ability to be nimble.
31:40
It’s always been surprising to me how, you know, Twitter of all the social media companies seem to not have maximized its asset value in terms of, you know, delivering a large enterprise value and multiple. Of course, there’s a lot of nuance, and there’s a lot of differences to Twitter’s model versus you know, Instagram, Facebook and others, but it seems like a a under access to asset to a degree.
32:13
Yeah, I think so. And I want to be I want to be a little holistic in how I think about it. And when we were investors in in Twitter many years ago, pre IPO, and it was a very outstanding return for us. And I, I think that it can be when things well, at any point in time, I think it’s it, you know, those of us on the outside can point at things and sort of armchair quarterback it. But I also want to sort of call out that, you know, a lot of people work there for a long time, you know, some clearly being in San Francisco, you know, and a lot of people work there, personally, and who are friends of mine? I mean, I think they were always in many aren’t there anymore, but they were working really hard to try and build something. And in that same vein, you know, we take Twitter for granted, but the company is not more than 15 years old. And yet it has a huge impact on the way that people do communicate, and in some cases, hopefully, more cases for good than for bad, but certainly some for bad too. You know, and if I if I if then you know, you would that acknowledgement. And I think delivery of hopefully people would feel this way if they heard it, and who worked there of credit to those who did work really hard. Yeah, I would agree with that. I mean, I think sometimes you you wanted to look, you know, there’s always something maybe you could have done better, but the sort of counterfactuals and impossible to prove, you know, maybe you could argue that in a world where, you know, short attention spans are increasingly even shorter. Could they have found a way to do something on video more effectively? Because clearly, you know, folks much younger than me, that’s predominant for them. Yeah, you can say that. We can say that for a lot of other properties. You know, could they? I think the demo, Stephen, the change in the character limit was was hotly debated for a long time. But I think the beauty is there’s actually a big, again, company, a lot of reach, a lot of people use it. The new ownership and new team as it will be constructed, can try and take it into another direction. So I try not to throw too many stones at it. I do think they are in a bit of a tough position as most social platforms are because you offer yourself to the public, and it’s impossible to please all the people all the time.
34:42
Agreed. You know, before we move off of sort of the exit discussion, is there any advice that you’d give to founders or investors on exit timing and preparation, right? Like hether there’s a certain set of activities or indicators, you know, that a startup should be optimizing for or, you know, if these startups are thinking about potential m&a, and exit opportunities over the coming six to nine to 12 months, you know, what advice would you have for them to kind of prepare themselves?
35:26
I would slightly rephrase the premise of that question, because I don’t think it’s really preparing for exit, I think the right frame of mind is to prepare to be an independent standalone company, because the foundation you’re building to do that actually are the things that will be required for a successful exit, or to maximize value in one, whether that’s for, as we talked about a successful public company that can deliver results to investors over a period of time, or to be acquired by another company, or financial buyer, they’re going to want to know that the assets they’re buying is built on firm ground. And so I think it is a lot of it sounds again, boring, but it is having a good handle on the business. Having a robust product pipeline, having a solid organizational Foundation, maybe some of the people will change that does tend to happen if you’re selling a company. But those are, those are all things that I think are required to be a healthy business. And the reason I say that also is because you can’t control the timing of an exit in the sense of the world around you, if you wanted to sell your company for a very high multiple today, it’s probably just not going to happen even though you want it to. And so on the flip side, when the market and people are feeling more optimistic, and more aggressive, and willing to take more risks, to make those acquisitions or to buy newly public companies, if you’re not ready, you missed that window. So to me, it’s it’s sort of doing the things that you’re supposed to be doing. And then when the market is in the app risk appetite is in your favor, striking while the iron is hot. But if you’d make that decision when the window is already open, you’re probably going to be too late because these these things come in cycles.
37:18
Eric, you know, you’ve demonstrated based on your your track record that you’re pretty open minded to different types of companies in different categories. There doesn’t seem to be sort of one size for for Eric Liaw. And IVP. Have you ever come across a great company with a visionary leader, you know, strong defensible tech, but for a variety of reasons, growth is slow and steady versus Fast and Furious. And maybe there aren’t obvious solutions to accelerate it without, you know, undermining the business some way or its revenue quality? How would you approach a prospective investment like that? You know, or if you are already an investment investor, how would you handle that situation? Some of which, you know, we all might be in and next year? Yeah.
38:06
Well, I think as a if a company. So I think there’s a bit of a bit of knowing what you’re looking for. And I think that’s true in life, but also certainly from an investment strategy. And so a company you described like that, let’s say it’s a 30%, a year grower, and it’s, you know, generating 10% or more profit margins annually. That’s actually a very healthy business. There’s nothing wrong with that may or may, many businesses out there, reach that level of predictability and sort of, you know, this is not the right word, but but boringness like that’s that’s, that is not a failure by any stretch as a company. Because what’s our company’s supposed to do, it’s supposed to be able to stand on its own and generate cash flows for its shareholders. That just probably isn’t an investment for us in terms of our new capital deployment, it might, but it might be a great investment. For a firm that does a lot more financial engineering, it might be a great investment for a company that wants to bolt on its product line. And the reason it doesn’t grow that fast is maybe because its founder owned and operated. And that founder doesn’t really want to run the risk of going into the red and therefore doesn’t invest in sales and marketing. But under, you know, as part of a bigger organization where they’ve got an existing set of sales channels, you can push that through and you can take that growth up might be perfectly fine. Just necessarily isn’t for us as a growth focused venture investor. So if that was a company that I came across today, I probably wouldn’t invest and that’s okay. If on the other hand, that’s a company that we have invested in, and presumably at the point at which we invested in the past, it was doubling or more and it probably wasn’t profitable. But, but for some reason or another growth has slowed. But it has become profitable. Not the worst thing in the world. But we should think about why is that temporary? Is that end markets? Is that increased competition? Is that sort of product staleness, something else, I think if the answer to that exploration for us is that it’s more temporal, probably makes sense for us to try and work through that and get growth on an accelerated path. Again, 30% not being being a number that isn’t bad by any stretch of the imagination. And if we think it’s probably a little bit more, hey, this is the new reality for this company. Probably that’s a company we would think about exploring different alternatives for and, you know, selling it to a different set of shareholders who might be more specialized in almost extracting that sense of reward, but maximizing value from that point forward. That’s not our strength. And I think a lot of life is knowing what your strengths are, what your weaknesses are, and playing to your strengths.
41:03
Eric, any suggestions, or maybe examples of founders you’ve worked with that have done a great job managing their board, and getting the most value out of that board? You know, Have you have you seen situations or observed behaviors, or just general approaches to, you know, working with a board, that, that, you know, you would share with the audience in it as advice for founders that, you know, are trying to manage a board and, and build a successful company.
41:43
So, let me start with, I think, the advice on what to do, and I’ll give an example of somebody that has done a really good job at it. I think, a, a well constructed board will have a range of opinions and perspective and in diversity in those opinions, perspective and experience. And I think of it as filling out a team, in the sense that the CEO, who will take a very hands on role in constructing that team should think about what does my company need? And also, what do I need, what are my gaps, and then trying to fill that in with people that spike highly in terms of their ability to address one of or more of those gaps, you don’t necessarily need and you probably can’t find one board member to fill all those gaps. But that’s why you have a board, you know, as you get to be a public company, that’s probably seven people, maybe more, some of the bigger ones have even more than that. And so you have a roster you can build, and think about filling the gaps in that in that roster. You know, for example, you wouldn’t only you wouldn’t put you wouldn’t try and find all of the same player, for any kind of sport, you’re already kind of team, you’d find complementary strengths. And importantly, and this is, I think, correctly, so become a more scrutinized area of corporate governance. Listen to the people that are around you, they are genuinely there to help you. And that’s that sort of truth in messaging and alignment of goals, ie what’s best for the company is a really, really valuable thing. And so, I think about a board that I’m on, which is a company called Zip recruiter, it’s a public company. And the CEO is one of four co founders and he continues to run the company I named Ian Segal. He’s done a fantastic job recruiting highly accomplished executives on his board. Our lead independent director is support Herman, who was formerly VP of Finance and treasurer of Facebook, and then she was CFO with 40, Niners. I think the the pace of scale over her time in her career has been phenomenal. And I think she’s got outstanding business judgment. And she’s our lead independent director. And you know, she’s been on that board and she’s great. But she’s not, for example, a go to market or SMB expert and zip recruiter, has a lot of SMB customers. So prior to going public in went out and recruited a guy named Blake Irving, who was CEO of GoDaddy for many years and actually took the reins from their founder, took them public and then ran her for five years. And so I think he’s got obviously a lot of market exposure. since acquiring smaller sized businesses, but also growing them, and there’s been a CEO successfully before, that was fantastic. We had a director of the board, Emily Choi, who we also know through our investment in Coinbase. And she’s president Coinbase. But she was someone that you got to know in her prior life, she was VP of Corporate Development at LinkedIn, which is in, you know, kind of the job space. And so he said, Look, I’m a great product person in in the job space, but having some industry experience with Emily would be fantastic as well, Emily’s recently transitioned off the board having completed return. And so he took that opportunity to add on, I forget the exact order, we may need to edit this because I’m gonna forget her last name, but it’s free. I believe Campbell, I should know this. Sorry, give me a sec. This is embarrassing. Carrera, sorry. So when when we had the opportunity to bring on Bri Carrera from FedEx, she’s runs marketing there. And we are increasingly, and this is, you know, we’re increasingly changing our marketing efforts to also focus on individual job seekers. They have one of the biggest budgets out there. And she brings great expertise in that respect, again, complementing a skill set. And then most recently, we added Yvonne Howe, who most recently was COO at pillpack, which Amazon acquired. And she brings operating experience, again, going from a company of you know, hundreds, and I think they’re, I think we’re north of 1000. Now, but scale. But, but Yvonne brings a lot of experience, having, you know, helped take pillpack from an idea to an operation that then you know, Amazon was able to acquire, so none of the people that I’m talking about are shy. And and I think the biggest mistake any CEO or company can make in constructing their board is is shying away from someone because they’re afraid that the incoming board members opinions may be too strong, you should calibrate to make sure that there’s alignment of what what you want. But you know, these people who are in the consideration set to join your board are generally already probably pretty well qualified. And I think also a good board member knows you are offering an opinion and a prospective management will listen to that they may or may not disagree. But a healthy discussion will ensue. And then hopefully, it’ll help construct the board he gets the right answer.
48:03
Very good. Eric, if we could feature anyone here on the show who Who would you like us to interview? And what topic would you like to hear them speak about?
48:13
Well, unfortunately, she’s passed. But if you could, I would really love for people to know more about Mary Kay Ash, she started Mary Kay Cosmetics. She was a single mother. At the time that she passed, the company was doing more than a billion in revenue. And she started herself, I think her son ended up helping her run it. And one of my favorite quotes is attributed to her, which is there are three types of people in this world, those who make things happen, those who watch things happen, and those who wonder what is happening. And I really like to be one of those people that makes things happen, and hopefully all of us are.
49:27
Eric, do you have any tools or hacks that are a secret weapon?
49:33
It’s a bit of a cheat, I think. But after you’ve had some kind of experience, I think you can start saying trust your gut, but it can also lead you to the wrong thing. I think I probably vacillate back and forth. But that was actually advice. One of my teachers gave me in high school, when we were all really nervous about taking the LSAT and she said, look at the You only have a certain amount of time, trust your gut and move on to the next one, you’ll probably get it right. But implicit in that is that you’ve done the work to have some sort of level of judgment. And I think, taken to the extreme, like many things can go the wrong way. But I think it can save you from a lot of bad decisions. If you something doesn’t feel right doesn’t smell right, it probably isn’t right. And there is a lot of risk inherent in the venture business, try and avoid the risk that comes from dealing with the wrong people.
50:35
Perfect. And then finally, your Eric was the best way for listeners to connect with you and follow along with IVP.
50:41
You can follow along on twitter at IVP. You can email me I will actually even give this out. It’s probably not hard to figure out. Alright, again, I hate it. But it’s first initial last name@ivp.com So you gotta at least do that kind of work to figure out how to get a hold of me. And, you know, I am available on social you can DM me pick your platform, candidly, more likely to respond to the DM on LinkedIn. Shameless plug than Twitter because there’s a lot more noise on Twitter. Back to our prior conversation.
51:13
Amazing. Well, he is. The firm is IVP. Eric, thanks so much for the time today congrats on, you know the many exits and you know, best wishes, managing on these boards through what seems to be a pretty difficult time that will be sustained for some time. Hopefully not too long.
51:29
Nick, thank you for having me on. It’s been a lot of fun.
51:36
Thank you, sir. Appreciate it.

Transcribed by https://otter.ai

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