The Exchanges

Q there. I, speaking of kind of unit economics being fantastic in those cities, I'm intrigued. You said about kind of going on a fence and we spoke about it in related to marketing budgets. How do founders know when to go on a fence? They've been through this cutting spree. When do they go on a fence, and how do they strategically think about that with their boards as well?

A I think it's like Maslow's hierarchy of needs. If you have enough cash that you're not worried about survival, then you can think about how to go on offense. So if you've cut to get efficient, you've raised more money, you're not worried about running out of money, then you can think about, you know, all these tactics. Um, and there's a lot of them, but you know, I think one of them is hiring great people and you may be able to hire people you couldn't hire before. For that engineer who, you know, probably would have taken that job at Google, um, but, you know, now Google has a hiring freeze, and so that person's in the market, and so your product team can go on offense by hiring better people. Um, your marketing team can go and spend in channels that you couldn't pay for before because the tax were too high, and now you can broaden your reach. So I think you can examine every single part of your business for offense.

AI assessment note: “If you have enough cash that you're not worried about survival”

Q As I said, I thought it was the most brilliant breakdown. I want to just ask you a couple of things before we dive in. You said about not going back to 2021. What does that actually mean? Does that mean 20% discounts, 50% discounts, structured rounds? We see everyone says, so like, what does that mean? What do these look like for those companies?

A So I would say discounts are the wrong way of framing it because you're just anchoring on something that was totally irrational in 20 or 21. Um, it's all about the fundamentals. Is this a good business? What's the quality of revenue? The unit economics? Uh, the founder quality. And then, yeah, you have to think about what's the exit potential for this business and the probability. And in 21, those fundamentals, for whatever reason, right, macro interest rates, whatever it is, I'm not a macro economist, people became unmoored from that. Diligence was being done in 24 hours by a lot of firms. Like, that sort of thing, I think, was actually unhealthy for the business, and I hope it doesn't come back.

AI assessment note: “discounts are the wrong way of framing it because you're just anchoring on something”

Q So when the storm hits, we've got thunder and lightning, it doesn't look good, Um, to carry that metaphor, um, what do the GPs do? How does this change what investors want in companies, and also how does it change deployment cadence?

A The deployment cadence is probably the first thing, and that's already changed. I think GPs saw that happening pretty quickly. So, 21, there were a bunch of funds that deployed their capital in nine to 12 months. And you say, well, why, why is that a bad thing? Why not just keep doing that? Well, because when you raise a fund, you generally tell your LPs, hey, it's going to take us, you know, two or three years to deploy The capital before we go raise our next fund, and so that LP needs to allocate a certain amount of funds. Um, let's say they're an investor in your fund, and they put, you know, five million in, and they think they're going to put another five million in three years from now, but nine months later, you said, hey, I need another five million. That depletes the books of the LP pretty quickly. Now, LPs start pushing back, and they say, I'm not going to commit if you come back in nine months. That's going to change Deployment cycles and VCs know that's already happening in the LP's minds. So they, they're now saying, okay, I have to hit the brakes and I'm going to go back to that three year deployment cycle. And so that's dividing the dry powder out there by a third.

AI assessment note: “The deployment cadence is probably the first thing, and that's already changed.”

Q Sadly not. Uh, the, the truth is now everyone is searching for the magic L being liquidity. Do you think we'll see a massive rise in secondary selling and buying?

A It's a good question. I'm not sure I have a crystal ball for that. You know, I think secondary buying though tends to be hottest probably at the worst times, right? That's, that's when things are overpriced and, you know, crypto's high and secondaries are high and all assets are high. Um, on the other hand, liquidity is a good thing and it's a good force. And the idea of secondary was kind of taboo in venture not that long ago. And I think it's been a good thing. And, and I don't think we're, you know, Rolling back on that. It's a force that's here to stay. And so, you know, how long does it take for secondary volumes to hit what they were a year or two ago? I don't know. But once again, in the longer run, our secondary is going to get bigger. Absolutely.

AI assessment note: “in the longer run, our secondary is going to get bigger. Absolutely.”

Q Do you think the LPs do push back when they do come back to market earlier and say, actually, we didn't budget for this and we can't make that commitment happen?

A Unfortunately, I think that is gonna be the, the comeuppance that a bunch of funds suffer. Um, LPs are gonna say no. You know, we, at IVP, we've been around for 43 years. Um, we are very careful about our deployment, and we really didn't go all that fast in 21, and we didn't slow down that much in 22. This is, like, something we've been harping on as a firm, um, just tirelessly, but for a while, it, it didn't feel like, you know, That was necessarily the winning strategy when everybody was trying to be an index fund, putting money to work as quickly as possible. You know, there were times when we were like, man, are we doing the wrong thing by just being super selective and not trying to index the world?

AI assessment note: “LPs are gonna say no.”

Q A fascinating one that you did tweet was, uh, bring on operators with experience in C-level, or even a professional CEO. I agree, and I like the idea. The trouble is, they're expensive. So number one, like, why would they join a company with, bluntly, maybe, you know, potential runway challenges ahead, and in a difficult spot? Why would great talent at that level join a, Company that is struggling.

A Well, it's incumbent upon the founders to convince great talent to join any company, and so I'm not sure what advice I have other than be super compelling and get great executives, but a good executive pays for themselves, right? If you're hiring a great head of marketing, you know, a VP marketing, and they cost three or 400,000 dollars, and you give them a 10 or twenty million dollar budget or a five million dollar budget over one or multiple years, like, think about that. Somebody who's new and doesn't really know what the efficient ad channels are for your products, probably going to waste a lot of money before they get it right. Somebody who's experienced may go in and hit the efficient frontier, you know, on day one or day two. So good execs pay for themselves, but you probably can't have it all, right? You can't have, you know, that amazing exec in every position. And so as a founder, I think like having, uh, some understanding of your strengths and weaknesses and of yourself is key. And you want to put those, you know, experienced operators in those roles that most complement your weaknesses as a founder, and then you can hire, you know, more junior people for the areas where you're strong.

AI assessment note: “I'm not sure what advice I have other than be super compelling”

Q UAE with, you know, more money than ever, um, looking to deploy more and more than ever. You know, I think the line is a trillion dollar project. I'm sure there is a venture fund alone in, in financing innovation there. Is there not a new wave of LP that actually is born in these generations, or this kind of economic cycle, that we can be hopeful of raising from?

A Uh, you make some really good points and I would say it depends on your timeframe. Like if you zoom out, we're in the best industry on earth, innovation, technology. If you ask me is venture as an asset class and technology, you know, as an asset class, are they bigger or smaller in 10 years? The answer is obviously bigger. How about 20 years? Bigger. 30 years? Bigger. I'm an optimist on that. Now, but if you look, you know, if we were to take a bet, Harry, is there, are there more LP commitments in 2023 and 24, or 21 and 21 combined? I guarantee you the 20 and 21 number was gonna be bigger than the 23 and 24 number, if you really zoom into that small timescale, but over a longer timescale.

AI assessment note: “I would say it depends on your timeframe. Like if you zoom out”

Q A fascinating one that you did tweet was, uh, bring on operators with experience in C-level, or even a professional CEO. I agree, and I like the idea. The trouble is, they're expensive. So number one, like, why would they join a company with, bluntly, maybe, you know, potential runway challenges ahead, and in a difficult spot? Why would great talent at that level join a, Company that is struggling.

A Well, it's incumbent upon the founders to convince great talent to join any company, and so I'm not sure what advice I have other than be super compelling and get great executives, but a good executive pays for themselves, right? If you're hiring a great head of marketing, you know, a VP marketing, and they cost three or 400,000 dollars, and you give them a 10 or twenty million dollar budget or a five million dollar budget over one or multiple years, like, think about that. Somebody who's new and doesn't really know what the efficient ad channels are for your products, probably going to waste a lot of money before they get it right. Somebody who's experienced may go in and hit the efficient frontier, you know, on day one or day two. So good execs pay for themselves, but you probably can't have it all, right? You can't have, you know, that amazing exec in every position. And so as a founder, I think like having, uh, some understanding of your strengths and weaknesses and of yourself is key. And you want to put those, you know, experienced operators in those roles that most complement your weaknesses as a founder, and then you can hire, you know, more junior people for the areas where you're strong.

AI assessment note: “I'm not sure what advice I have other than be super compelling”

Q Sadly not. Uh, the, the truth is now everyone is searching for the magic L being liquidity. Do you think we'll see a massive rise in secondary selling and buying?

A It's a good question. I'm not sure I have a crystal ball for that. You know, I think secondary buying though tends to be hottest probably at the worst times, right? That's, that's when things are overpriced and, you know, crypto's high and secondaries are high and all assets are high. Um, on the other hand, liquidity is a good thing and it's a good force. And the idea of secondary was kind of taboo in venture not that long ago. And I think it's been a good thing. And, and I don't think we're, you know, Rolling back on that. It's a force that's here to stay. And so, you know, how long does it take for secondary volumes to hit what they were a year or two ago? I don't know. But once again, in the longer run, our secondary is going to get bigger. Absolutely.

AI assessment note: “in the longer run, our secondary is going to get bigger. Absolutely.”

Q UAE with, you know, more money than ever, um, looking to deploy more and more than ever. You know, I think the line is a trillion dollar project. I'm sure there is a venture fund alone in, in financing innovation there. Is there not a new wave of LP that actually is born in these generations, or this kind of economic cycle, that we can be hopeful of raising from?

A Uh, you make some really good points and I would say it depends on your timeframe. Like if you zoom out, we're in the best industry on earth, innovation, technology. If you ask me is venture as an asset class and technology, you know, as an asset class, are they bigger or smaller in 10 years? The answer is obviously bigger. How about 20 years? Bigger. 30 years? Bigger. I'm an optimist on that. Now, but if you look, you know, if we were to take a bet, Harry, is there, are there more LP commitments in 2023 and 24, or 21 and 21 combined? I guarantee you the 20 and 21 number was gonna be bigger than the 23 and 24 number, if you really zoom into that small timescale, but over a longer timescale.

AI assessment note: “I would say it depends on your timeframe.”