The Exchanges

Q is that, uh, because there's a lack of IPOs, uh, VCs have been struggling to return, uh, capital to their LPs within a stated timeframe, let's call it 10 years. Um, and by consequence, their ability to raise a follow on fund is Is kind of, has kind of faced some headwinds. Um, does the data continue to prove that's the case, or are we starting to see a thaw?

A We're seeing, we're starting to see a thaw, but that doesn't mean that the venture fundraising market for funds has gotten much easier. This is a very difficult year to raise a venture fund, to put it, to put it bluntly. Part of that is because of liquidity problems. So I think that one of the underrated, uh, dynamics within venture capital is, uh, it functions at such long timescales that these things, what happened two or three years ago is still impacting us today. So if you're an LP, maybe you're not Stanford endowment, but you're just a, you're a, you're a institutional family office, for instance. You've got a decent amount of capital to devote across investment classes. You put a bunch of money into venture funds in 2019 and 20 20. Those venture funds have given you no money back, and many of them are probably not likely to give you money back anytime soon. So you're faced with the decision Okay, I could invest into a new class of venture funds, but I'm already pretty in deep in the venture asset class. I got a lot of money in venture that is not returning capital to me yet, and I don't want to put more money in right now. So I'm just going to hold off. And if enough LPs are kind of in that hold off position, fundraising for the whole asset class will retreat. The fly in the ointment here, the different countervailing narrative is big funds, the biggest venture funds in …

AI assessment note: “We're seeing, we're starting to see a thaw, but that doesn't mean”

Q Um, and while you might not see 10 X returns, um, you'll still, as an asset class, it'll still, uh, give you enough exposure with enough upside. Um, and so I'm, I'm curious then, do you have, um, For the, for the smaller managers or emerging managers who are able to raise any, any, uh, key insights that you can pick up on of why they may be having success?

A I think one of the things that we've seen a little bit more of lately, so there's two sort of trends within early stage venture. The first one is solo GPs. Um, those can be spin-outs from big funds that are doing their own thing. They can be deep operators in the space that have sort of a unique viewpoint, but the idea that you can do Everything that you want to do as a venture manager, but you don't need anybody else. You're, you're effectively a one man or one woman shop. That's kind of new. And it's kind of a bigger trend this year than it has been. Uh, I think that LPs are excited by that because you know that there's no dilution in the partnership, right? This person is the person who's going to make the investments. They're going to be there with the founders. It's kind of all on them. It's a little bit of a key person risk, but you know, That's okay. The second trend, which is interesting, which is, it's something that is always fascinating about venture. For a long time, it seemed like the goal of every venture manager was to get bigger. Like, okay, I'll start with a twenty-five million dollar fund. My second fund will be 50. My third fund will be a 150. And if I make it to fund four and I become a real firm, that one might be 300. Well, those are massively different investment strategies. You cannot invest into the same companies that you were investing into at a fifty…

AI assessment note: “there's two sort of trends within early stage venture. The first one is solo GPs”

Q what time of the decade, uh, it is, uh, what the underlying valuations are, um, and now not to complicate things, uh, even more, um, you know, you, you have, uh, artificial intelligence Changing the revenue profile as a company and what seems like by consequence, um, what the, what the fundraising profile looks like. In broadest of strokes, is that, is that a, is that a fair, uh, depiction?

A It is a fair depiction. I'd add maybe two other things. One, whatever dynamics you see going on within the startup community, those dynamics are reflected and maybe even deepened in the venture fund community themselves. They have to fundraise from LPs. They have to explain this whole ecosystem to LPs. They have to make the right investment choices. It's a pretty difficult job. This, the latter part, which is a data set that we, I think again, uniquely have access to is not just you're a founder. You're going to build what is hopefully a generational company and hopefully make some money out of it as well. You're also going to build a team. And so there's this massive amount of attention and time being spent on what's going on with startup hiring. How are these jobs changing within startups? You know, it candidly, if you put a tagline on that, it used to be really cool to say how many people worked for you. The higher the number, the better. And now the exact opposite is true. You want to have as lean a team as possible. You know, the idea of having a million dollars of revenue per full-time employee is this new benchmark that a lot of startups are throwing around. So just an example of how these benchmarks shift and mold depending on, as you said, the era that you're building in.

AI assessment note: “It is a fair depiction. I'd add maybe two other things.”

Q Dr. Bayer, are you seeing any of that as well?

A Absolutely. It's been a revitalization, uh, Um, and I'd say a large part of that is due to the AI boom that's happening here. Um, it is as full of hacker houses and young founders scrapping together rounds as it has ever been, at least in my decade or so in the Bay. So it is, uh, AI is making SF thrive again. Um, there's a, there's again a question that comes up. You know, moving yourself as a founder, if you don't live in San Francisco to San Francisco, it's a big deal. It's a big choice. It's more expensive here. Talent, there's a higher density of talent, but that talent is expensive for sure. Uh, so there's pros and cons, but if you are, if what you want is to be surrounded by startups, if you want to be in the Hollywood for startups, then you have to move to San Francisco. There's no other place where you walk around every single coffee shop in the city and everyone's talking about What, what they're building. It just doesn't, you know, this is a company town in some ways. An industry town, I think, is a better way to say it.

AI assessment note: “Absolutely. It's been a revitalization, uh, Um, and I'd say”

Q That makes good sense. And so then do you see a trend amongst the generalists or specialists for those solo GPs?

A Uh, I mean, solos are, I've seen both. It's kind of tough for me to distinguish what is an actual specialist fund. You know, you'd be surprised. Maybe you wouldn't, but I was a little surprised. If you look through what is supposedly a specialist fund manager's portfolio, there, there might be a lot of B to B SaaS in there too. Uh, you know, it's not always the case that just cause it stays says, uh, You know, biotech specific fund that all their companies are biotech or whatever the special specialist may be. What we're getting a lot of now is, yes, I'm a specialist fund, but my investment thesis is, you know, AI dev tools. It's like, okay, well, is that specialist or is that just like a category of AI that you seem to like at the moment?

AI assessment note: “I've seen both. It's kind of tough for me to distinguish”

Q And what do you, what do you attribute to the economy?

A Um, a lot of things. Venture, mega fund venture is now, uh, It's almost as though we need a new word for it. You know, venture capital has become effectively two different asset classes with two different dynamics. It would be, if you had looked back 15 years ago, the idea that you could raise a five billion dollar venture fund would have been laughable. It just, it just doesn't happen. Now we've had two or three of those this year. Um, those, those managers, those big funds, the Andreessen's, the Sequoia's, the whoever, they are promising fundamentally different things than the smaller venture fund. What, what the mega fund pitch is, as far as I know it these days, when I talk to LPs is it kind of boils down to two things. One, companies are staying private longer. If you want to get into these companies before they IPO, a fantastic way to do that is to own a portion of our fund. Cause we're going to be in all the big companies, you know, Anthropic, Perplexity, OpenAI, Databricks, SpaceX, et cetera. Many, many, many of the biggest Funds on the venture side are in almost every one of those companies in some way, shape, or form. So you're kind of building a late stage index of companies that have yet to go public.

AI assessment note: “venture capital has become effectively two different asset classes with two different dynamics.”

Q Yeah. So, um, you know, as I, as I'm thinking about this conversation, a natural extension is the talk about secondaries to return LPs, but before we do that, Actually, something else that I don't think I've ever read about is how often do you see about LPs selling their stakes in VCs? Does that happen that often?

A It does happen. Uh, I think it's, I don't think it happens super frequently, and there are many different kinds of secondary sales, right? You could sell the entire position, you could sell strip sales of all the underlying, there's a lot of different ways to go about doing secondaries, uh, on the LP side. I do think I think there is a natural trend for private markets to adopt public market technologies and approaches. I think we've seen that over the last 10 years. I mean, secondaries used to be almost a dirty word, and now it's a core part of every venture portfolio, it feels like. So as those things continue to march forward, I do expect that we'll see more LPs trading positions. But today, you know, to get to the question, broad question around secondaries, If you look at the, not Carta data, but just general secondaries data for direct secondaries in venture. It's so much of the volume is driven by 10 names. Everybody already knows these names. It's trading in and out of SpaceX. You know, that is the, that's probably 80% of the total transacted volume in secondaries for venture these days is eight to 10 names that everybody already knows. So it's kind of a power law market. Secondaries at series B or for younger companies, those are still murky and still much harder to do.

AI assessment note: “It does happen. Uh, I think it's, I don't think it happens super frequently”