Latest / trading places / TP18: James Riney of Coral Capital 🇯🇵 | Japan's VC Explosion 🚀 | 2026 IPO Predictions 📈

Transcript

TP18: James Riney of Coral Capital 🇯🇵 | Japan's VC Explosion 🚀 | 2026 IPO Predictions 📈 · trading places

• 0:00
  Secondary is historically in Japan has not really been a
• 0:02
  thing because it hasn't really needed to be.
• 0:04
  And in fact there was kind of a of of the early VC selling.
• 0:08
  But now that there's more capital available in private
• 0:11
  markets and therefore companies have waited to go public later,
• 0:14
  it's become a lot more normalized.
• 0:17
  There are a lot of companies that are, you know, that are
• 0:19
  making money, which have an AI capability story, like an AI
• 0:23
  enabling story, those LLM pure plays and those were not making
• 0:26
  money. That does feel like a theme that
• 0:28
  can come and go. Yeah.
• 0:30
  And I think even though the secondary market is growing,
• 0:32
  there's still probably not enough capital out there to meet
• 0:37
  all the potential supply that's available.
• 1:07
  All right, Aman, Happy New Year and welcome to Trading Places
• 1:12
  episode 18, our terrible, horrible, very bad podcast.
• 1:15
  Whether What's the line in the movie Trading Places Merry New
• 1:20
  Year? Merry New Year.
• 1:22
  It's going to be a, it's going to be a Happy New Year and a
• 1:25
  Merry Christmas. I'll roll into one.
• 1:26
  And however wrong Eddie Murphy got that.
• 1:29
  I think it's going to be a great year, Dave, for a couple of
• 1:31
  reasons. So let's just start with the
• 1:32
  macro picture on economic growth, which should then tell
• 1:36
  us where like earnings and overall the overall business
• 1:40
  environment and the IPO market will go.
• 1:42
  So let's start with GDP growth in in the US and this chart
• 1:46
  shows this high level. Here's where GDP has been the
• 1:49
  last couple of quarters. So after a down quarter in Q1,
• 1:54
  we've now seen two straight quarters of basically 4% GDP
• 1:57
  growth. We saw that in Q2, we saw that
• 2:00
  in Q3. So growth seems to be pretty
• 2:02
  strong and accelerating into the second-half of the year.
• 2:04
  Therefore, I think it's going to give us a good table set in
• 2:07
  2026. How much of that growth do you
• 2:10
  think is coming from AI data center build out versus other
• 2:13
  stuff? Based on the national reports
• 2:16
  that we saw in Q3, something like 2 of the four points came
• 2:20
  from business investment broadly.
• 2:22
  And it was most, most of that was AI from the bunch of hyper
• 2:25
  scalers. I'm talking about Meta and
• 2:27
  Microsoft and then Alphabet and Amazon.
• 2:30
  So the four big hyper scalers are responsible for between one
• 2:32
  and two points of GDP growth. Half of the recent growth is
• 2:35
  coming from AI data center hyper scaler build out and that's
• 2:38
  probably going to continue next year.
• 2:40
  Yes, at least for the, let's say for the first half of next year
• 2:42
  because that's what the, that's what the companies are guiding
• 2:44
  to. So that's kind of 1, you know,
• 2:47
  that's kind of 1 backdrop of, hey, we've got some good growth
• 2:49
  now and maybe accelerating. Here's a couple other points to
• 2:52
  make about the overall economy in addition to, you know, the
• 2:55
  existing growth. Think about the drivers of
• 2:58
  economic growth being fiscal policy, such taxes and spending.
• 3:01
  If the government is helping or hurting growth with its taxes
• 3:04
  and spending plans, monetary policy, that's really the Fed
• 3:08
  and interest rates. And maybe just as importantly,
• 3:10
  as the Fed expanding its balance sheet or contracting its balance
• 3:13
  sheet, is it doing quantitative easing or tightening?
• 3:16
  Is it adding to liquidity or taking away?
• 3:17
  And then there's the rest of everything, right?
• 3:20
  All the companies and individuals and what John
• 3:23
  Maynard Keynes called animal spirits back in the 1930s.
• 3:26
  And I don't know if a better word for for the sum total of
• 3:28
  all the private sector energy. But let's talk about this first
• 3:31
  two for a second. In particular, I think what we
• 3:33
  know on monetary policy, which in 2025 a lot of people think
• 3:38
  was, hey, the the Fed was cutting rates and that was true,
• 3:42
  but they were also engaging in something called quantitative
• 3:44
  tightening, which means they are using their balance sheet to
• 3:47
  shrink the money supply. They're basically taking money
• 3:50
  out of the system and letting treasuries and other assets roll
• 3:53
  off. And in December, for the first
• 3:55
  time in three years, they announced that they're no longer
• 3:58
  going to be doing quantitative tightening.
• 4:00
  They're going to be doing something called quantitative
• 4:02
  easing. So they're going to be expanding
• 4:04
  the balance sheet and buying a security is not selling them.
• 4:07
  And I think we're going to get more rate cuts in the next
• 4:09
  couple of months. And and so that's going to
• 4:10
  continue the monetary policy being accommodative and maybe a
• 4:14
  plus the economic growth. So that's, that's kind of one
• 4:18
  reason to be optimistic for next year.
• 4:19
  The other reason is on fiscal policy.
• 4:21
  So what happened in 2025, there was a, one big beautiful bill
• 4:27
  that passed, which had a 1 tax cut in 2025 and that's it.
• 4:31
  It was an accelerated depreciation for businesses and
• 4:33
  investment, which I think helped to increase the business
• 4:36
  investment. But a few other things happened
• 4:38
  in 20251. Government spending went down a
• 4:41
  little bit as a percent of GDP. The deficit went down a little
• 4:44
  bit as a percent of GDP in 2025. And then we had tariffs in the
• 4:47
  middle of the year. And those have been on again,
• 4:50
  off again, on again, off again. And that was definitely a drag
• 4:54
  on economic growth. How much we don't fully know,
• 4:56
  but it doesn't seem like fiscal policy helps in 2025 very much.
• 5:01
  What's going to happen in 2026? Well, we now know for sure
• 5:05
  they're going to be a bunch of tax cuts kicking in in the first
• 5:08
  quarter when people file their tax returns for the first time,
• 5:11
  they're going to get back a refund based on tips, based on
• 5:15
  Social Security and based on overtime. 3 tax cuts that were
• 5:18
  passed last year but didn't take effect last year.
• 5:20
  They've taken effect in, in the in the spring to allow people to
• 5:23
  take some of these exemptions. And then I think we're going to
• 5:27
  get a Supreme Court case in the first quarter probably on
• 5:30
  tariffs. And my expectation is it'll undo
• 5:32
  a lot of the tariffs that got put on last year and might, it
• 5:36
  may or may not result in the elimination of some tariffs or
• 5:38
  refunds going back to people. But I think that is also going
• 5:41
  to be a positive market sentiment driver.
• 5:44
  So if I had a bottom line it I would say we have good economic
• 5:47
  growth coming out of the 2025 period, Fed rate cuts and
• 5:51
  quantitative easing in the first quarter along with the biggest
• 5:53
  tax refunds I think we've ever seen in the first quarter of
• 5:56
  next year. And and maybe some positive news
• 5:58
  on tariffs being undone by the Supreme Court.
• 6:02
  In any event, it's an election year next year, which you and I
• 6:04
  both know, Dave. That's usually when the when the
• 6:07
  government comes out to start buying votes to put maybe not a
• 6:11
  charitable. New line.
• 6:13
  They're going to put, they're going to want to put some money
• 6:15
  in your pocket, in my pocket well in advance of November.
• 6:18
  So anyway, all good reasons I think why we have a bit of a
• 6:20
  tailwind going into 2026. Well, I guess I agree with you
• 6:25
  on some parts of that. Certainly on the fiscal policy,
• 6:28
  it seems like the government's going to be spending a little
• 6:32
  bit more money and possibly, you know, tax cuts, you know,
• 6:36
  encouraging people to spend more money.
• 6:38
  I do wonder whether pull back on healthcare savings accounts and
• 6:41
  other things is going to force people to spend more of that
• 6:44
  money on their own healthcare than previously being spent by
• 6:47
  the government or by business. So I I do wonder if there's a
• 6:51
  little bit. Of a mixed bag in the consumer.
• 6:53
  Side the rate cuts definitely seems like that's likely and
• 6:57
  probably quantitative easing is going to increase money supply.
• 7:00
  I think the business spending is the clearest picture.
• 7:02
  There's definitely like a lot of evidence that at least tech and
• 7:06
  probably other businesses, well are going to be spending money
• 7:10
  on building out AI and building out tech and, you know,
• 7:13
  potentially building out other, you know, related businesses.
• 7:16
  So I generally feel pretty good about how this is going to
• 7:19
  affect the tech and private market and particularly IP OS
• 7:23
  coming up for the next year. And I, I feel like maybe it's a
• 7:26
  little less clear on the consumer side what's going to
• 7:28
  happen. We'll, we'll see how.
• 7:29
  About how that all plays out. But let's let's flip over to
• 7:33
  talking about what we think is going to happen in the IPO
• 7:35
  market because that has a really significant impact on our
• 7:38
  business and a lot of our audience.
• 7:40
  If you're a betting man, what are your predictions for 2026 on
• 7:43
  the most significant IP OS? Well, I think we've had a lot of
• 7:46
  announcements in the last month or so.
• 7:49
  Maybe a month or. 2 about 3 big companies, SpaceX and Tropic and
• 7:54
  Open AI in particular. SpaceX has made it very clear
• 7:58
  that they intend to IPO next year at 1.6 trillion even they
• 8:04
  even have a number associated with it.
• 8:06
  I'm not sure I really believe that completely.
• 8:09
  I think that is intended to support the recent, you know,
• 8:13
  primary, secondary round financing at 800 billion and put
• 8:17
  a number out there that's higher than that as the IPO.
• 8:20
  But certainly that's possible. Sounds like they're headed in
• 8:23
  that direction with Entropic and open the eye.
• 8:27
  I'm not sure it's definite that either or both of those
• 8:30
  companies go public, but I would say it's possible, maybe likely,
• 8:34
  that at least one of them goes public.
• 8:37
  Maybe both? But I would say that's.
• 8:39
  Probably going to be a little bit more on the optimism for
• 8:41
  their future performance, not necessarily on the fundamentals
• 8:44
  of the business. Maybe Anthropic is a little bit
• 8:47
  more solid than Open the Eye, but then I think you have.
• 8:50
  A bunch of other companies. Data breaks, Stripe, Canva,
• 8:54
  Binance, Kraken that I've been kind of waiting for the right
• 8:57
  moment to go public and certainly have the track record
• 9:00
  and the financials to kind of go public.
• 9:02
  They may not be as large as that.
• 9:04
  First group of three. So probably all the attentions
• 9:07
  on, you know, the very, very large potential IP OS from
• 9:10
  SpaceX, Entropic and Open AI. But I would say Databricks feels
• 9:16
  like the biggest and strongest story of the rest of that group.
• 9:20
  It's pretty likely that Stripe in Canva and Kraken will go out
• 9:23
  as well. So I think we're going to see a
• 9:26
  big year for IPOs, whether whether it's a very, very big
• 9:30
  year or just a big year, I think it's certainly going to be a
• 9:33
  positive year. Seems that way already, if you
• 9:36
  know, barring some other. Major, you know, disaster or
• 9:39
  Black Swan event. By the way, here's a fun fact.
• 9:42
  In the entire history of the US, as far as I can tell, we've
• 9:45
  never had a down year in the stock market when these things
• 9:49
  are true. One, we just had a record year
• 9:52
  with broad equity markets #1 #2 the economy is growing, not
• 9:57
  shrinking. And then #3 the Fed is easing.
• 10:02
  Forget about tax cuts and all that other stuff.
• 10:03
  If just those three things are true, we've never had a down
• 10:06
  year in the history of the stock market, knock on wood.
• 10:09
  But I think all this speculation aside, we generally both feel
• 10:12
  pretty positive about the IPO market.
• 10:14
  There's several candidates who are likely to go public, some of
• 10:17
  them absolutely huge and could set records for FP OS, some of
• 10:20
  them maybe not quite so huge, but still really strong
• 10:23
  candidates to go out. I guess let's take the other
• 10:26
  side of that equation and say of the companies that aren't going
• 10:30
  to go public. What's your general feeling
• 10:32
  about the private markets and our valuations likely to
• 10:36
  continue? The size of the secondary
• 10:39
  market, the activity in the secondary markets, there's still
• 10:42
  a pretty high bar for companies to go public.
• 10:44
  We've, we've generally seen not too many companies doing less
• 10:47
  than 4 or 500 million in revenue are able to go public, at least
• 10:51
  in U.S. markets. And there's a ton of those
• 10:55
  companies out there. And you know, let's, let's pull
• 10:57
  out those top five, top seven that represent $2 trillion.
• 11:01
  There's still another 2, three, $2 trillion, maybe 3-4 trillion
• 11:05
  dollars of private companies that aren't going public yet.
• 11:10
  Yeah. My sense of that market and a
• 11:12
  lot of companies in our portfolio are in that category.
• 11:15
  They're not. We do own shares in SpaceX and
• 11:18
  Canva and a row, so we do have some of the more high profile
• 11:21
  companies where the fundraising seems to be very easy.
• 11:24
  But next level down it seems like it is easier now than it
• 11:27
  was like, you know, three or four years ago.
• 11:29
  It is still relatively difficult to CF OS we talked to would say
• 11:33
  if you have an AI story and you don't have a story on how that
• 11:37
  helps your business, then it's still a little bit, you know,
• 11:40
  challenging because I guess the the extent of fundraising is has
• 11:44
  loosened up. AI is sucking a lot of the
• 11:46
  oxygen out of the room. And so there's a, there's a
• 11:49
  force, there's a, a requirement to spend time on what's your
• 11:52
  business then look like as to how much of its recurring, how
• 11:54
  much of it is profitable? The other path to profitability,
• 11:57
  unit economics, if you have that story buttoned up, then it's
• 12:00
  relatively easier than it was five years ago, But still, you
• 12:04
  know, still on the, on the challenging side overall, that's
• 12:07
  it. I think.
• 12:08
  I think if we, if we see continued growth in the economy,
• 12:11
  that IPO market begins to open up, investors will get their
• 12:13
  money back. So LP's will have some liquidity
• 12:15
  and returns that will make that the rest of the fundraising
• 12:18
  ecosystem a little bit healthier.
• 12:19
  So it's never easy to fundraise, but it's certainly now easier
• 12:22
  than than three years ago, I think.
• 12:25
  I think one of the other factors that's going on is a lot of the
• 12:28
  secondary market that we've been seeing lately is happening when
• 12:32
  a primary round is occurring or when a large tender offer, which
• 12:35
  is an organized process is occurring.
• 12:37
  And so for employees and early investors of these companies
• 12:41
  that maybe aren't the top 5 to 10 most exciting companies out
• 12:45
  there, they're pretty much dependent upon a primary round
• 12:49
  or an organized tender offer to get.
• 12:51
  Liquidity. At least at a reasonably fair
• 12:54
  price. And if those are not going on,
• 12:56
  if they're having to sell outside a primary round window
• 12:59
  or outside a large secondary window and they're not the top
• 13:02
  ten names that are in demand, I think a lot of those sellers are
• 13:06
  having to discount their shares in order to get buyers.
• 13:09
  And and that's really kind of this more tale of two markets.
• 13:12
  I think everybody's very excited and there's huge demand for
• 13:16
  those top five to 10 companies to the extent that some of them
• 13:20
  are even priced at premiums to their their primary round
• 13:23
  offerings. But I think the more general
• 13:26
  case is most of those companies. Still have to do.
• 13:29
  An organized marketing process to raise capital either for
• 13:33
  primary or secondary offers. And if you're a small seller or
• 13:36
  an individual employee that's selling outside one of those
• 13:39
  windows, you're probably going to have to sell at a substantial
• 13:42
  discount in order to get a buyer together.
• 13:45
  And I think that's the opportunity that we see in the
• 13:49
  secondary market that maybe most other people are overlooking.
• 13:54
  Yep, I think, I think that's correct.
• 13:56
  That's, that is the, I think the dynamic that we've talked about
• 13:58
  before, but you don't think it's going away is that those top ten
• 14:01
  companies that are attracting most of the capital are able to
• 14:04
  do it because they're brand names recognized investors are
• 14:07
  coming in and there is this that an organized process.
• 14:10
  Either it's a primary round where the company is running a,
• 14:12
  a secondary offer to get liquidity for employees.
• 14:14
  And you know, outside of that, it's probably, I think it's
• 14:17
  heading in the right direction because the more that secondary
• 14:19
  market opens up, it gets a little bit more accepted.
• 14:22
  Companies kind of figure out what they're doing and why and
• 14:25
  it becomes a bit more understood how the process works.
• 14:29
  But still I think the very, you know, under scoured, under
• 14:32
  reported market and still significant discounts usually to
• 14:35
  where where we've seen this last price round.
• 14:37
  So that seems to me like where the opportunity should be for
• 14:39
  us. I think in a lot of ways it's
• 14:42
  maybe parallel to if you look at the the public market, the
• 14:45
  difference between companies that have high growth rates and
• 14:49
  lower growth rates and companies that issue dividends or don't
• 14:52
  like companies that have lower growth rates, maybe not quite as
• 14:56
  much profitability might be, you know, issuing dividends at least
• 15:00
  on a way to attract or keep their investors.
• 15:04
  Whereas companies that are growing fast making a ton of
• 15:06
  profits don't necessarily have to distribute those profits.
• 15:09
  In order to get a market attractive.
• 15:10
  Market for their shares. I wonder if that same effect is
• 15:13
  happening in the private market, where again, the top ten
• 15:16
  companies can set a price pretty much anything they want, and the
• 15:19
  market will buy it. But for a lot of the rest of the
• 15:22
  market, they might have to sweeten the deal in order to get
• 15:25
  buyers to come to the table. Yeah, I think that's right.
• 15:29
  I think that's what what what seems to be happening in the
• 15:32
  market. Those top ten now those top ten
• 15:34
  are going to have more, more options going forward if indeed
• 15:37
  the IPO markets open up. And so it'll make those
• 15:40
  secondary offers even more competitive and the the pricing
• 15:43
  even tighter. And so maybe the attention
• 15:45
  begins to flow, you know, down to the next tier of companies.
• 15:49
  That would seem logical, but but we haven't really seen that yet.
• 15:53
  Just because the markets opened up at the top 10 doesn't seem
• 15:55
  like it's it's yet opened up beneath that.
• 15:57
  But maybe that's just a matter of time.
• 16:00
  Yeah. And I think even though the
• 16:01
  secondary market is growing, there's still probably not
• 16:03
  enough capital out there to meet all the potential supply that's
• 16:09
  available. Right, right.
• 16:14
  Gilligan, why don't you stop that?
• 16:15
  You don't know anything at all about space.
• 16:17
  I know one thing about it, you take out more of it than I do.
• 16:20
  Very funny. Well, why don't we jump into
• 16:24
  some other topics that we can talk about here.
• 16:26
  There's been three or four major acquisitions at the end of the
• 16:29
  year. Most notable on that is probably
• 16:32
  the NVIDIA acquisition of Rock and some cases it's not quite an
• 16:38
  acquisition. Do you want to give us a little
• 16:40
  bit of that story and your thoughts on it?
• 16:43
  Rock is not a huge competitor to NVIDIA, but it's a it's
• 16:46
  significant enough to depend on Nvidia's radar.
• 16:49
  And what they're going to do is they're going to license the
• 16:51
  technology that Grok has to NVIDIA.
• 16:53
  It's not technically an acquisition.
• 16:56
  I think the reason was if NVIDIA said we're going to buy Grok,
• 16:59
  that would invite some antitrust scrutiny.
• 17:02
  So instead they said we're going to send $20 billion over to Grok
• 17:05
  and their shareholders and it's going to be a a non exclusive
• 17:08
  license. But then Jonathan Ross, who's
• 17:11
  the CEO of Grok and basically the entire engineering talent
• 17:16
  team over at Grok is going to come over to NVIDIA.
• 17:19
  So you know, when, when the, when the management team of a
• 17:22
  company like Rock goes over to NVIDIA, that's basically like an
• 17:26
  acquisition. And so for them, I think it, it,
• 17:28
  it functions as if it does as if it is an acquisition, just
• 17:31
  without the antitrust scrutiny. So pretty good deal I think for
• 17:35
  NVIDIA given that much cash to generating and what they have.
• 17:38
  Rock obviously has an interesting technology with a an
• 17:40
  emphasis on this inference tech, which is obviously what NVIDIA
• 17:43
  has been been focused on. And so to be able to get that in
• 17:47
  a deal like this and effectively an acquisition and take out
• 17:50
  Brock or weakens them as a competitor, probably a good
• 17:52
  thing for them, kind of a market share grab for NVIDIA.
• 17:54
  News. If there was an opportunity for
• 17:57
  Grock to consider going public in the future, this is a faster
• 18:00
  alternative for them to get an exit.
• 18:03
  The company was I think making about 500 million in 2025.
• 18:07
  That's up from less than 100 million in 2024.
• 18:11
  So pretty substantial growth in the last year and projected
• 18:14
  revenue maybe north of 1.4 billion in the next year or so.
• 18:18
  Certainly there is a lot of revenue that the company was
• 18:21
  generating. Pretty big win for the investors
• 18:24
  in Grok. I think Chamath and Social
• 18:27
  Capital were early investors and probably have made quite a bit
• 18:30
  of money. Chamath has had a lot of
• 18:31
  criticism for other deals that he's done and that is Spacs.
• 18:35
  That didn't work out quite so well, but that one seems to work
• 18:37
  out well. I've got to give them props.
• 18:39
  I've, I've, I've called out when those don't work, but every once
• 18:43
  in a while, you know, you had, you had a home run, you have 3
• 18:45
  strikeouts. That's still a pretty good day
• 18:47
  at the ballpark, Dave. You said this was a pretty good
• 18:51
  deal for NVIDIA, and $20 billion might sound like a lot of money,
• 18:57
  but if you look at Nvidia's free cash flow, it's really less
• 19:02
  than, I guess 20%. Nvidia's cash flow in 2025, at
• 19:08
  least projected, is almost $100 billion.
• 19:12
  That's really pretty incredible. If you look at the cash flow
• 19:14
  coming from some of these hyper scalers, Nvidia's gone from a
• 19:18
  little over 20 billion in 202360 billion in 2024 and now almost
• 19:23
  100 billion in projected free cash flow in 2025.
• 19:27
  Kind of a crazy big number. Yeah.
• 19:30
  Alphabet, Google has been hovering around 60 billion in
• 19:34
  free cash flow. Meta, Microsoft and Amazon maybe
• 19:37
  in the, you know, 40 to 60 range.
• 19:40
  There's a lot of money being generated by those companies.
• 19:44
  I think we kind of did some analysis of this before as part
• 19:47
  of their build out not being a a crazy amount of money for at
• 19:50
  least those companies. Oracle, I think it's probably a
• 19:53
  slightly different story, but at least for NVIDIA, just a huge
• 19:57
  amount of money coming in the door.
• 19:59
  What do you think they're going to be doing with that money
• 20:01
  about? Do they they have enough
• 20:03
  opportunities to actually put it to good use?
• 20:05
  Are they going to be buying back stock, making acquisitions,
• 20:09
  spending it? Yeah, I would think it's the
• 20:13
  number one thing I think. But well, just as a reminder,
• 20:15
  there are what 5 trillion in market cap.
• 20:17
  So which you, you suggested before it was, was expensive and
• 20:22
  the valuations are expensive and they're historically expensive.
• 20:24
  But you know, when you think of it, if you think of them trading
• 20:27
  at 22 to 24 times free cash flow in a 4% and declining rate
• 20:33
  environment, that actually sounds to me that sounds like a
• 20:35
  reasonable, you know, reasonable evaluation.
• 20:38
  And So what is it going to do with the cash flow?
• 20:40
  I think one on the one hand, at 100 billion, they could buy back
• 20:43
  stock. Based on Michael Bury's tweet
• 20:46
  from 2 weeks ago, they've spent 112 billion buying back stock
• 20:50
  over the past five years. Maybe they ramp up their stock
• 20:54
  buyback program. I don't think they get a lot of
• 20:56
  credit from the market for doing that, but I think some of that
• 20:59
  is probably healthy. I think it's a CFO.
• 21:02
  If I was spending 20 to 50% of my free cash flow buying back
• 21:05
  stock, I'd say that's, but that seems like a lot.
• 21:08
  I don't think you need to spend, you know, more than that.
• 21:09
  They're not really paying a dividend.
• 21:10
  They have like a 1 cent a share dividend, I think.
• 21:12
  So that's neither here nor there.
• 21:14
  So either they bank the money or they go after acquisitions like
• 21:17
  this for cash where you can buy a, a company like rock.
• 21:20
  And if they're, if they're doing 500, you know, million revenue
• 21:23
  and you can add that to your income statement and then
• 21:26
  integrate that into your chip stack and, you know, you don't
• 21:29
  have to invest as much as you ordinarily would.
• 21:31
  That seems like a, a really easy thing to do for them to, to, to
• 21:33
  make, you know, 3-4, five of these acquisitions on an annual
• 21:37
  basis. And that just puts a little tiny
• 21:39
  dent in their free cash flow. And, and they keep building
• 21:42
  their business. So that that to me seems like
• 21:43
  the number one thing they'll do in this environment is keep
• 21:45
  making acquisitions. Yes, Gilligan, I'm stuck.
• 21:51
  Are you sure positively you're stuck I'm.
• 21:53
  Sure, positively I'm. Stuck.
• 21:54
  Are you definitely positively sure you're stuck?
• 21:56
  I'm. Definitely, positively sure I'm
• 21:58
  stuck. One of the biggest deals that
• 22:01
  was recently announced was SoftBank buying data center
• 22:04
  investment firm Digital Bridge for $4 billion.
• 22:07
  It's interesting for SoftBank, this is the first time I think
• 22:10
  that they've moved away from LLMS and software and they're
• 22:14
  kind of they're moving towards where there's a rising demand
• 22:17
  for like the computing capacity that that underpins AI.
• 22:22
  They made a, the acquisition Digital Bridge is a, they're an
• 22:26
  alternative asset manager. They invest very heavily and
• 22:30
  digital infrastructure like data centers and cell towers and
• 22:33
  fiber networks, all the stuff that undergirds the digital
• 22:36
  economy. They paid a 15% premium over
• 22:39
  digital digital bridges closing share price December 26th.
• 22:43
  It's a 50% premium over there like 52 week average closing
• 22:46
  price. So like SoftBank is, is want to
• 22:49
  do they pay a, you know, pretty healthy premium, but I think
• 22:52
  this is their first really big bet on AI infrastructure as
• 22:55
  opposed to just the LLMS, which I guess was just a matter of
• 22:58
  time and and seems to make sense.
• 23:01
  Another data center related acquisition, Alphabet, is buying
• 23:05
  a company called Intersect Energy for about $4.7 billion in
• 23:09
  cash and some debt. They had taken a minority stake
• 23:12
  in Intersect Power and also participated in a $800 million
• 23:17
  funding round back in 2024. So they've already got a little
• 23:22
  piece of the business and like I just want the rest interesting
• 23:24
  with this one, as you said, it's a data infrastructure play
• 23:27
  hardware or not software. That last deal included TPG rise
• 23:32
  climate and some climate funds and green funds.
• 23:35
  And it's really more now I think about power generation for them.
• 23:38
  It's, it's not just data centers, but also this is going
• 23:41
  to help Alphabet expand its power generation capacity so
• 23:44
  that they don't have to rely on the local utilities that are all
• 23:49
  struggling to keep up with the, with the power demand from AI
• 23:52
  companies. So securing access to this, the
• 23:54
  energy that powers the data centers is becoming a, a
• 23:57
  critical part of like training AI models in that whole stack.
• 24:00
  And I think that's, that's the thing that now companies are
• 24:02
  running into is where do you get all the power from?
• 24:04
  And if the local utility providers either can't provide
• 24:07
  it or they can, but they're driving up the price of power
• 24:10
  for the rest of us, like us little, little people, that's
• 24:14
  creating political backlash now in in a lot of these
• 24:18
  communities. And so that's I think well, but
• 24:20
  also Google is trying to avoid. So as it turns out, oil and gas
• 24:24
  or power in general, like the new oil used to be chips and
• 24:28
  maybe it maybe oil and gas is like the new oil.
• 24:31
  Maybe we have to go back to figuring out sources of power.
• 24:34
  And at least, you know, at least as far as Google is concerned,
• 24:37
  you know, they're betting here on a on a green energy solution
• 24:39
  which will help them to fill part of that need.
• 24:41
  China has been scaling out incredible amounts of
• 24:44
  alternative energy, particularly solar and also nuclear, really
• 24:49
  massively scaling up solar and it seems like.
• 24:51
  If. Power is a constraint on data
• 24:53
  center build up. In the future, the US might have
• 24:55
  a lot more concerns than China does in terms of where that
• 24:59
  source of power is coming from. China's ahead for sure.
• 25:01
  And they're way ahead on. They're standing up, you know,
• 25:03
  nuclear plants every like 10 or so nuclear plants every year.
• 25:07
  And it's, I don't think the US is, I can't remember the last
• 25:10
  time the US built 1 California's down to one over near Half Moon
• 25:13
  Bay in San Luis Obispo and just hasn't made the same level of
• 25:16
  investment. So China does seem to have like
• 25:18
  a, you know, all, all the above strategy on energy, which will
• 25:21
  give them, yeah, a little bit of an advantage because that's
• 25:23
  that's a constraint on AI growth.
• 25:27
  Perhaps being submerged in saltwater has had an effect on
• 25:30
  the seeds. If my father ever saw string
• 25:32
  beans like this, I think he'd faint.
• 25:33
  They're. More like pretzel beans.
• 25:36
  Pretzels. Oh, we only had some beer to go
• 25:38
  with them. OK.
• 25:42
  One last acquisition topic. Meta is acquiring a company
• 25:45
  called Manus for $2 billion. Manus is a company out of
• 25:49
  Singapore and they specialize in intelligent agents.
• 25:53
  It's not big, but they have grown, you know, from zero to
• 25:56
  100 million in ARR in two years or maybe three years now.
• 26:00
  So that's kind of amazing. Their focus is on autonomous AI
• 26:03
  agents. In fact, Manus is Latin for for
• 26:07
  hand, right? So it's like they're the hand
• 26:08
  that helps you do things. It's like a digital assistant
• 26:10
  that helps you perform multiple tasks in sequence and you can
• 26:13
  create multiple steps independently.
• 26:15
  They're kind of cool because they have a computer interface
• 26:17
  where where you can see what's happening.
• 26:20
  And as the agent, just like doing things like creating
• 26:22
  research reports, whatever, you can jump in and intervene.
• 26:25
  And so it's like your digital hand, but also with a lot of
• 26:28
  control over it, which is kind of cool.
• 26:29
  And obviously Meta thought it was cool too.
• 26:31
  I think Meta in this case, it's what's also interesting.
• 26:33
  It's a Chinese company. A lot of the company was founded
• 26:36
  in China, then moved to Singapore.
• 26:38
  They shut down a lot of their Chinese operations and now
• 26:41
  they're selling to AUS company. OK.
• 26:45
  Interesting way to maybe get around restrictions on use of
• 26:47
  Chinese tech. Well, I wonder if there'll be a
• 26:50
  regulatory scrutiny. Whoever the Chinese equivalent
• 26:53
  is. If you know, David Sachs, who's
• 26:55
  who's, who's a friend of ours, like whoever their AI czar is,
• 26:59
  is probably looking just to make sure that there's no technology
• 27:02
  that's, that's subject to some kind of export restrictions.
• 27:04
  I imagine there'll be some AI antitrust scrutiny here on, on
• 27:08
  Beijing side. But it does seem like a very
• 27:09
  good acquisition. I think met has struggled a
• 27:11
  little bit to kind of keep up in the AI work.
• 27:14
  They spend a whole bunch of CapEx on it.
• 27:16
  And you know, I think that's just they're, they're, they're
• 27:19
  seem to be a little bit behind, but this is the kind of
• 27:21
  acquisition that can integrate well with their stock and and
• 27:23
  get them in the game. So while we're on the subject of
• 27:26
  China, I guess we should talk a little bit about tech, IP OS and
• 27:29
  IP OS in China. China's had really boom year in
• 27:33
  2025 S double the amount of IP OS 115 firms generating $18
• 27:39
  billion in IPO offerings in 2025.
• 27:43
  It was a bit of a surprise that they had such a strong year.
• 27:46
  Their, their economy hasn't done great, but as you said, their
• 27:50
  IPO market doubled from, you know, 2025 from its, from its
• 27:56
  prior year. So the amount of money that's
• 27:57
  being raised in the China markets is very high.
• 28:00
  And turns out that did you know this Shanghai is now the number
• 28:03
  5 market in the world for IPO proceeds.
• 28:06
  They trailed in the two New York exchanges and then London.
• 28:09
  And the number one is Hong Kong. And this is, this is the first
• 28:12
  time Hong Kong's been the biggest IPO exchange venue in
• 28:16
  the world since 2019. And I think what's happening is
• 28:19
  we had in the middle of the year, we had easier rules from
• 28:22
  the regulators. So they're encouraging IP OS.
• 28:24
  In fact, they had a rule until the middle last year that if you
• 28:27
  were unprofitable as a tech company, you couldn't, couldn't
• 28:30
  list. But but now they're allowing
• 28:32
  unprofitable tech companies to list.
• 28:34
  At least on the Shanghai exchange, it was one of their
• 28:36
  big three. They've got very low interest
• 28:39
  rates in China, like sub 2%. The real estate shine is coming
• 28:43
  off that bubble. And so a lot of money is moving
• 28:45
  out of real estate into tech stocks.
• 28:48
  And then they had a couple of very successful IP OS.
• 28:50
  And this is just two of them that were that were featured and
• 28:53
  Bloomberg TV last week. One of them is more threads,
• 28:55
  which is a GPU maker. And they're up, you know, 5X
• 28:58
  from their IPO. And then another GPU
• 29:01
  manufacturer, Meta X was up 700% in their debut trading.
• 29:05
  So basically they're retail markets, really strong investors
• 29:08
  are snapping them up. And I think it seems like it's
• 29:10
  a, it's a very positive environment for them as they're
• 29:12
  trying to encourage a lot of their domestic companies to list
• 29:14
  and raise money as opposed to being dependent on some of the
• 29:17
  American companies. So I'd expect that to continue
• 29:20
  in in next year. I don't know if I'd want to buy
• 29:22
  a lot of China tech IPOs and they've performed well so far,
• 29:25
  but that seems like that seems like a very risky bet to me.
• 29:28
  Question for you. Do you think that China IPO
• 29:31
  markets will eventually become as sizable as.
• 29:34
  The US market, I think it's possible.
• 29:37
  I think the things that investors don't like about
• 29:39
  investing in China, you hit and you hit on the major one, which
• 29:42
  is the quality and diligence of the financials of a China listed
• 29:45
  company, especially if it's Shanghai and they don't they
• 29:48
  don't follow the same accounting procedures is gapped.
• 29:51
  It's it's subject to market manipulation.
• 29:53
  Just rules that have been in the US since the 1930s that aren't
• 29:56
  there in China and the Hong Kong exchange listing departments a
• 29:59
  little bit different. It is a higher standard and a
• 30:01
  higher bar. The the level of auditor
• 30:02
  financials. I think in in for a Hong Kong
• 30:05
  listed company is significantly better than Shanghai, not quite
• 30:08
  to where you'd expect in the US, but I think there is a it's a
• 30:10
  much different environment. So the other issue is currency
• 30:13
  controls, which has been an issue with investing in China
• 30:16
  for for any American or non China investors.
• 30:19
  But I think that's another one where that's if the government
• 30:22
  makes it easier to to bring money into and out of China,
• 30:25
  then, you know, that could make the market the at least the
• 30:28
  second biggest in the world, if not the biggest, probably bigger
• 30:30
  than bigger than London and any of the European markets anyway.
• 30:33
  I don't know if that's a priority for the current
• 30:34
  government though. They seem to be a little, you
• 30:37
  know, betwixt in between on that.
• 30:38
  They'll be very careful about that, I think.
• 30:40
  Seems likely the US markets are still going to be the deepest
• 30:43
  and largest pool of capital around the world, at least for
• 30:47
  some time. But I, I do wonder in terms of
• 30:50
  like the number 2 market, I don't know if you count the
• 30:55
  NASDAQ and Knight and I see is maybe 1:00 and 2:00, but you
• 30:57
  know after that European markets.
• 30:59
  The only European one with that's even close now is London
• 31:02
  and then Paris and and Germany have kind of faded significantly
• 31:07
  over the past, you know, decade or so.
• 31:09
  The market cap that those general, in general in those
• 31:11
  countries is of the, of the whole stock market is no higher
• 31:14
  than it was like 10 years ago. So you know they're paying
• 31:17
  dividends and you can make money in those markets, but it's not a
• 31:19
  very large dynamic market. China obviously is the up and
• 31:22
  Comer and then I think you're right, India, but India is
• 31:24
  probably 10 to 15 years behind where where China is.
• 31:27
  So not for, not for our third fund, Dave, maybe by the time we
• 31:30
  get to our fifth fund, II will be a the big player.
• 31:46
  Today we're going to have a great recording with James
• 31:48
  Riney, Founder and Managing Partner of Coral Capital in
• 31:51
  Tokyo, Japan. James, how you doing today?
• 31:54
  Hey, Dave, good to see you again.
• 31:56
  Nice to see. You thanks for spending some
• 31:58
  time with us. What's been happening in Japan
• 32:01
  and what's been happening with you and.
• 32:03
  What's going on with secondaries and startups and public
• 32:07
  companies in Japan? The big announcement for us is
• 32:09
  that we sold a big stake in Smart HR.
• 32:13
  It's the largest secondary sale ever in Japan.
• 32:16
  It's about fifteen ¥15 billion, which is whatever the exchange
• 32:20
  rate is. I think it's roughly it's around
• 32:22
  100 million right now. And this represents like
• 32:26
  basically half of our stakes. So we, we went really big into
• 32:29
  the company in 2017. We set up an SPV to acquire, you
• 32:34
  know, I mean, we did the entire Series B.
• 32:36
  So you can imagine what, how big of a stake it was.
• 32:39
  And at the time, we had over 20% of the company and we had been
• 32:43
  holders for a long time. And and after that, they had
• 32:46
  raised from Sequoia, let's say KKR Ontario teachers, you know.
• 32:51
  Yeah, they had some really, really solid investors and they
• 32:54
  are planning to go public. And we are very, very bullish.
• 32:57
  But you know, for all the reasons that you've talked about
• 33:00
  on this podcast, it's always good to take some shifts on the
• 33:03
  off the table. And thankfully, you know,
• 33:07
  because we had been so early, our position in the company was
• 33:10
  just so big at that point that we sold half of our stake and
• 33:16
  ended up six Xing the ESPB that we did.
• 33:21
  And then we, you know, we're still holders.
• 33:22
  So we still have half our stake. So, you know, we're, we're now
• 33:26
  we can just like sit tight and wait for for the upside from
• 33:29
  here. But for all sorts of reasons, it
• 33:31
  just felt like a very good risk management exercise just as a
• 33:35
  fund manager. Well, congratulations.
• 33:37
  That's a pretty amazing milestone.
• 33:40
  I guess returning 6X and the fund is about 8 years old and
• 33:44
  still got another 6X hopefully maybe more on the way.
• 33:47
  So that's that's fantastic. Yeah, we, we think it's going to
• 33:51
  be like A10 to 20X fund, but fingers crossed, you know, but
• 33:54
  you never know what's going to happen.
• 33:56
  So it's great to. Great to lock it in, you know?
• 33:58
  Yeah. I was going to say probably
• 34:00
  great to just, you know, hedge your bets at least a little bit
• 34:02
  and 6X is certainly amazing DPI if they're only 7-8 years.
• 34:07
  I, I guess if the audience wants to know, like smart HR is the
• 34:10
  it's like the rippling of Japan. So you know it's.
• 34:12
  I see. Huge Tam, you know, HR, HR, SAS
• 34:16
  company. You can, you can imagine, you
• 34:18
  know, it's, it's done well in other markets.
• 34:19
  It's it's of course done well in Japan and we think that it
• 34:22
  could, it's on the path to do a billion in an AR just in Japan.
• 34:27
  Amazing. So we, it's gonna be a massive
• 34:28
  business. It's just that, you know, high
• 34:30
  class problems like our stake was just so big at that point
• 34:32
  that it made sense to take the table.
• 34:36
  How did you get? To the point where you're at
• 34:37
  right now with Coral and what's been your journey into venture
• 34:41
  capital over the last, I guess, 1020 years?
• 34:44
  I guess I'll start with the fact that I grew up in Japan mostly,
• 34:47
  so I spend most of my childhood in Japan.
• 34:50
  I came back to Japan after I graduated, worked at JP Morgan,
• 34:53
  initially hated it. After about a year and a half, I
• 34:55
  started a company, raised much capital, did a few things.
• 34:58
  The company ended up becoming Coin Check, which is one of the
• 35:01
  largest crypto exchanges in Japan.
• 35:04
  I left kind of midway, so I can't take full credit.
• 35:08
  And I was thinking I was going to start another company and I
• 35:13
  thought maybe going to the investor side would be an
• 35:15
  interesting place to kind of prepare because I would just
• 35:18
  learn about many different industries and need to like meet
• 35:20
  lots of people and hopefully figure out like what my next gig
• 35:24
  would be. And and then, and then you
• 35:28
  showed up, you know, you showed up 15 and asked, hey, you know,
• 35:34
  you're interested in watching the Japan Focus Fund.
• 35:37
  And for all sorts of reasons that we can get into, the timing
• 35:41
  just seemed really, really good in, in, in 2015.
• 35:44
  I mean, when I was raising venture capital as an
• 35:46
  entrepreneur, there was less than a billion invested in
• 35:49
  venture capital in Japan. Most of that capital was coming
• 35:52
  from like corporate investors. So you had corporate investors
• 35:54
  and then like financial institution affiliated venture
• 35:57
  capital firms, but you didn't really have like independent
• 35:59
  Silicon Valley style venture capital firms.
• 36:02
  And so, you know, when you approached us, it really felt
• 36:05
  like the market was was unaddressed.
• 36:08
  But perhaps more importantly, the narrative on Japan was
• 36:13
  dislocating from the reality of what was actually going on.
• 36:15
  So what I mean by that is that most people when they think of
• 36:19
  Japan, they don't think of startups like, you know, they
• 36:21
  think of people going into like the Sony's or the Mitsubishi's
• 36:24
  and kind of staying there for, for life or for decades.
• 36:27
  And what we were finding in the market is that actually the
• 36:30
  smartest people that we knew were either starting companies
• 36:33
  or joining startups. And so the narrative was
• 36:36
  dislocating from the reality, which is usually a good place to
• 36:39
  be when you're looking for investments or business
• 36:41
  opportunities. And that particular market that
• 36:44
  that core set of like really talented people that are
• 36:46
  pursuing great, you know, opportunities.
• 36:49
  We're unaddressed. You know, it was basically
• 36:50
  salary, salary man, VCs in 2015. So, you know, you came to us,
• 36:55
  you took a chance on us. You know, I was 26 at the time,
• 36:58
  no fund manager experience for some reason, you know, you still
• 37:01
  take a chance on us. So we really appreciate that and
• 37:04
  we should. Probably just explain a little
• 37:06
  bit about what we're talking about here because I don't, I
• 37:07
  don't think the audience knows all this context, but well.
• 37:10
  Why don't you share the context? Yeah, What?
• 37:12
  What were you doing? Launching all over the world.
• 37:14
  That time. Well, this, this is back when I
• 37:18
  was still running 500 startups and we had a, a vision to have
• 37:22
  startups all over the world and fund managers actually all over
• 37:25
  the world. I had been coming to Japan for,
• 37:27
  for many years for both personal and business reasons.
• 37:31
  And we were looking to start a firm in Japan.
• 37:34
  And I, I believe, correct me if I'm wrong, I don't, I don't know
• 37:37
  if we met before this, but we we happen to bump into each other
• 37:41
  at a robot restaurant show They did.
• 37:43
  Yeah. For folks who haven't been
• 37:45
  there, it is quite a wacky show, which is a lot of fun to
• 37:48
  experience. Definitely, definitely a little
• 37:52
  bit of the Japan Tokyo experience.
• 37:55
  But we had a conversation, I guess while we were waiting in
• 37:57
  line and then kind of got to know each other from there.
• 37:59
  And one thing led to another and we were able to convince you and
• 38:03
  Yohei to join us and start 500 Startups in Japan, which was a
• 38:08
  really amazing opportunity. Thanks for thanks for taking us
• 38:11
  up on that. And obviously you've gone on to
• 38:14
  greater heights after that, too. You know, Dave, I think you, you
• 38:18
  deserve a lot of credit for being one of the first in
• 38:20
  Silicon Valley to, to go out, you know, and, and go to all
• 38:23
  these geographies and invest time and capital and intake bats
• 38:28
  on folks like us that had no, no track records.
• 38:30
  So I think you get the credit for that.
• 38:33
  Well, I I think. You struck me as a pretty smart
• 38:35
  guy and certainly having fluency in Japanese, but also having a
• 38:40
  little bit of a different perspective than maybe the
• 38:42
  traditional, the Hanjin gave you a bit of an advantage.
• 38:46
  And and also I should mention, Yohei, you know as well helped
• 38:52
  you get started with there. I think one thing that I was
• 38:55
  always surprised about was there's a lot of technical
• 38:58
  talent in Japan. There's certainly a long history
• 39:02
  of, you know, entrepreneurship in Japan with many different
• 39:06
  companies, but a lot of that was kind of in more corporate
• 39:09
  environments and. I guess there there's some maybe
• 39:14
  truth. I don't I don't know what your
• 39:15
  perspective is on whether, you know, Japanese culture is not so
• 39:19
  conducive to startups because of fear of failure and whether that
• 39:23
  has, you know, been a been a problem for people in Japan to
• 39:27
  do start-ups, You know, certainly more conservative
• 39:30
  environment, a lot of people who are used to traditional
• 39:33
  corporate salary environments and you know, people don't want
• 39:36
  to experience failure. I think that's, you know, a
• 39:39
  badge of honor here in Silicon Valley, but not so much in other
• 39:42
  parts of the world and certainly not in Japan.
• 39:44
  But what? What did you?
• 39:46
  See with kind of this change that you were just, you were
• 39:49
  describing where a lot of smart people were starting to jump
• 39:52
  into start-ups. How?
• 39:52
  How were they overcoming some of those cultural issues?
• 39:55
  You know, and like I said, we started late 2015 closer fund in
• 39:59
  2016 and the timing was impeccable.
• 40:02
  So the amount of capital going into start-ups in Japan when we
• 40:06
  started was less than a billion. Got it.
• 40:07
  You know, closer to like 700 million, something like that.
• 40:10
  And then now it's like 7 to 10 billion depending on what the
• 40:13
  USGP was compared to pretty much any other geography outside the
• 40:17
  US And I don't know the latest numbers on China.
• 40:20
  I know there's been a pullback, but.
• 40:22
  It's substantial, right? It's, it's quite, it's quite big
• 40:25
  relatively GDP, it's so small. I think we, we probably can
• 40:28
  still get to every 20-30 billion.
• 40:30
  I think we have a lot of development to do, but things
• 40:33
  have definitely changed. There's more capital available
• 40:36
  start us to become much more mainstream.
• 40:38
  We have probably like 1 to $3 billion exits per year in Japan,
• 40:42
  You know, like, there's a lot of government support as well.
• 40:45
  And I think especially in like Northeast Asian cultures where
• 40:48
  like, you know, you did, you need to sort of like top down
• 40:51
  encouragement within the society.
• 40:55
  Japan is very much pro startups, pro technology, and especially
• 41:00
  with the new Prime Minister kind of looking at startups as like a
• 41:05
  growth engine for the economy. There's a lot of tailwinds right
• 41:09
  now and we can get into some of that stuff if you ever said.
• 41:11
  Yeah. Yeah.
• 41:12
  And I think you mentioned as a percentage of GDP, Japan is
• 41:17
  still relatively small percentage of GDP being invested
• 41:21
  in startups, But I think that speaks to the potential for what
• 41:24
  could be a much larger venture economy in Japan.
• 41:27
  What do you think about kind of a number and type of venture
• 41:30
  capital firms that are operating in Japan and how does that
• 41:33
  compare to the US? Yeah.
• 41:36
  So like I said, when we started, most of the capital was was
• 41:39
  coming from corporates and I believe on a percentage basis
• 41:43
  that may still be the case. It's harder to pin down the
• 41:45
  number because the capital not only comes from balance sheets
• 41:49
  and then CVCS, but also a lot of capital that's funded into the
• 41:53
  venture funds. You know, the, the capital
• 41:55
  behind capital is also from corporates in a lot of cases.
• 41:59
  Now in our case, we've moved to complete institutional, but a
• 42:03
  lot of the VCs that even if they are independent VCs, they still
• 42:06
  raise from, from corporate capital.
• 42:10
  So, so I think I, I would guess that if you include that still a
• 42:15
  lot of it is, is coming from corporates.
• 42:18
  However, however, a lot has changed in the sense that, you
• 42:22
  know, folks like us, Globus, a few others have been able to
• 42:26
  raise larger funds from institutional investors.
• 42:29
  So it's much more mature of a market than used to be.
• 42:32
  And then the other thing that's changed is that there are a lot
• 42:35
  more global investors coming in. So like I said, you know,
• 42:37
  Sequoia had invested in in Smart HR, but we also had DST Green
• 42:42
  Oaks, you know, like I said, KKR best similar as invested in our
• 42:47
  companies so on and so forth. And so there's a lot more
• 42:51
  foreign capital looking at Japan.
• 42:53
  Part of that is the pull back from China, but also part of
• 42:56
  that is, you know, people are looking elsewhere for alpha and
• 43:01
  recognizing that actually Japan is looking quite interesting
• 43:03
  these days. Yeah, that's a.
• 43:05
  That's a. Really big change from maybe
• 43:07
  10-15 years ago when hardly any US firms, USVC firms were
• 43:12
  investing in Japan. I think it was very unusual, but
• 43:16
  but you're right, it does seem like there's more capital coming
• 43:19
  from outside Japan and and certainly that's true in private
• 43:23
  equity in other areas as well. Yeah, definitely.
• 43:29
  I think the two things that I miss the most are are vegetables
• 43:32
  and dates. We.
• 43:32
  Have plenty of dates here in the island.
• 43:34
  Not the kind I miss. I wonder if you could talk a
• 43:39
  little bit about what the IPO market and secondary market
• 43:42
  looks like in Japan because those are also pretty different
• 43:45
  from the US and I guess it's, it's much easier for companies
• 43:50
  to go public in Japan at smaller scale.
• 43:53
  Is that is that correct? Yeah, that's right.
• 43:55
  Yeah. So when you're looking at Japan,
• 43:57
  I, I, I always tell people that they need to kind of switch out
• 43:59
  their lenses because you need to understand the context before
• 44:04
  hearing the the story and what's going on.
• 44:07
  And the context is companies in Japan, like startups in Japan,
• 44:11
  they can go public around series B or series C in terms of
• 44:16
  valuation and and sort of revenue stage.
• 44:19
  And it's largely like it was beforethe.com boom in the US.
• 44:24
  So you know, like, you know, Netscape, Amazon, so on and so
• 44:28
  forth. Like they went public within
• 44:30
  four years, right? Like that's like, right.
• 44:31
  The reason that there's a four year investing period is because
• 44:34
  that was you. They went to the public.
• 44:36
  I don't think most people even think about that, but that's
• 44:38
  that's completely correct that that was why it was 4.
• 44:41
  Years. That was why it is.
• 44:43
  In fact, I would argue that it should not be.
• 44:44
  It should be way more than four years.
• 44:46
  Like you know, because it takes way.
• 44:47
  Longer to build in those the US now my peers are taking 12 years
• 44:51
  maybe even longer and. Probably, yeah, I don't.
• 44:53
  Think anybody's thought about 12 year investing schedule?
• 44:57
  Exactly, exactly. So so we're still like anchored
• 44:59
  this four year thing. But but the whole backdrop is
• 45:02
  because companies really did go public that early.
• 45:06
  Now, you know, after Sarbanes Oxy and all the sort of
• 45:09
  regulations that made it more difficult to go public in the US
• 45:12
  and then more private capital becoming available, companies
• 45:17
  seem like they never go public now.
• 45:18
  So it which is why secondaries are so important, which you can
• 45:23
  kind of get into. But but in Japan, that really
• 45:26
  never happened. So a lot of companies would go
• 45:29
  public a lot earlier because they could, but also because
• 45:32
  there wasn't a lot of private capital available to raise
• 45:35
  larger rounds. And so it was it was kind of
• 45:37
  both of these things and going public early.
• 45:41
  Like it's a double edged sword. Like on the one hand, you can
• 45:43
  get liquidity quickly, but on the other hand, you know, you
• 45:47
  know, in some cases it can stunt growth because you're trying to
• 45:51
  invest in growth, which usually means that you're going to be
• 45:53
  unprofitable for a while in your shareholder base because you're
• 45:56
  at a small scale, might not be so, so sophisticated to
• 45:59
  understand that you're investing in growth, right?
• 46:01
  So we are very small. And and So what companies do is
• 46:04
  like they raised to profitability and ultimately
• 46:06
  don't become, you know, I don't think they reached a full
• 46:09
  potential, right? This dynamic actually has like
• 46:12
  second order effects. And so the, when we're talking
• 46:16
  about like startup ecosystems, usually we're talking about
• 46:19
  Unicorn count, right? So like the word Unicorn is like
• 46:23
  like a like, you know, UK has X number of unicorns and the US
• 46:28
  have widened unicorns and so on and so forth.
• 46:30
  And because companies in Japan would go public around Series B
• 46:33
  or Series C, they would go public around the same time that
• 46:38
  let's say you know, you know, AUS company equivalent would go
• 46:41
  would raise a serious C, for example.
• 46:43
  And then after going public, they would become a billion
• 46:46
  dollar enterprise in terms of market cap, like an enterprise
• 46:49
  value. But because they were already
• 46:51
  public, they were no longer counted as start-ups.
• 46:54
  And technically the definition of Unicorn is a private company
• 46:57
  by. Private company start up.
• 46:59
  I see exactly. So in Japan, what we had is you
• 47:03
  do have companies that have gone to a billion dollars enterprise
• 47:06
  value within 12 years of founding.
• 47:08
  It's just that they're public companies and so they're no
• 47:10
  longer counted anymore. And so we call these hidden
• 47:12
  unicorns in Japan. And so we were just curious over
• 47:15
  like a 10 year time horizon, how many hidden unicorns have there
• 47:19
  been? And when we ran the the
• 47:21
  analysis, there was like 4243 companies that are like these
• 47:24
  hidden unicorns. And so if you count the hidden
• 47:27
  unicorns, there's like way more to the story on Japan when it
• 47:31
  comes to startups. It's just that, you know,
• 47:34
  foreign media in particular, they count unicorns as a way to
• 47:39
  hype up or think about like how big startup ecosystem is.
• 47:42
  And Japan has been like under the radar because like
• 47:45
  journalists are just counting the private market companies and
• 47:48
  not the, the public market companies.
• 47:50
  That is like a very different factor they have to consider
• 47:53
  when working at the time market. You mentioned the presence of
• 47:56
  CVC or corporate venture capital in Japan being a big, a big
• 47:59
  presence and a big force in numbers as well.
• 48:03
  And you spent a little bit of time in corporate Japan,
• 48:05
  although I guess it sounds like you probably didn't spend too
• 48:08
  much time there. I would imagine that's tough for
• 48:11
  a person like you to want to work in a corporate environment,
• 48:14
  But but how does that impact, you know, kind of the startup
• 48:17
  environment? And I guess you, you mentioned
• 48:20
  that even, you know, traditional funds still raise capital from
• 48:24
  corporates. And so there's, there's probably
• 48:26
  a lot of corporate politics, corporate strategy that is
• 48:28
  involved in the venture capital market in Japan.
• 48:31
  Is that is that still the case or is that really changed?
• 48:34
  It is the case. It is the case, yeah, like all
• 48:37
  all the hesitation or like warnings that people have about
• 48:41
  corporate money in the US largely track in Japan.
• 48:45
  So that's true. But then you add in the other
• 48:48
  factor that Japanese corporate culture has a it's called Jinji,
• 48:52
  but basically it's like a rotation system within the
• 48:55
  company. So like every three to four
• 48:56
  years you automatically rotate out.
• 48:58
  And so you'll see wait money from Mitsubishi, from Suzuki
• 49:02
  Sam, because he's a real great guy.
• 49:04
  And you give, you give rights to Mitsubishi.
• 49:07
  Well, you think you're giving it to Suzukan, but it's actually to
• 49:09
  Mitsubishi. And Suzukan gets rotated out
• 49:12
  into like some other department. And then you have like, you
• 49:15
  know, Tanak Hassan from accounting and now he's on your
• 49:20
  board And it's like, Oh my God, like, what did I just do?
• 49:23
  You know, like, And so we're, we always tell our, our company is
• 49:27
  like, it's fine to raise from corporate, you know, corporates,
• 49:31
  as long as you don't give them the, the governance rights that
• 49:34
  come with, with that. And, and then, you know, it's
• 49:39
  even better if you can raise from a proper VC and they will
• 49:43
  lead. So, you know, that, you know,
• 49:45
  Dave is going to be there because he's a, you know, GP has
• 49:47
  made a commitment for, for the long term.
• 49:50
  And then Tanaka, Science, Suzuki come in as, you know, follow on
• 49:52
  investors. And that's why, you know, yeah.
• 49:55
  I think for folks who are not familiar with Japanese corporate
• 49:57
  culture that that process of rotation is very established
• 50:01
  tradition as a way to give senior, you know, execs in
• 50:05
  Japanese companies experience in different parts of the company,
• 50:07
  which, you know, might make sense for them to be
• 50:10
  well-rounded. But as you mentioned, it might
• 50:12
  mean that there is a sudden change in who's running your
• 50:16
  partnership with that company if you're used to someone who then
• 50:19
  gets moved to a different, you know, department or even a
• 50:22
  different country sometimes. Yeah, exactly.
• 50:25
  And then you might be interested in the fact that now because the
• 50:29
  market has gotten bigger and companies have been able to
• 50:32
  raise, you know, 100 million plus in the private markets,
• 50:37
  they they've chosen to do so. And so like Japan is a landscape
• 50:41
  where you can go public early. So like the bar to go public
• 50:45
  right now is about 10 billion Japanese yen, which is roughly
• 50:48
  around $60 million. So you still go public really,
• 50:51
  really early. However, you, you know, for the,
• 50:55
  the, the best quality companies, you can raise large amounts of
• 51:00
  capital in the private market as well.
• 51:02
  And so we have the best of both worlds, I think.
• 51:04
  So some people kind of complain about the Japan market companies
• 51:08
  go to go public too early, so on and so forth.
• 51:10
  But like, I actually think it's great to have both options
• 51:13
  available, you know, to choose from depending on the
• 51:17
  circumstances of the company. And the companies that are best
• 51:22
  in class continue to raise a lot more capital.
• 51:25
  Smart HR is like one of those examples where they've raised,
• 51:28
  you know, hundreds of millions of dollars in the private market
• 51:31
  and you know, they can go public if they want to go public, but
• 51:34
  they don't need to, right? There's no, there's not really a
• 51:36
  reason to as like early, early VCs that needs to generate
• 51:40
  liquidity for for LP's. Obviously like the next question
• 51:43
  is like, OK, like how do you manage that?
• 51:46
  Secondary is historically in Japan has not really been a
• 51:48
  thing because it hasn't really needed to be.
• 51:50
  And in fact there was kind of a of of the early VC selling.
• 51:54
  But now that there's more capital available in private
• 51:57
  markets and therefore companies have waited to go public later,
• 52:01
  it's become a lot more normalized to switch up the cap
• 52:06
  table. You know, like it's certain
• 52:07
  stages you have certain types of investors.
• 52:09
  And then later stages you might have more sort of like, you
• 52:12
  know, the Bailey Giffords or like the capital groups, like,
• 52:15
  you know, those folks that are coming in in preparation for for
• 52:19
  30, the IPO. And so it's smart insurance
• 52:23
  particular case, you know, they had, you know, some of those
• 52:25
  names, but General Atlantic was also looking to make an
• 52:28
  investment into Smart HR Smart HR was not raising any primary
• 52:33
  capital. They didn't need any new
• 52:35
  additional funding. And so it worked out for us
• 52:38
  because we were also looking to generate some liquidity.
• 52:41
  We were not in a hurry because we were bullish, but it was
• 52:44
  great to have like a win, win, win situation where we would
• 52:48
  generate liquidity. We got it on good terms.
• 52:51
  We think there's way more upside for here.
• 52:52
  So General Atlantic, I think we'll also make money and we
• 52:55
  want them to have a good impression on Japan.
• 52:58
  So if they make money in Japan, that means that they'll make
• 53:00
  well, they're going on Spanish or they'll make, they'll they'll
• 53:02
  be more inclined to invest in other companies in Japan, which
• 53:05
  means that there'll be hopefully more capital coming to Japan.
• 53:07
  So, you know, I think that it's, it's a great scenario for
• 53:10
  everyone. It seems that a box containing
• 53:15
  radioactive seeds is missing every.
• 53:17
  I think he said something about seeds.
• 53:19
  The vegetable seeds were in a small wooden crate and
• 53:21
  individually packaged. These radioactive seeds are of
• 53:24
  an experimental nature and considered dangerous.
• 53:28
  You mentioned it was the largest secondary in Japan and
• 53:32
  certainly, you know, 6X is a huge, you know, DPI to be able
• 53:36
  to lock in early. Were you thinking about that
• 53:39
  before you got to this point? Did that happen rather quickly
• 53:42
  or had you been thinking about it for a while as kind of part
• 53:45
  of your strategy? We had been thinking about it
• 53:49
  for a while because like I said, our, our ownership stake was so
• 53:54
  big that we, we knew that it's not like we can just sell
• 53:58
  everything and do the IPO. So in Japan, existing investors
• 54:02
  can usually sell let's say like 30 to 7080% of their shares into
• 54:08
  the IPO. But you know, there's no
• 54:10
  guarantees. It's all a negotiation.
• 54:12
  And yeah, and then of course there's also the IPO discount.
• 54:16
  So it's like whether you actually want to sell at that
• 54:18
  point or not sure. And so like we, we figured that
• 54:22
  probably what we'd have to do is sell a little bit before the
• 54:25
  IPOA, little bit into the IPO and then a little bit off like,
• 54:29
  you know, six months after, you know, after a lock up and all it
• 54:32
  we were just dollar cost average out of the position.
• 54:35
  Basically. That was that was our plan.
• 54:38
  But you know, we were again, not in a hurry.
• 54:42
  And it just so happened that we got like terms that were
• 54:47
  confined enough for for us to to execute on that early.
• 54:51
  And frankly, like we were not planning to sell as much as we
• 54:53
  did. You know, it was just like it
• 54:54
  was a compelling enough offer and they wanted to get a large
• 54:57
  enough slug. I.
• 54:58
  See. Yeah.
• 55:00
  Well, Congrats again. That's a pretty amazing success
• 55:03
  and milestone to have happen. You know.
• 55:06
  Hopefully that bodes well for your future fundraising and
• 55:09
  future investments. I would, I would guess, have you
• 55:11
  seen changes in the secondary market happening in the last
• 55:14
  couple of years? I don't know that there are too
• 55:16
  many players in the secondary market in Japan.
• 55:18
  Has that changed? Are there now other firms that
• 55:21
  are raising capital to become purely secondary investors or is
• 55:24
  that or you know, occasionally some folks who are traditional
• 55:28
  investors do secondary? It's definitely changed.
• 55:31
  It's changed a lot. So a lot of people don't know
• 55:34
  this, but we actually bought up secondaries in HR in the early
• 55:40
  days from from digital Garage, which is like a early like
• 55:43
  corporate investor. And there's a lot of situations
• 55:46
  like this where these corporate investors like, you know, they
• 55:48
  get excited about startups, they start making a bunch of
• 55:50
  investments and then they realize like, damn, this stuff
• 55:53
  is really hard and they don't want to, they want to like have
• 55:56
  the balance sheet. And, you know, we were just at
• 55:58
  the right place, the right time where we were bullish on the
• 56:00
  company and we bought up secretaries and that inspiring
• 56:03
  charring did well, but that's that had been very uncommon at
• 56:06
  the time. Fast forward to today because of
• 56:10
  of, you know what I would just mention about companies being
• 56:12
  able to raise larger rounds and stay private longer.
• 56:15
  The topic of liquidity has come up a lot more often and in some
• 56:20
  folks have set up funds dedicated to secondaries in
• 56:25
  particular, but still probably is like 5 to maybe 10 names that
• 56:31
  I can think of that are like specifically focused on
• 56:33
  secondaries. And then I believe there's also
• 56:36
  a government related fund that is also focused on, on
• 56:39
  secondaries as well. So it's still few and far
• 56:42
  between. I mean it's not that that many
• 56:44
  that are specifically focused on secondaries.
• 56:46
  We'll do it if it's a company that we're particularly
• 56:48
  interested in. But you know, we we do it
• 56:49
  opportunistically. I I think another thing that
• 56:53
  might be a little bit different and again I don't know if this
• 56:55
  has changed, but equity ownership for rank and file
• 56:59
  employees didn't used to be very common in Japan.
• 57:03
  Has that has that changed or is that still also, you know, not
• 57:07
  very common? Yeah, that's, that's a good one.
• 57:09
  So for a while, believe it or not, stock option plans, I mean
• 57:14
  they were not really set up until probably like, I don't
• 57:18
  know, 10 years ago or something. And it's.
• 57:20
  Mostly like just founders and execs, right?
• 57:22
  That had. Yeah, exactly.
• 57:26
  Even then it was set up through a trust sort of structure
• 57:31
  because there wasn't an official, there was an official
• 57:34
  guidance from the tax authorities on like whether
• 57:38
  stock options would actually be treated as like capital, capital
• 57:42
  gains. And so there was this like back
• 57:44
  door system or people set up like a trust and like it was
• 57:48
  like a don't ask the hotel to have a really weird situation.
• 57:51
  The tax authorities would not actually tell you whether that's
• 57:53
  OK or not, you know, but like, it was happy, you know, And you
• 57:57
  know, it's really weird, right? So it wasn't a comfortable
• 58:00
  situation for anyone. And so there was some lobbying
• 58:02
  that happened. And then it was like, OK,
• 58:04
  finally the tax authorities agree.
• 58:06
  Like this is the way that you do stock options so that you can
• 58:09
  get capital gains treatment. And so that changed.
• 58:12
  Now, the reason I mentioned that is because because it was just
• 58:16
  like convoluted trust structure. You couldn't buy employee stock
• 58:20
  options so that, you know, it would be converted into the IPO
• 58:24
  and then, you know, you go public.
• 58:25
  But like before that sort of liquidity event, you could not
• 58:29
  buy employee shares. That has changed.
• 58:32
  And so now you can do that. In fact, Smart Jar has provided
• 58:36
  liquidity events for their their early team members.
• 58:41
  And yeah, I mean, like a lot of other companies are kind of
• 58:43
  doing the same. Yeah, I think here, you know, in
• 58:47
  the States and particularly in the Bay Area, you know, there's
• 58:50
  a lot of people who have equity. And because these companies have
• 58:54
  been, you know, taking much, much longer to go public, it's
• 58:57
  become a significant issue for a lot of employees who, you know,
• 59:00
  on paper might be millionaires, single digit millionaires or
• 59:04
  even double digit millionaires, but not a lot of banks.
• 59:07
  And, you know, hardly any banks and not very many people would
• 59:10
  consider that lendable assets. And so there's been, there's
• 59:14
  been a pretty big change, I think, in how companies think
• 59:18
  about, you know, providing liquidity to their employees,
• 59:21
  especially for companies that are staying, you know, private
• 59:23
  for 10 years or more, where they're starting to do tender
• 59:26
  offers almost at the same time. And then they're raising primary
• 59:30
  capital. They'll offer, you know, early
• 59:33
  employees and early investors that chance to cash in some of
• 59:36
  their shares. I guess it's.
• 59:39
  Still pretty early in Japan, but do you see companies arranging
• 59:42
  tender offers for employee equity or is that still, you
• 59:46
  know, pretty nascent early? Yeah.
• 59:48
  So it's happening, happening more and more.
• 59:51
  And in fact, coincidentally so one of the founders of Smart HR
• 59:57
  has started a platform to facilitate secretaries in
• 1:00:01
  Japan's. And actually, I mean he has many
• 1:00:04
  different, there's many parts of this sort of vision that he's
• 1:00:07
  painting. But the first product is is SAS
• 1:00:11
  solution to manage stock option plans.
• 1:00:13
  And then based off of that, he's going to create a platform to
• 1:00:16
  enable secondary. So, you know, at some point and
• 1:00:20
  manage those, those liquidity events through the, through the
• 1:00:24
  platform that's happening. And they're they're also working
• 1:00:27
  like the government to make it more efficient for not only like
• 1:00:32
  ambassadors to sell their shares, but also employees to
• 1:00:36
  sell their shares. Yes, Sir, You don't suppose
• 1:00:40
  that? Well, he said that the crate was
• 1:00:41
  clearly labeled. Well, but when?
• 1:00:42
  When? Gilligan showed us the crate.
• 1:00:44
  It didn't have a cover on it, did it?
• 1:00:45
  I took the cover. Off Do you know where it is?
• 1:00:48
  I made it into this bench right here.
• 1:00:52
  Nothing there, Steve. What's your portfolio strategy?
• 1:00:58
  What's your investment thesis? Has that changed over the years?
• 1:01:02
  I guess the the question that's on everybody's mind these days
• 1:01:04
  is, you know, what about AI and what's going on with AI in
• 1:01:07
  Japan, I guess is maybe one question to ask if that's, you
• 1:01:11
  know, part of your strategy these days.
• 1:01:13
  Yeah, I mean, you know, like AI is like saying you have us in
• 1:01:16
  the Internet. So like.
• 1:01:18
  Yeah, yes, of course, yes. Yeah.
• 1:01:21
  So we definitely do that. Yeah.
• 1:01:23
  I mean, like, you know, we, we don't, we don't look at the
• 1:01:25
  world in terms of cyber security AI, like per SE, like, you know,
• 1:01:30
  it's like we, we don't break it up like that.
• 1:01:31
  We, we look at it more as like there's basically two types of
• 1:01:35
  companies that we're looking at. So 1 is what we call Japan
• 1:01:38
  category leader. And basically what this is, is
• 1:01:41
  looking for concepts that seem to be working in other markets
• 1:01:44
  and then trying to understand whether that could work in
• 1:01:46
  Japan. And if the answer is that we
• 1:01:49
  want to understand why the Japan player would win Japan.
• 1:01:52
  So Japan is not China. So China, you know, the
• 1:01:56
  government protects the startups, but in Japan, for
• 1:01:59
  better or for worse, it's an open market.
• 1:02:01
  And so we when we invest here, we have to consider a
• 1:02:04
  possibility that a highly capitalized foreign player is
• 1:02:07
  also going to come in, right. So the sales forces and his
• 1:02:10
  sales force, they do like 1.5 billion an error just in Japan.
• 1:02:14
  The X or Twitter of Japan is X Twitter.
• 1:02:18
  You know, it's the Japan is the second largest market for for
• 1:02:21
  Twitter. You know, Uber, Uber of Japan
• 1:02:25
  is, is what Uber eats of Japan rather is, is Uber Eats.
• 1:02:28
  So, so like, you know, there's a lot of foreign companies that
• 1:02:30
  have done really, really well in Japan.
• 1:02:31
  And so we're looking for these like regulatory or structural
• 1:02:34
  reasons why the local player would win.
• 1:02:36
  And in the case of smart HR, yes, there's like hundreds of HR
• 1:02:41
  SAS companies globally, but for them to come in, they have to
• 1:02:44
  consider the employment law differences, the government API
• 1:02:48
  differences, the insurance company differences.
• 1:02:52
  And so because of that, like the product needs to be
• 1:02:55
  fundamentally customized for the Japan market.
• 1:02:57
  And so it's, it's not impossible, it's just harder for
• 1:03:00
  a foreign player to come in. And so we like areas like that.
• 1:03:03
  And in the case where we concluded that those dynamics
• 1:03:07
  create a lot of advantage for the local player, reinvest into
• 1:03:09
  the local player where we've concluded that it's not that,
• 1:03:13
  you know, it's not that. And in fact, it's it's probably
• 1:03:16
  going to be the former player that comes to Japan historically
• 1:03:19
  have not made investments there. But now we are starting to make
• 1:03:22
  some investments in companies outside Japan that we think have
• 1:03:25
  the potential to win Japan. And so we've brought on two
• 1:03:28
  people in San Francisco to to kind of focus on that.
• 1:03:31
  So that's kind of like 1 area. And then the other area is what
• 1:03:35
  we call Japan advantage. And this is basically looking
• 1:03:38
  for companies that are leveraging Japan's strengths in
• 1:03:43
  order to be globally. So this tends to be like in in
• 1:03:47
  deep tech manufacturing, you know, robotics, bio IP gaming,
• 1:03:53
  things like that, where the companies that we're messing in
• 1:03:56
  or leveraging, whether that be like, you know, the supply
• 1:03:58
  chain, the the talent, the industrial base, what whatever
• 1:04:03
  it is something that's leveraging Japan's strengths in
• 1:04:06
  order to build a a very global company.
• 1:04:08
  And it's probably not going to be like in software.
• 1:04:10
  So it's probably not going to be like, I don't think there's
• 1:04:12
  going to be like AAI application play going global from Japan,
• 1:04:16
  unless maybe it's like in consumer or like related to some
• 1:04:18
  of the things that that that we mentioned on, on Japan.
• 1:04:21
  Because like, you know, software it's yeah, when it comes to SAS,
• 1:04:24
  for example, it's a very like marketing and sales oriented.
• 1:04:27
  And so the language and culture barriers actually tend to matter
• 1:04:30
  quite a bit. Whereas when it comes to like
• 1:04:33
  deep tech, for example, like you just want the thing to work like
• 1:04:35
  it's like, it's much more spec. Or I was like, like all these
• 1:04:40
  like flashy websites and marketing like, like that's
• 1:04:43
  great. But like, you know, you, you,
• 1:04:45
  you just want your like substrate in your semiconductor
• 1:04:48
  to actually be, you know, up to spec, you know, whatever it is.
• 1:04:52
  And so, so, and so Japan has thrived in those areas.
• 1:04:55
  And, and in fact, like, I think Northeast Asian countries just
• 1:04:57
  in general have done well when it comes to those spaces.
• 1:05:00
  And so the language culture part just tends to matter less.
• 1:05:03
  And so we've done nuclear fusion company that, that's building
• 1:05:07
  the components that go into the fusion reactor and selling to,
• 1:05:09
  you know, all the global players that you would see like Sam
• 1:05:13
  Altman or Bill Gates, like investing in, you know, the
• 1:05:15
  nuclear fission company, Diamond Semiconductor, so on and so
• 1:05:18
  forth. And so like these like hard tech
• 1:05:20
  areas are quite interesting. Just saying when it comes to
• 1:05:22
  like Japan going global. Right.
• 1:05:26
  Yeah. I think that's something that
• 1:05:27
  I've noticed over the years is that there's a tremendous amount
• 1:05:30
  of expertise in Japan and, you know, areas that you mentioned,
• 1:05:35
  you know, consumer electronics, certainly for many, many years,
• 1:05:38
  but auto manufacturing, batteries, chips, you know, all
• 1:05:41
  kinds of, you know, hard tech, hard science areas.
• 1:05:45
  The, the challenge has always been, you know, can Japan do
• 1:05:48
  software in other languages, other cultures?
• 1:05:51
  And, you know, that's that's typically not been very easy for
• 1:05:55
  at least a lot of Japanese entrepreneurs.
• 1:05:57
  Do. Do you think that, you know,
• 1:05:59
  changes with AI and and translation maybe now open up
• 1:06:02
  that market more? Is it Do you think it might be
• 1:06:04
  easier for Japanese entrepreneurs to go global with
• 1:06:08
  the with AI as a as a helpful translator?
• 1:06:12
  I do think it's easier to go grow better.
• 1:06:18
  The way you say that makes me make me wonder if you really
• 1:06:21
  believe it though. Well, I think the opposite of
• 1:06:27
  those are true. I also think it makes it easier
• 1:06:29
  for foreign companies to come in Japan.
• 1:06:30
  So like I think it's a it's a double edged sword there.
• 1:06:34
  Yeah. I mean, like to be honest with
• 1:06:36
  you, I think that when it comes to the opportunity for AI in
• 1:06:39
  Japan, it's, it's, it's in the like the whole sort of, it's a
• 1:06:44
  periphery of, of what you see like from Chachi.
• 1:06:47
  So like it's more like within the semiconductor supply chain,
• 1:06:50
  right? So there's been, there's some
• 1:06:53
  projects happening in Japan where they're, you know, they're
• 1:06:55
  building 2 nanometer chips or there's, there's a project
• 1:07:01
  called Rapidos that's being, it's a project in Hokkaido of
• 1:07:04
  where they're, they're going to be producing 2 nanometer chips
• 1:07:08
  to, and then hopefully they'll improve from there to eventually
• 1:07:11
  compete with, for example, TSFC. And so there's a, there's a
• 1:07:14
  pullback from China across like many different sectors, you
• 1:07:17
  know, semiconductors is, is potentially one of them, but one
• 1:07:19
  of the more complicated ones. There's areas like when it comes
• 1:07:22
  to like energy, for example, where Japan is, is also
• 1:07:25
  important. And then this is a big question
• 1:07:27
  around like battery tech, you know, we're too dependent on
• 1:07:30
  China on that front as well. And so like, how do we how do we
• 1:07:32
  kind of solve that problem when it comes to these areas?
• 1:07:35
  There's a lot of government grant money available because
• 1:07:38
  the Japanese government realizes that this is huge opportunity
• 1:07:42
  for them to capitalize on the pull away from from China,
• 1:07:45
  right. And so all these, you know,
• 1:07:47
  defense is hard in the US right now.
• 1:07:48
  So like defense, you know, like, I mean, it's not just like what
• 1:07:53
  you see on the outside, it's also what you, what's on the
• 1:07:56
  inside. Like where are you going to
• 1:07:57
  source all these components? It's not going to be China,
• 1:07:59
  obviously, it's going to have to be somewhere else.
• 1:08:01
  And Japan is, is, you know, the best at that when it comes to
• 1:08:05
  like high precision manufacturing and so on and so
• 1:08:07
  forth. And so there are companies in
• 1:08:08
  our portfolio that have raised 10s of millions of dollars in
• 1:08:10
  grants from the government to set up factories.
• 1:08:14
  And so the biggest, the biggest question we get from LP's is,
• 1:08:17
  you know, isn't deep tech like super capital intensive?
• 1:08:19
  And the answer is yes. But in Japan a you have
• 1:08:25
  government grants that are available.
• 1:08:26
  So like we've invested like single digit millions and then
• 1:08:30
  unlocked like 10s of millions of dollars.
• 1:08:32
  In addition to that, because we're like a Japanese government
• 1:08:35
  certified VC where they can, we can get a lot of leverage on the
• 1:08:38
  capital that we invest. And then and then B, that is
• 1:08:42
  really cheap here. So you can get like, you know,
• 1:08:45
  1-2, three percent interest rate debt to fund your expansion
• 1:08:51
  factories and clients and things like that.
• 1:08:53
  Like those are the things that are very bankable from a
• 1:08:56
  Japanese bank perspective, but. That's pretty interesting
• 1:09:00
  insight. I guess I hadn't really thought
• 1:09:02
  about that, but capital intensive businesses might be
• 1:09:05
  easier to do in Japan with those factors going on.
• 1:09:08
  I think one other area you mentioned was robotics.
• 1:09:11
  And I just wonder, you know, we, we see the impact of AI on
• 1:09:15
  software. I don't know that we've seen the
• 1:09:17
  impact of AI on robotics and manufacturing automation, but I
• 1:09:21
  wonder if you have any, you know, visibility into that.
• 1:09:25
  Are you seeing sort of factory floor automation and AI change
• 1:09:29
  how the manufacturing process is working?
• 1:09:30
  Is that an area of innovation that's happening in Japan?
• 1:09:34
  Well, Japan was a pioneer when it comes to bringing robotics
• 1:09:37
  into manufacturing. So, you know, you have Denso and
• 1:09:40
  Nioskala and then FANUC as like the leaders when it comes to
• 1:09:45
  this area. So that has been a thing in
• 1:09:47
  Japan for for a long time. The the question is like, where
• 1:09:50
  do you go from here? So like, are you going to start
• 1:09:52
  bringing like humanoids into the mix?
• 1:09:55
  And what do you? What do you?
• 1:09:56
  Think about that. It seems like there's just, you
• 1:09:58
  know, crazy amount of money going into humanoid robotics.
• 1:10:01
  And I just wonder, is that just because of science fiction that
• 1:10:04
  we think robots look like humans?
• 1:10:07
  But you know, is that really the spec for what robots, what kind
• 1:10:11
  of robots are needed? I just wonder if that's, you
• 1:10:13
  know, or just human imagination, that actual need.
• 1:10:16
  My view on this is that it's going to be both, like you're
• 1:10:20
  going to have R2D2 and you're going to have C3PO, you know,
• 1:10:23
  like it's not. There you go.
• 1:10:27
  That's the answer, I think. So I, I buy the argument that
• 1:10:31
  because our world is like built for humans, you know, if you
• 1:10:36
  have a human form factor, you can amortize the cost across
• 1:10:40
  like many different use use cases.
• 1:10:42
  And so like the, the sort of iPhone or robotics is probably
• 1:10:46
  humanoid. I I get that.
• 1:10:48
  I actually think that's, that's the thing at the same time like
• 1:10:51
  you know, there are so many other devices other than your
• 1:10:53
  phone, right? So you're probably you're also
• 1:10:56
  going to have other form factors for for robots, depending on
• 1:10:59
  what the use case is. We've talked about a lot of
• 1:11:01
  different. Topics.
• 1:11:02
  I wonder if you can do a little crystal ball gazing and tell we,
• 1:11:05
  you know, what do you guys see over the horizon both for Japan
• 1:11:09
  as well As for your investing areas?
• 1:11:13
  The the big focus for us over the next five years is actually
• 1:11:17
  this whole like US Japan partnership.
• 1:11:19
  I think that, I mean, I would argue that Japan is the most
• 1:11:22
  important ally for the United States within Asia and maybe
• 1:11:26
  even the world, right? So people don't, people don't
• 1:11:28
  realize that actually Japan is the largest foreign investor in
• 1:11:31
  the United States, right? So for sure, you know, it's not
• 1:11:34
  just a $500 billion number that that you see in the news
• 1:11:37
  recently. Like this has been the case for
• 1:11:39
  a long time. And you, and you look at like
• 1:11:41
  places outside of, you know, you know, let's let's say California
• 1:11:45
  and York, like it's actually like Tennessee and Ohio and
• 1:11:49
  Kentucky and like all these places like actually Japan is
• 1:11:53
  the silent capital partner and also provider of jobs in the
• 1:11:58
  United States. And as we start, you know,
• 1:12:02
  there's two factors like 1 is the, the pull back from China.
• 1:12:04
  With that pull back from China, there's also this push to build
• 1:12:08
  up the industrial base. And you know, as much as
• 1:12:11
  Americans like would love to build everything domestically,
• 1:12:14
  like that's probably not going to happen.
• 1:12:16
  Like there's there, it's a long. Way to catch up.
• 1:12:19
  A long way to catch up. It's a long way to catch up.
• 1:12:21
  And so they're going to need Japan to be able to do that.
• 1:12:25
  And so a lot of the conversation is about like China versus
• 1:12:29
  United States, but the reality is when it comes to
• 1:12:32
  manufacturing, it's going to have to be China versus Japan
• 1:12:36
  and the United States as a team. And collectively, that's how
• 1:12:40
  we're going to get there, right? So.
• 1:12:42
  And I wonder if that isn't just a lot of the rest of East Asia
• 1:12:46
  and Southeast Asia, as well as Japan, you know, certainly
• 1:12:49
  Korea, Taiwan and you know, other parts of Southeast Asia.
• 1:12:53
  I, I, I have often think that, you know, it's very short
• 1:12:56
  sighted of the US to not proceed on the Trans Pacific Partnership
• 1:13:00
  back in 2016 and we're sort of rebuilding all of those
• 1:13:04
  relationships all over again when, when we could have done
• 1:13:08
  it, you know, 8-9, ten years ago.
• 1:13:11
  Yeah, yeah, yeah. As you know, Japanese would say
• 1:13:14
  like, you know, multi nai, you know, that's what a waste, Yeah.
• 1:13:18
  Well, James, thanks for spending some time with us.
• 1:13:21
  It's been a really great conversation.
• 1:13:23
  Congrats on all the success you've had with your firm and
• 1:13:27
  Congrats again on the recent secondary sale.
• 1:13:30
  That seems like this been a really amazing opportunity for
• 1:13:33
  you guys and I hope it continues to go well.
• 1:13:36
  I hope that smart HR has a positive future again for the
• 1:13:38
  other half you didn't sell. Yeah, you too.
• 1:13:42
  Well, thank you, Dave. And again, you know, thank you
• 1:13:44
  so much for for taking a chance on us.
• 1:13:46
  So really, you changed your lives.
• 1:13:49
  I get to brag that I got to hire you first, so that was amazing
• 1:13:53
  and wish you all the success going forward.
• 1:13:55
  Thank you for betting on us when we are padawans.
• 1:14:10
  We're going to take a look at a slightly different evaluation
• 1:14:13
  corner this time around. We're going to start off the
• 1:14:15
  year looking at the public Mag 7, maybe plus one, and the
• 1:14:20
  private Mag 7 + 2 or three. I think on the public Mag 7,
• 1:14:25
  these are pretty well defined, NVIDIA, Apple, Alphabet,
• 1:14:29
  Microsoft, Amazon, Meta, Tesla. I think we're going to throw in
• 1:14:32
  Broadcom also there right among. Yeah, I think so.
• 1:14:35
  Gary, they're a trillion dollar company and some joined that
• 1:14:37
  elite group, so may as well. All big tech companies, a little
• 1:14:41
  bit over $20 trillion in market value, maybe about 1/3 of the
• 1:14:45
  overall market. And then if we're looking at the
• 1:14:48
  private Mag 7, SpaceX Open AI, Byte Dance, probably the top
• 1:14:53
  three Anthropic and data bricks, probably the next couple after
• 1:14:57
  that, maybe Stripe, Canva revolutes probably missing from
• 1:15:01
  there. Maybe that's a little bit
• 1:15:02
  between those two. But these valuations are maybe
• 1:15:06
  not exact because it could be based on whether the companies
• 1:15:10
  are talking about their last primary round or more recent
• 1:15:13
  secondary or whether you're buying through brokers and SPVS
• 1:15:17
  roughly about $2 trillion in market value.
• 1:15:20
  Again, hard to say what percentage of the overall
• 1:15:23
  private market that is, but based on maybe the private
• 1:15:26
  market being somewhere between 4:00 to $7 trillion in size,
• 1:15:30
  this could be as much as half as little as 1/3.
• 1:15:33
  Most that value was created in the past 12 months, right?
• 1:15:36
  We've had huge markups in open AI.
• 1:15:37
  SpaceX I guess. XAI is this on the next?
• 1:15:40
  This group has increased in value quite a bit in the last 12
• 1:15:44
  months, so probably doubled in value.
• 1:15:46
  How do we compare these companies?
• 1:15:47
  Are we looking at revenue, market cap, growth rates, other
• 1:15:50
  things? The question for today in the
• 1:15:53
  first valuation corner of the year is really where would you
• 1:15:57
  rather be, private markets or public markets And the easy
• 1:16:00
  we'll come up with some metrics to benchmark their revenues.
• 1:16:03
  Profitability, not so much because most of the private
• 1:16:05
  companies are not profitable or at least we don't know how
• 1:16:08
  profitable they are. But if you look at their
• 1:16:11
  valuations in general and a revenue multiple that that might
• 1:16:14
  be a good way to benchmark. So let's define the groups.
• 1:16:17
  On the left are roughly the the 10 biggest, most prominent
• 1:16:21
  private companies. You've got companies under under
• 1:16:24
  on the left hand side, which includes SpaceX and Open AI at
• 1:16:28
  the top, which are the most valuable ones in the game today.
• 1:16:31
  You've got a bunch of AI companies, LLM specifically Open
• 1:16:34
  AI, Anthropic and XAI. You've got some forward
• 1:16:38
  technology companies like Waymo. You've also got Bite Dance and
• 1:16:41
  it's subsidiaries, TikTok and others.
• 1:16:46
  You got Databricks in Canva, which are SAS companies.
• 1:16:48
  And then you've got some fintech companies like Tether, Revolute
• 1:16:50
  and Finance. And then the right hand side.
• 1:16:52
  I want to talk a bit about the public markets 1st and just
• 1:16:55
  convince you maybe that we're not in a bubble or that the
• 1:16:58
  market is not historically expensive for, for no good
• 1:17:01
  reason because that's AI. Think that's a premise going
• 1:17:03
  forward or where do you where you want to be?
• 1:17:05
  Depends a little bit on what you think of the investment
• 1:17:07
  backdrop. And so focus on the biggest
• 1:17:09
  companies in the S&P 500, which are the MAG 7.
• 1:17:12
  And then Broadcom is now a trillion dollar companies.
• 1:17:15
  So they're have included them as well in this in this take.
• 1:17:19
  So let's start with price to earnings ratios for the Mac 7
• 1:17:21
  and Broadcom. That's the chart showing where
• 1:17:24
  they are. You can see there most of them
• 1:17:26
  are in the low 20s to low 30s and a price earnings ratio, the
• 1:17:31
  growth rates in this group are typically in the mid to high
• 1:17:35
  teens. You have a couple of outliers
• 1:17:36
  like NVIDIA is growing 60% year over year.
• 1:17:40
  You have Meta growing in the mid 20s and then Broadcom in the
• 1:17:43
  bottom is low 20s. But overall the the baskets
• 1:17:45
  growing around 20% year over year.
• 1:17:47
  So if I said, hey, you've got a group of companies in the low to
• 1:17:50
  mid, let's say high 20s to low 30s PE ratios growing around
• 1:17:55
  20%, you'd say, OK, well, that's that doesn't seem far to watch
• 1:17:59
  there's. One exceptional outlier there
• 1:18:02
  Tesla, which is way bigger on the right big bar there almost
• 1:18:07
  200 X forward PE ratio. That seems a little crazy,
• 1:18:12
  doesn't it? Yeah, I've never really
• 1:18:14
  understood. Let's take Tesla out for a
• 1:18:16
  second because I don't really know.
• 1:18:17
  I've never really understood how to value them other than their
• 1:18:20
  car company that doesn't trade like a car company.
• 1:18:23
  It trades to some kind of a little bit of car company, a
• 1:18:26
  little bit of, you know, AI, autonomous driving magic, a
• 1:18:29
  little bit of like it's going to be the, IT is the pre eminent EV
• 1:18:32
  vehicle and Elon magic feature. It's definitely a Elon meme
• 1:18:37
  stock in magic and some marketing genius.
• 1:18:39
  And just, you know, if you think EDS will be the dominant vehicle
• 1:18:42
  going forward and they've got that locked up, then there's
• 1:18:45
  something there. But aside from that, you've got
• 1:18:47
  a 30 PE ratio basket of of companies growing around 18 to
• 1:18:52
  20%. That's a PEG ratio of 1.5.
• 1:18:55
  Just take the PE ratio divide by the growth rate.
• 1:18:58
  We're talking companies that are kicking off free cash flow
• 1:19:00
  buying back shares. They got 350 billion in net cash
• 1:19:03
  on their balance sheets. They take all the cash and cash
• 1:19:05
  equivalents and and back out the debt.
• 1:19:09
  So it's a very healthy group at the top that's leading the
• 1:19:11
  market. If you just 01 in Tesla for a
• 1:19:14
  second, there is a there is a reason why the growth rate looks
• 1:19:16
  pretty anemic at 12%. I would expect that they not
• 1:19:20
  only are not only they have a tough Q4, but I expect them to
• 1:19:22
  kind of miss their delivery numbers for next year as well.
• 1:19:25
  And the reason is there was a $7500 EV credit the federal
• 1:19:30
  government had instituted. I think they, they put it back a
• 1:19:32
  number of years ago. They extended it during COVID.
• 1:19:35
  They reauthorized it in 20/23/24 and it just rolled off.
• 1:19:39
  And so there was a rush of buying cars in the middle of
• 1:19:42
  2025 and then Q4 it went away. So I think sales are just down
• 1:19:47
  in Q4 and it'll probably be down next year just because of the
• 1:19:50
  the impact. And that'll affect Rivian and
• 1:19:51
  everyone else too. I think I might also argue that
• 1:19:54
  at least for Tesla, they maybe some of their audience was
• 1:19:58
  alienated by Elon's politics earlier in the year,
• 1:20:01
  particularly in Europe. I think there was quite a
• 1:20:04
  significant crash, yeah, no pun, no pun intended in car sales for
• 1:20:10
  Tesla and perhaps I think it's more thing in Canada as well.
• 1:20:16
  Yeah, I'm not familiar with the Canadian numbers, but certainly
• 1:20:18
  there was some backlash in Europe.
• 1:20:20
  So the first quarter of the year might have been softer.
• 1:20:22
  So I guess the question is today, you know, did they pick
• 1:20:24
  it up again and they did they reaccelerate their growth with
• 1:20:26
  their new models And but it's a competitive market and
• 1:20:29
  obviously, you know, there's a lot now that the competition's
• 1:20:31
  coming. I think there's a lot of still a
• 1:20:33
  lot of speculation in that stock.
• 1:20:35
  So that's the group at the top. And I guess the question then
• 1:20:38
  is, well, are these price earnings ratios reasonable when
• 1:20:41
  you see PE ratios of around, you know, high 20s or low 30s, what
• 1:20:45
  what, where is that historically?
• 1:20:47
  And this is a chart showing PE ratios over the last 150 years.
• 1:20:51
  And in the last 40 or so, the average has been 2122 times PE,
• 1:20:56
  the price earnings ratio. So we're definitely above the
• 1:20:59
  trading multiples of the last 40 or 50 years.
• 1:21:02
  It is certainly, it is certainly the case then the market is
• 1:21:05
  expensive historically. I do want to point out it is
• 1:21:08
  nowhere near in 1999 when we had a a bubble and the market then
• 1:21:13
  retreated 78% from the bubble. At that time the NASDAQ 1000 had
• 1:21:19
  a 73 times PE ratio and today it's 26.
• 1:21:22
  And so the market is way shorter where it was in in in 1999.
• 1:21:27
  But even if we might. Be a little crazy, but not as
• 1:21:30
  crazy as 1999. Yeah, it's certainly not the
• 1:21:33
  bubble of 1999 proportions. This is this is, this doesn't
• 1:21:36
  feel to me like a thing that bubbles are are made of.
• 1:21:38
  Now you might say it's expensive, it is historically
• 1:21:40
  expensive. And I just want to point out
• 1:21:41
  that that while that is true, there's good reason why the
• 1:21:44
  market is expensive today versus let's say 40 years ago.
• 1:21:47
  And if you look at this chart, this shows the biggest companies
• 1:21:51
  in the S&P 500 going back 50 years now.
• 1:21:54
  So anything 75 the biggest companies were IBM, AT&T, they
• 1:21:59
  so utilities and and a a large mainframe company.
• 1:22:02
  They also included ExxonMobil and Standard Oil, what became
• 1:22:06
  Amoco Shell and and other iterations.
• 1:22:09
  You can see GM and Merck and City and Berkshire Hathaway.
• 1:22:13
  Like a lot of financial services, Procter and Gamble
• 1:22:15
  consumer companies, they don't normally get the same multiples
• 1:22:18
  that tech companies do because they're not growing at the same
• 1:22:21
  rates. Like a when the economy is
• 1:22:22
  growing at 7-8 percent a year, a big consumer company like PNG,
• 1:22:27
  it's going to be hard pressed to grow more than 7 or 8% a year
• 1:22:29
  because that's just their, that's retail sales.
• 1:22:31
  But these tech stocks growing three times that.
• 1:22:33
  So if you just for growth and the fact that they're all tech
• 1:22:37
  at the top of the index now it's different.
• 1:22:40
  And then look at the road at the bottom.
• 1:22:41
  This is a 10 year bond. If you look about 75 and 85, we
• 1:22:44
  had eight to 10% interest rates back then on the 10 year.
• 1:22:47
  Bond higher interest rates, yeah.
• 1:22:49
  And today we're at 4:00 and you can think of that like what?
• 1:22:51
  So if you invest in a bond to the 10% yield, your price
• 1:22:55
  earnings ratio is sort of 10. Like you buy a bond for 100
• 1:22:57
  bucks, you'll get 10 bucks a year.
• 1:22:59
  Price earnings is like 10, but it's a 4% yield.
• 1:23:03
  The price earnings and a bond is 25 S.
• 1:23:05
  Of course stocks are going to have a yield if you know or a
• 1:23:08
  price earnings ratio more like 25.
• 1:23:10
  So you add those two together. And if I would actually argue
• 1:23:13
  that the the Mag 7 and the top of the public companies are
• 1:23:16
  doing well, healthy businesses recently valued based on the
• 1:23:20
  growth rates and probably not about to crash like 1999.
• 1:23:25
  OK. So if we're convinced of that,
• 1:23:27
  let's talk about the private markets, whether that's also
• 1:23:29
  what do we, what do we think about private markets here?
• 1:23:32
  I think it's a little bit of a different story.
• 1:23:34
  I, I think there are companies at the, at the top of the
• 1:23:37
  private company lists that have this AI dependency of the LLM.
• 1:23:41
  So open AI, entropic and then XAI, the multiples on the right
• 1:23:45
  hand side you can see are on this is on a revenue basis, not
• 1:23:48
  a profit basis. It's kind of Infinity on a
• 1:23:51
  profit basis because none of them are making money.
• 1:23:52
  But on a revenue basis, we're talking 20 to 30 times sales.
• 1:23:57
  So these companies are growing at historically very fast rates,
• 1:24:00
  right, 70 to 100% year over year.
• 1:24:01
  If they can do that for another couple of years then I think you
• 1:24:04
  get these multiples will begin to compress to where the mag 7
• 1:24:06
  is like 7 to 10 times sales. I think we did the analysis on
• 1:24:09
  those top 10 private MAG 7 to MAG 10 companies.
• 1:24:13
  Growth rates are probably over 50%, maybe even 6070% in a few
• 1:24:17
  cases over 100%. Yeah.
• 1:24:19
  And I guess the question is if they keep growing for another
• 1:24:21
  year at 100%, then Bob's your uncle.
• 1:24:24
  But if we have a stumble or if any of these companies stumble
• 1:24:27
  at these valuations like these are such, these are priced for
• 1:24:29
  such perfection that I do think it's a lot of idiosyncratic risk
• 1:24:32
  in at the very top of the companies.
• 1:24:35
  If I take one step down though and look at the next 7 or you
• 1:24:38
  know, next, next half a dozen or seven companies.
• 1:24:40
  So the big one is bike dance. They're about 2 1/2 X revenues.
• 1:24:44
  They're they are a third of the valuation of Meadow and have
• 1:24:48
  more revenue than Meta and are are just as profitable that as
• 1:24:52
  Meta or will be next year. So that doesn't seem, you know,
• 1:24:55
  for a Chinese company, admittedly, that doesn't seem,
• 1:24:58
  you know, outside of the bands of of reasonableness.
• 1:25:01
  You got Databricks trading at 20 times sales, which were SAS
• 1:25:04
  company growing at 50% a year is high end top quartile public
• 1:25:08
  company, but not certainly not crazy Canva at 7 times sales.
• 1:25:12
  This is a company also growing at 50% year over year.
• 1:25:13
  That seems that seems actually very cheap to me and you look at
• 1:25:18
  Fintech like Stripe, like these companies are not trading way
• 1:25:21
  out of whack versus public comp. So if you avoid the froth at the
• 1:25:24
  very top in the AI category, I think you've got a lot of very
• 1:25:26
  reasonable bets down down below. But Aman people are not avoiding
• 1:25:30
  those top three companies up there.
• 1:25:33
  They're all in on those companies.
• 1:25:35
  Well, at least Open AI and Entropic and probably SpaceX of
• 1:25:39
  the top people are paying up for these, you know, AI stories and
• 1:25:44
  chip stories and in private markets and and there are some
• 1:25:49
  more reasonable candidates. But still, I would say a good
• 1:25:52
  bit of that market, at least by size, is perhaps optimistically
• 1:25:56
  valued. Yeah, for sure.
• 1:25:59
  So those, those top three are definitely pricing and a lot of
• 1:26:01
  a lot of continued growth imperfection.
• 1:26:03
  The other one you mentioned SpaceX, so they are something
• 1:26:05
  like 16 billion revenue this year.
• 1:26:07
  They might get a 25 next year. Most of that is Starlink.
• 1:26:10
  They're also trading in the low 30s in terms of a revenue
• 1:26:13
  multiple, Revolut is an interesting one.
• 1:26:17
  They are, you know, 12 to 13 times multiple in terms of the
• 1:26:20
  revenue. We've covered them before, which
• 1:26:22
  doesn't sound terrible. We've covered them before in the
• 1:26:25
  pod. They just will remind you that
• 1:26:26
  they have a a lot of income coming from some new sources for
• 1:26:30
  them, in particular interest income and some fees that make
• 1:26:35
  them feel like a bank as opposed to a payment processor.
• 1:26:38
  So if you said, hey, what should a payment processor trade at?
• 1:26:40
  12 to 13 times sounds fine. If you're like, hey, what is
• 1:26:43
  the, what should a bank trade at?
• 1:26:45
  Certainly wouldn't get 12 to 13 times you get, you might get
• 1:26:47
  more like, you know, 8 to 10 if if that.
• 1:26:50
  And so I think there's a little bit of conversations to be had
• 1:26:53
  about Revolute and and SpaceX. And then maybe some of these
• 1:26:56
  other ones that are interesting, like finance is a crypto
• 1:26:58
  exchange. It is priced, I think, in a very
• 1:27:01
  reasonable way if you think they can keep executing.
• 1:27:04
  But there's a lot of regulation and risk around crypto and
• 1:27:07
  whether they can successfully enter all the US states.
• 1:27:11
  And the same for Tether. Tether is a $13 billion in
• 1:27:13
  annual profit company and it also has a lot of opportunity.
• 1:27:18
  But as they come to the US and as they kind of improve their
• 1:27:21
  regulatory oversight, a lot of that arbitrage they can get
• 1:27:23
  right now might go away. So I'll just conclude by saying
• 1:27:26
  there's a lot of idiosyncratic risk within those private
• 1:27:28
  companies, although I think there's a lot of good bets to be
• 1:27:30
  had if you can get into those companies at the valuation,
• 1:27:33
  you're not paying SPV prices and fees on fees and carry on carry.
• 1:27:37
  And then you have to make a bet on AI.
• 1:27:39
  Those top three or so AI companies are, you know, in a
• 1:27:41
  world of their own. They're growing faster than any
• 1:27:43
  other company probably in the history of of private markets,
• 1:27:46
  but they're also priced that way.
• 1:27:48
  If you can get that, especially that second tier of companies
• 1:27:50
  where they I think they are maybe a little bit under the
• 1:27:53
  radar, given how much money open AI and SpaceX have taken out of
• 1:27:56
  the market. There's definitely healthy list
• 1:27:58
  of companies that are have an active secondary market and can
• 1:28:01
  get a discount. So that that I think is going to
• 1:28:03
  be a probably the the sweet spot in the private markets.
• 1:28:06
  Yeah. And I'll share again this slide
• 1:28:09
  that I've shown a couple times before about our sort of four
• 1:28:11
  different profiles of secondary companies that that big red
• 1:28:15
  circle on the right, it's listed as 2 trillion in value, but
• 1:28:18
  that's probably even more than two trillion.
• 1:28:20
  Now if you consider the top 30 or so companies, that's really
• 1:28:24
  what we were just talking about, definitely more of a seller's
• 1:28:26
  market for those top five to 10 companies.
• 1:28:29
  But after you get outside the top 20 or 30 companies, there's
• 1:28:32
  several 100 companies that are probably not valued at 100
• 1:28:35
  billion. They're probably valued at maybe
• 1:28:37
  between let's say 2 to 20 billion where they're not maybe
• 1:28:41
  on everybody's radar. And they're still great
• 1:28:44
  companies potentially growing at anywhere between 20 to 100% per
• 1:28:47
  year, definitely making significant amount of revenue,
• 1:28:51
  maybe on their way to profitability.
• 1:28:53
  And still, I think you can get some of those companies stock
• 1:28:57
  and secondaries at a discount. But I would also caution that
• 1:29:01
  there's those other two circles on the lower left hand side
• 1:29:04
  where at least for unicorns that were valued in 20 and 21, they
• 1:29:09
  may have raised too much capital.
• 1:29:10
  They might not clear that, you know, preference stack of
• 1:29:12
  capital if they were to go public or get acquired.
• 1:29:15
  And there's a whole bunch of companies that just are never
• 1:29:17
  going to be large enough or growing fast enough to get to
• 1:29:20
  any kind of exit. So I think you have to be
• 1:29:23
  careful in looking at the secondary market, which group
• 1:29:25
  of, you know, sort of profile companies we're talking about.
• 1:29:29
  I do wonder if everybody in both public and private markets is
• 1:29:32
  betting the farm on AI. It seems like that's the
• 1:29:36
  defining theme for almost everything that's going on right
• 1:29:38
  now. There are a lot of companies
• 1:29:40
  that are, you know, that are making money, which have an AI
• 1:29:43
  capability story, like an AI enabling story, those LLM pure
• 1:29:46
  plays and those who are not making money that that does feel
• 1:29:49
  like a a theme that can come and go.
• 1:29:52
  But I'm, I've been, you know, I think the profitability you can
• 1:29:54
  see in the MAG 7 you mentioned that the free cash flow numbers
• 1:29:57
  and the profit margins and then the continuing growth that is
• 1:30:00
  real durable businesses like the likes of which we have not we
• 1:30:03
  have not seen before. So at least that's that's good
• 1:30:05
  news. It'll be interesting to see what
• 1:30:08
  happens with those top 345 companies, whether they go
• 1:30:11
  public this year at least There's been a lot of discussion
• 1:30:13
  about SpaceX, Open AI, Anthropic, probably also
• 1:30:17
  Databricks, maybe Stripe, maybe Canva.
• 1:30:21
  So I think it's going to be a big year for IPOs.
• 1:30:24
  We'll, we'll see if those super big companies actually complete
• 1:30:27
  an IPO this year. But even if exclude those top
• 1:30:30
  three, there's still some very big companies that are going to
• 1:30:32
  be going out next year. Yeah, indeed.
• 1:30:37
  All right, well, happy New Year or a merry new year, I'm on and
• 1:30:41
  we'll see you next week. See you next week, Dave.
• 1:30:52
  You're looking, you're looking when it gets done 2026.
• 1:30:56
  Contrary to my shirt, I am not going to be a whiny bit in 2026.
• 1:31:01
  I'm going to be a very optimistic person.
• 1:31:05
  Six to seven sixes and sevens, 6 to $7 trillion question.
• 1:31:09
  I mean, that is amazing on I guess on Boxing Day.
• 1:31:15
  You, you Americans do know what Boxing Day is.
• 1:31:16
  Canadians and Brits know it's December 26th.
• 1:31:18
  It's the day after Christmas when you put all your in the box
• 1:31:21
  and send it back to the store and it's a 50.
• 1:31:24
  It's a 50% premium over there, like 52 week average closing
• 1:31:27
  price. So.
• 1:31:28
  Terrible, horrible, very bad podcast.
• 1:31:32
  Except that it's not going to be bad.
• 1:31:35
  This year's going to be great.