Latest / The Learning Corner by Precursor / Episode #22: Secondaries Across Venture, Stripe's Tender Offer, Knowing How Much Is Too Much To Fundraise

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Episode #22: Secondaries Across Venture, Stripe's Tender Offer, Knowing How Much Is Too Much To Fundraise · The Learning Corner by Precursor

• 0:00
  You only have a million dollars, you can only work on a couple of things with a couple of
• 0:03
  people.
• 0:04
  And the pat answer to a lot of things is we can't afford to do that.
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  And I'm a big believer that constraints breed creativity.
• 0:10
  It's the week of March 3.
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  Welcome to the Learning Corner Precursor Ventures
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  podcast.
• 0:20
  Welcome to the Learning Corner by Precursor.
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  I'm Mia Farnham, and I'm joined by our GP and managing partner, Charles Hudson, where we will
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  be talking through the articles and Goodreads that caught our team's attention over the past
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  week.
• 0:33
  Our first topic, Strictly VC's latest podcast featuring Chris Farmer, founder of SignalFire,
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  to discuss how venture capital is facing a fundamental mismatch between fund structures,
• 0:45
  structures, capital cycles, and the long term nature of building great companies.
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  He pointed out that while the best performing startups are taking longer than ever to reach
• 0:54
  meaningful liquidity, most venture funds still operate on a ten year life cycle that hasn't
• 0:59
  evolved to match this reality.
• 1:01
  This misalignment has made secondaries a more important, though still inefficient tool for
• 1:06
  providing liquidity with private to private stock sales gaining traction, but often at a
• 1:10
  deep discount.
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  Farmer also emphasized that venture firms need to take a more active role in capital markets,
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  helping founders plan for m and a, structured secondaries, or alternative exits rather than
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  relying solely on the IPO market.
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  On the AI side, he argued that owning proprietary, continuously trained data is the
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  only true long term moat as purchasing third party datasets won't provide a lasting
• 1:35
  competitive advantage.
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  So Chris talked about how early stage investors now play a bigger role in shaping a startup's
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  long term exit strategy.
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  Instead of just writing checks, they can help founders line up strategic investors, set the
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  stage for M and A, or even start conversations with private equity firms for companies nearing
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  profitability.
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  So how do you Charles think about this specific concept as it pertains to Precursor Land?
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  I feel like last week was liquidity week.
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  I don't know.
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  There must have been something in the VC water cooler that had everybody thinking about I I
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  think a lot of the things that Chris said are right.
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  And one of the things I've been thinking about, and I don't have all the answers to this yet,
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  is I think for a long time as a venture capitalist, the relationships that were
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  valuable to have were with the strategic acquirers in your category.
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  So, you know, the big tech companies, knowing all the corp dev and product leaders at those
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  places was important if you wanted to get your companies acquired.
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  Also, having relationships with other venture firms that could fund those companies and to a
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  lesser extent, if you were really playing the long game, having relationships with investment
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  bankers who could eventually take your companies public.
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  And I think with fewer IPOs and less m and a, those sort of relationships are less valuable.
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  If I could wave a magic wand, I'd love to have more stronger, deeper relationships with
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  private equity buyers or or even growth equity minority stake buyers.
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  I think the people who provide liquidity for venture capitalists, it's gonna switch.
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  And my sense is it's gonna be less about m and a and IPO IPO and more about secondaries and PE
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  led buyouts and roll ups, and we're gonna end up selling to people who will probably continue
• 3:04
  to operate these businesses, whether it's selling to the next set of venture.
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  Private equity will sell a whole company to another private equity firm.
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  And I think that's partially easier when you have controlled transactions when you already
• 3:20
  control the company.
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  But venture capital has historically been a minority ownership position business.
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  So you don't actually own enough of the company in most cases to dictate a total sale.
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  You're selling a portion of your stake, which is often small.
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  Some of the things that Chris talked about, I think there will be an increase in the level of
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  sophistication in venture when it comes to selling.
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  And I do think, he hinted at this, our industry is gonna become more involved in manufacturing
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  and generating liquidity.
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  I think he mentioned a mid aughts position that he's still in, and it's 2025.
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  You're gonna be in these things left to the company's own devices for fifteen to possibly
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  twenty years.
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  The thing he didn't mention is I don't think most VCs are gonna go back to their LPs and
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  say, hey.
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  You know this ten year closed end fund that we've talked about with extensions?
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  Why don't you turn this into a fifteen year vehicle?
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  I don't think most LPs wanna give most VCs fifteen years without having to have a
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  conversation regularly about, should we continue to do this, or should you work harder
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  to find liquidity and give me the rest of my money back?
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  I I think venture capitalists are gonna begin to manage their own portfolios more
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  aggressively towards liquidity.
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  Just being mindful of the fact that holding to maturity just takes longer than maybe some of
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  their investors want.
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  This kind of heavier hand for helping companies reach exit for a portfolio of our size feels
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  like a lot of back and forth and managing of communication.
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  So how do you think about it as it pertains to our fund?
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  I
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  think for us, we have, like, a different problem than other people.
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  We have a lot of companies where we have a small to medium sized ownership position, and
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  we're not on the board.
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  So I think in many cases, these liquidity decisions will be done in consultation with the
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  board.
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  The good news is if you're on the board, you'll see these things coming from a mile away.
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  The bad news is you'll have to deal with all the complexities of making these things happen.
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  And the challenge for smaller funds will be how do you make sure you're included and you take
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  advantage of those.
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  You'll have less information than other people will.
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  I think the other thing that's gonna become interesting is, you know, we've spent twenty
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  years talking about being founder friendly and being in it for the long run.
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  Well, founders are already doing meaningful secondary in many companies that achieve scale,
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  and early stage VCs are as well.
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  Some of the later stage folks and the bigger holders aren't because they're on the board or
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  because they feel like it's really not their business model.
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  And I think it's gonna be interesting when we're in a world where everybody recognizes
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  that everybody on the cap table might be a seller at some point and that probably nobody
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  other than maybe some of the lead investors is likely to hold the majority of their position
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  until the sale.
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  I think it's gonna create a different dynamic and a different set of conversations.
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  And, also, I think a different set of expectations between investors and founders,
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  particularly around situations where founders are getting meaningful liquidity earlier in the
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  cycle than VCs are.
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  And I think those conversations are gonna be very different.
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  Going along the lines of secondaries, we've been obviously talking about the rise of this,
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  but it still remains to be inefficient as a process and often heavily discounted.
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  So what actually needs to change about the ecosystem around secondaries for venture for it
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  to become more mainstream than structured tool?
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  Like, is it really just the rails aren't quite there yet, or do we just need to have all our
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  cards out on the table to be able to interact fluid?
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  Oh, yeah.
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  It's a great question.
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  Yeah.
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  I think the holy grail for a lot of people has been, well, what if we just had a Nasdaq like
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  marketplace where at any point in time, you could go and sell shares?
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  I'm like, oh, you mean like a public market with regular prices where one could buy and
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  sell?
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  I don't know.
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  Why doesn't somebody make one of those?
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  But, obviously, part of the advantage of being a private company is you have a say over who
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  owns stock in your company and under what circumstances you're willing to trade that
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  stock.
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  I think most of them haven't succeeded, partially because there's this weird asymmetry.
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  In most cases, the energy to buy is concentrated in a fairly small number of well
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  known names.
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  Here's why I think the next ten years could be different.
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  I think increasingly, there are more series b and c rounds where the investor expectation
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  expectation is that if you were early, there will probably be a secondary.
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  But right now, that secondary sale is oftentimes sponsored and organized by the lead
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  investor.
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  And so long as the lead investor has appetite for the shares and a big enough fund, they can
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  do it themselves.
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  There is more money than ever flowing into venture secondaries in terms of dedicated
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  funds, which to me means there'll be more people hanging around the hoop who can buy.
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  And this is maybe a smaller thing that people don't appreciate because it's a little bit in
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  the weeds.
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  More venture capital firms have become registered investment advisers, and they're no
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  longer exempt.
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  And for those in the audience, the difference is when you're an exempt adviser, you get a
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  lighter touch relationship with the SEC.
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  You don't have to register.
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  But it also means no more than 20% of your fund can be put into certain types of assets,
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  cryptocurrency and secondaries.
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  Because more firms are not registered, they don't have the same restriction on secondaries.
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  And with the proliferation of new products, to me, it's inevitable that some of these larger
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  venture funds are gonna create their own in house secondary funds that will not only buy
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  secondary shares in rounds that they want, but will also buy secondary shares in rounds where
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  they were not primary buyers.
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  And I think the amount of money chasing secondary buying opportunities in hot VC
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  companies will five to 10 x in the next ten years.
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  And it will be both an expansion of the platforms from people like Industry Ventures
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  and the creation of in house captive secondary firms by registered firms.
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  And just the normalization that in the b and the c part of the deal is you create liquidity
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  opportunities for angels and seed stage investors.
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  And it will become normal and institutionalized as a best practice, but probably not as, like,
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  a requirement.
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  Normal and institutionalized.
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  Moving on to the next topic.
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  Stripe has once again commanded a massive valuation reaching 91,500,000,000.0 in
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  secondary stock sale.
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  This is a key signal in the environment where big name private companies are looking for
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  liquidity while awaiting for the IPO window to fully reopen.
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  So as a reiteration, this was a secondary sale, not a primary raise.
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  Stripe didn't raise new capital.
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  It just allowed employees and early investors to cash out.
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  It's the latest example of late stage secondaries providing liquidity, similar to
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  what we've seen with companies like SpaceX.
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  This move gives insiders an off ramp while Stripe stayed private.
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  And so we couldn't have teed up a better example after our conversation last week,
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  questioning IPOs as the golden standard for exits.
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  We talked about the allure if you are a founder at one of these companies to stay private.
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  But as an employee and an early stage investor, this is a clear mechanism to reward you
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  financially for staying with a company with an elongated exit timeline.
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  I thought it was interesting that he said we have no plans to go public anytime soon.
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  And I feel like Stripe is every time someone talks about the window, they're like, well,
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  Stripe's gonna go out.
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  And I'm like, being private seems to be serving them just fine.
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  I think there's another constituency, Mia, that we don't talk about as much in secondaries
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  that's worth considering at a place like Stripe, which is departed employees who have
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  vested options that they've exercised.
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  And this is the other real reason that these tender offers, I think, change the employment
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  decisions that people make.
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  Because if you can be early at a company like Stripe, and you have low priced options, and
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  you have the financial resources to exercise those, or you can work with a firm that can
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  help provide liquidity.
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  You don't have to wait for that company to go public to get personal liquidity either.
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  So you could work at Stripe for two or three years.
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  This is not unique to Stripe.
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  But in the old days, if you did this at Facebook or Google, you still had to wait for
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  the company to go public.
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  Now you don't.
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  Some companies have had prickly rules about whether only current or former employees can
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  sell.
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  So each tender is different.
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  But at least there's a mechanism to value and potentially transact in the shares of a company
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  where you worked, where you did an exercise and hopefully an 83 B, and you did all the good
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  things from a tax efficiency standpoint, and you can get liquidity.
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  That's like a whole new thing.
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  Twitter and Facebook were one of the first companies I can think of in the modern internet
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  where that was a thing, but that was narrowly restricted to one or two companies of
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  relatively small number of times before they went public.
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  And those companies went public at a fraction of the price of Stripe's current private
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  valuation.
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  So I always felt like employees were the final frontier.
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  They could, to some extent, agitate for an IPO maybe successfully, maybe unsuccessfully, but
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  these large tenders really do take the pressure off.
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  I think of all my friends who work at Google who they get to decide when they want to come
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  in and out of their stock options.
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  Here, this offer is basically the same thing.
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  If you come in at the right time and there's a secondary or a tender offer on the table,
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  that's something that you probably, to your point, wouldn't have ever dreamed of having the
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  option of.
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  It's a new dynamic.
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  I think it also makes this trickier because when you were forced to hold, you were forced
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  to hold.
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  Now you have to decide, do I wanna sell my strike at 60,000,000,000 or at 90,000,000,000?
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  Or do I wanna keep holding because I think it's gonna go up?
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  I think you're gonna have very interesting distribution of outcomes, not just based on
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  when people join, but when they decided to sell Mhmm.
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  And how much they decided to sell.
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  What that means?
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  More of a question for LPs investing in early stage venture funds.
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  One, I guess, with occurrences like this, what do you have to believe in order to support
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  these types of transactions as healthy exits when you look at your fund portfolio?
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  And then two, how do you spot the right types of fund managers that can lead to these types
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  of exits?
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  I used to think like, oh, this is very similar to just being able to spot your best companies
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  that will be multibillion dollar exits.
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  But now to our large thread of conversation that we have, this is a new skill set that
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  you're flexing from an LP's point of view.
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  What are the things that you're looking for?
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  Beazer had some good comments on my last post, and she basically was like, look.
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  We've seen this sort of secondary selling thing work to generate meaningful returns for small
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  funds, but we've never really seen it work for big funds.
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  I think about Stripe and DoorDash as two examples in my lifetime.
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  Those companies have compounded as or even Databricks have compounded as private
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  companies.
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  I wouldn't fault somebody who got out of Databricks at ten or fifteen.
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  How were you supposed to know it was gonna go to 82?
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  I had a friend who was in DoorDash at one and got out at three and felt great, and then I
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  went to forty.
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  And so now the trick is, like, well, how do you know when to sell and how much to sell of your
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  winners such that you maximize the returns for your LPs, but don't miss out?
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  And I think different firms have different personalities.
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  I think there'll be some firms who just say, hey, look, I would rather lock in a four x fund
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  and be done than try to be legendary and end up with a two x fund.
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  So we're dumping the whole thing.
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  We've we've locked in a four x fund.
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  We've more than done our job, and whatever comes from here, so be it.
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  And I think there's some funds that are gamblers that are gonna say, we're gonna sell
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  the minimum amount we think to to make our LPs happy, but we really wanna let this thing ride
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  because we think we've got a generational Meta or Google.
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  Like, the truth is, if you're in one of those companies, anytime you sold, you probably
• 13:28
  regret it.
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  Now most companies aren't like that.
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  Most companies do have some, like, effective peak where if you're still in them, it's
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  suboptimal.
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  But if you're in a Meta or a Google or an Amazon, you probably look back at any sale
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  you've done and been like, I wish I'd held it.
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  I've typically always thought about this relationship between LPs and fund managers and
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  embarking on secondaries as a damned if you do, damned if you don't scenario.
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  My question is really, will they actually support these types of sales and be okay with
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  it if you four x down the road knowing maybe you can text?
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  My sense is for small funds, this is gonna become an essential skill.
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  And I think the LP expectation is going to be these secondary sales will be an important
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  returns driver.
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  The more I study this, I've become even more convinced they're not gonna be an important,
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  they're gonna be the primary way.
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  If they're the primary way, these decisions are gonna become, like, make or break, LPAC level,
• 14:19
  fun performance defining decisions.
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  And most LPs, I think, are gonna consult with the GP and say it is ultimately your call, but
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  don't screw this up.
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  Topic number three, it's on a recent blog by Fred Wilson titled drinking from a fire hose
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  reflects on a long standing tension in venture.
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  Oversized funds lead to overfunded startups, which often results in poor returns, diluted
• 14:41
  ownership, and undisciplined spending.
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  He calls out that this is nothing new.
• 14:44
  Companies have been flooded with capital for over a decade, but with AI driving down the
• 14:49
  cost of starting and scaling businesses, this dynamic is becoming even more extreme.
• 14:53
  So while there won't be some sort of large scale resolution really anytime soon, some
• 14:58
  founders are opting out instead of chasing endless fundraising cycles.
• 15:01
  Some are choosing profitability, lean operations, and sustainable growth.
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  And while not every startup can or should bootstrap, Wilson suggests that this mindset
• 15:10
  shift may become more common.
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  So Fred argues that the combination of excess capital and lower startup costs due to AI is
• 15:17
  creating a bigger divide.
• 15:18
  Some founders are taking massive rounds while others are going lean.
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  Do you, Charles, think that we're entering an era where bootstrapping or capital efficiency
• 15:26
  becomes a more viable or maybe even preferred path for certain founders?
• 15:30
  It's hard to actually imagine that right now just in this time of AI, to be honest.
• 15:34
  Well, Mia, it took the words out of my mouth.
• 15:36
  First of all, I just wanna say, like, for those of you who don't read Yoni's subsect, 99%
• 15:41
  derisible, it's good.
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  And Fred referenced a post that Yoni had in his subsect.
• 15:45
  It was well read.
• 15:46
  I think there's these two competing tensions, and they've always been competing tensions in
• 15:51
  venture.
• 15:52
  Capital needs for companies and capital deployment needs for venture funds.
• 15:56
  I remember when everyone was like, the cost of starting a startup is going way down.
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  I'm like, yes.
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  That is true.
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  That is a t zero condition when you're starting.
• 16:05
  I think what we forgot is and maybe it doesn't have to be this way.
• 16:08
  We've created a set of conditions where the cost of starting a company is very cheap and
• 16:12
  the cost of scaling a company costs hundreds of millions of dollars.
• 16:15
  Now you could say, like, what's the chicken and the egg?
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  Does the existence of large venture firms with lots of capital to deploy allow people to
• 16:24
  pursue ideas that are capital intensive because that capital is available, or does the presence
• 16:29
  of ambitious people who need lots of capital induce venture capitalists to raise big funds
• 16:34
  to support them?
• 16:35
  Maybe this is cynical.
• 16:36
  I think the capital deployment needs of really large venture funds create conditions where
• 16:41
  people who have ambition can go and say, please give me a hundred million dollars to go build
• 16:46
  this thing.
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  And people can say, I can afford to do that for you, which I think is great for ideas that
• 16:50
  really do require that amount of money to get started.
• 16:53
  Something I always attribute to Micah from Founder Collective, I don't know if he actually
• 16:57
  said this, but I've heard him say it before.
• 16:59
  You may be the originator, which is that capital has no insights.
• 17:02
  And I often tell our portfolio company founders money is great if you have something that's
• 17:05
  already working and you want to do more of it.
• 17:08
  If you don't have something that's working, the probability that money will solve that problem
• 17:13
  for you is very low and, in fact, might have a negative deleterious impact on the probability
• 17:19
  you'll find an answer.
• 17:20
  And this is why I focus so much of our firm's time on these small sub million dollar pre seed
• 17:24
  rounds.
• 17:24
  When you only have a million dollars, you can only work on a couple of things with a couple
• 17:28
  of people, and the pat answer to a lot of things is we can't afford to do that.
• 17:32
  And I'm a big believer that constraints breed creativity.
• 17:35
  And I even see it with our portfolio companies.
• 17:37
  Companies that were lean and efficient and scrappy and clever get money, and suddenly
• 17:41
  they're like, well, like, we could just hire another engineer to solve that problem.
• 17:44
  Or the thing that's just below the priority line, we could work on that.
• 17:47
  And I think that people have this vision that you raise a big round, and you go buy a huge
• 17:51
  office, and, like, you throw a rager.
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  That was like the 2000s era of excess.
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  What I see in startups is it's this little creeping lack of discipline.
• 18:00
  You hire more people than you need.
• 18:02
  You pay them all a little bit more.
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  You're a little bit more lax on the cut line for what projects the company is gonna work on,
• 18:09
  and you just slowly become bloated and less efficient.
• 18:12
  And it's not like you make some huge silly decision.
• 18:16
  It's a bunch of little decisions that make the company less interesting and less efficient.
• 18:19
  And as long as I've been a venture capitalist, there's always been a cadre of founders who are
• 18:22
  like, I want nothing to do with venture capitalists, and I wanna do this on my own.
• 18:25
  And, again, the truth is you can start a lot of things on your own, but it's hard to scale
• 18:29
  them.
• 18:29
  And so I'm a big believer that you should spend as little money as you can, pre product market
• 18:33
  fit, and stay as lean and small as you can.
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  Because in my mind, that's the best way to find the answer.
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  Then once you find the answer, you should raise as much money as you need to lean into the
• 18:41
  opportunity.
• 18:42
  But, Mia, we have a whole media industrial complex, not the sound of conspiratorial, in
• 18:46
  venture that's, like, designed to talk about how much money companies have raised and at
• 18:51
  what valuation.
• 18:52
  And our portfolio companies live in environments where sometimes they're like, wow.
• 18:55
  Our competitor just raised $50,000,000 from this really famous VC firm.
• 19:01
  Shouldn't we go do the same?
• 19:02
  And I'm like, do you think they're gonna put it to good use?
• 19:05
  Are you in the same position?
• 19:06
  And oftentimes, I'm just, like, raising a lot of money or pursuing raising a lot of money
• 19:10
  because you like to see your name in the headlines or because your competitors did it is
• 19:13
  not a very good reason to raise money.
• 19:15
  And I thought, well, instead of thinking about it as raising money, think of it as, like, I'm
• 19:18
  selling ownership of my company.
• 19:19
  That's what you're really doing.
• 19:20
  There isn't, like, a media publication focused on the amazing quarter over quarter or year
• 19:25
  over year growth of private low key bootstrap software.
• 19:29
  There's a few that are, like, quasi boot strapped, like buffer.
• 19:31
  And there's a few examples of companies that have been reasonably lean or have taken
• 19:35
  relatively little venture capital and continue to grow and talk about that experience.
• 19:38
  Fundraising is noteworthy.
• 19:40
  And so I think the presence of large amounts of capital means that most companies will raise.
• 19:45
  I am very interested in this notion that I've heard Lemkin talk about it.
• 19:47
  I've heard Yoni talk about it.
• 19:49
  Companies that will raise modest amounts of money, think 5 to $10,000,000 to get started
• 19:53
  and it hits on the skate velocity.
• 19:54
  But beyond that point, we'll be self financed and we'll control their own destiny.
• 19:57
  I'd love to meet those companies.
• 19:59
  We have a couple in our portfolio.
• 20:00
  And I can say as a VC, it's hard to report on those companies because for a lot of limited
• 20:04
  partners, the easiest thing to tell them is, like, we did an investment at time zero.
• 20:08
  And two years later, this big series a firm that you've heard of came in and priced it and
• 20:12
  led the round at a three x price.
• 20:14
  That's easy to understand.
• 20:15
  A company where, like, hey.
• 20:16
  They're profitable, and they're doing 15,000,000 a year in revenue.
• 20:19
  And they'll never raise again?
• 20:20
  They'll never raise again.
• 20:21
  That LP could be like, so what do you think it's worth?
• 20:23
  And I'm like, I mean, I could give you a bunch I can give you a range.
• 20:25
  But it is attention, and I have a special place in my heart and at our firm for people who are
• 20:30
  interested in being more capital efficient.
• 20:32
  But I realized it's more interesting to us because we have a small firm.
• 20:34
  It made me think about a blog post that you wrote a while ago, getting off the VC train.
• 20:38
  Were any of the founders that you've talked to who are interested in getting off the VC train,
• 20:42
  were they ones who raised tons and tons of money, or are they ones who had thought about
• 20:45
  it very efficiently and raised smaller rounds early on?
• 20:48
  I think, ironically, that is the most popular post I've written in the last three years.
• 20:53
  Yeah.
• 20:53
  Which tells me a lot about where people's heads are.
• 20:55
  A lot of them are people who'd raised ten or fifteen million dollars and are like, this is a
• 20:59
  good business, but it's not gonna be what my VCs need.
• 21:02
  What do I do?
• 21:03
  I know in my heart this is not gonna be a billion dollar slightly money losing, growing
• 21:10
  concern, but my VCs don't care.
• 21:12
  What do I what do I do?
• 21:13
  We don't have great answers for those companies yet, but we're gonna have more opportunities to
• 21:16
  find the answer in the next five years.
• 21:18
  Well, we are all out of time.
• 21:19
  Thank you, Charles, for stopping by.
• 21:20
  Thank you to our listeners for listening in.
• 21:22
  We will talk with you all next week.
• 21:24
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• 21:26
  Thanks.
• 21:26
  Bye.
• 21:27
  Bye.