Latest / trading places / Anthropic's $44B Revenue Run Rate, SpaceX's $75B IPO Problem, and the Retail VC Trap | Ep 34

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Anthropic's $44B Revenue Run Rate, SpaceX's $75B IPO Problem, and the Retail VC Trap | Ep 34 · trading places

0:00
By the way, I'm on Are tariffs legal or not legal?
0:05
When you're taking a company public, one of the things you
0:07
think about as a CFO is like who's going to buy the float
0:10
that I'm putting out? Who are the shares and where are
0:12
they going to? Go It seems like Anthropic is
0:15
now hitting a $44 billion run rate.
0:39
Welcome to another very bad episode of Trading Places, the
0:43
world's worst BC secondary podcast.
0:46
This week we're going to talk about the overall macro picture
0:49
of the market. The markets are up, although
0:52
prediction markets seem to be thinking that the around war is
0:55
not ending anytime soon. SpaceX and Anthropic announced a
0:59
big deal. Pretty good for SpaceX, I think
1:02
maybe pretty good for Anthropic too.
1:04
We have a lot of FOMO on Anthropic at 900 billion to a
1:08
trillion dollar evaluation. Actually secondary trades
1:10
happening higher than that. We'll cover Sam versus Elon, the
1:14
trial, getting some juicy gossip there.
1:20
The cerebrous IPO continues to get more attention.
1:23
It's 20 times oversubscribed and they're raising the range.
1:26
On the other hand, we still see SAS apocalypse problems and
1:31
every time Anthropic releases a new connector or some kind of
1:34
plug in, it kills a bunch of companies about.
1:37
I think we're going to cover public retail venture capital
1:39
funds in our valuation corner. Is that correct?
1:42
That's right. We're going to hit the publicly
1:44
traded retail VC. So we'll talk about Robin Hood
1:46
Ventures and then Destiny, Tech 100 and Fundrise and we'll go
1:51
through a pros and cons of each one of those.
1:53
All right, let's jump into the macro picture.
1:56
Seems like everything's coming up roses a month.
1:59
Despite the price of oil, everybody's setting record
2:03
highs. What's what's causing all this?
2:05
Yeah, it was definitely a strong leak for the public markets in
2:08
the US, The NASDAQ and the S&P both had records on Thursday and
2:12
on Friday intraday highs and closing highs.
2:14
And then yeah, even Japan joined in on the fund.
2:17
The the Nikkei hit an all time high on Friday and the UK also
2:21
hit one on Thursday. So look, I think broadly the
2:24
market's focused on earnings. We are something like 89% of the
2:27
way through earnings season for the S&P 500.
2:30
The EPS expectation from analysts had been 13% year over
2:34
year growth, which is pretty solid.
2:36
Based on my math, we're at 27% earnings growth from the S&P 500
2:40
right now. So the index is up something
2:43
like 8% year to date, but with earnings up 27% year over year,
2:46
it's actually gotten cheaper since the start of the year.
2:49
So I think the market's focusing on that and and not as worried
2:53
about the potential for higher oil prices.
2:56
How do you can reconcile the fact that the public markets are
2:58
up crazy, but the prediction markets are saying we're we're
3:01
likely to have an oil crisis for at least a few more months?
3:05
I would offer that you got to hold two things in your head at
3:07
the same time. 1 is the conflict in the Middle East is going to
3:10
go on for a lot longer than people think I think I'm told
3:14
reliably Dave, that there is no war in the Middle East, that
3:16
hostilities are over. I'm going to respect from the
3:18
president of the United States. I'm being told directly, oh,
3:21
wait a second, that's just in you're all going to die tonight.
3:23
All right, nevermind. I'm not I'm not sure I can trust
3:26
what is being said. I think it's fair to assume the
3:29
Iran does not want to negotiate a deal anytime soon now that
3:33
they have leverage and that they can probably hold out a lot
3:36
longer than we can because they have a much higher pain
3:40
threshold in terms of what they'll endure.
3:42
And it just they seem, I think they want to drag this out until
3:44
the midterms. That's what I would do if I were
3:46
them. But at the same time, you know,
3:48
the oil prices are at between 95 and 105 dollars a barrel.
3:52
We were at 140 back in 2022. So oil prices are elevated, but
3:57
not enough to tip us into a recession.
3:59
And when you start to see companies like Meta at 1718
4:01
times earnings, NVIDIA 20 times earnings, Microsoft 20 times
4:05
earnings, even Google at 24. Times Earnings.
4:07
Like there's still a lot of optimism around earnings,
4:09
earnings growth, reasonable evaluation multiples.
4:11
And I think that's probably where the market is more focused
4:14
and that's dragging global markets higher as well.
4:16
So I think that's what's happening.
4:18
It's just where's the what's the market take attention to and how
4:21
do you value earnings growth and economic growth versus oil
4:24
prices that may or may not be stretched into the end of the
4:26
year? Well, I think I'd probably
4:29
comment that oil prices probably have less impact on tech
4:32
companies. And right now, the market's
4:35
being driven by these gains from the top tech companies.
4:38
At the same time, you know, the Straits of Hormuz is not just
4:41
affecting oil prices, it's affecting fertilizer prices.
4:43
It's affecting other commodities.
4:46
That's generally affecting the rest of the economy.
4:48
Certainly in Southeast Asia, there are substantial increases
4:52
in the price of oil, much higher than where we're seeing it
4:54
traded. There's lots of, you know,
4:56
crisis and those countries. I just think that we're seeing a
5:00
disconnect between the overall market, which might be driven by
5:03
tech and the everyday market that consumers and normal
5:07
businesses experience as a result of these shutdowns and
5:11
and also potentially other things like tariffs.
5:14
By the way, I'm on, are tariffs legal or not legal?
5:19
And depends who you ask. Here's the here's the good news.
5:21
The International Court of Trade in the US said The Section 122,
5:26
the new tariffs that came in place of the old illegal tariffs
5:29
are also legal. So several attempts are to, you
5:33
know, place tariffs. I would say that tariffs are
5:35
legal if it put, if applied by Congress.
5:37
The ones that have been applied to dates either through the
5:39
AIEPPA before or through Section 122 now like repeatedly have not
5:44
been ruled illegal by every court that's looked at it and
5:47
and we're now off again on tariffs.
5:49
And so that's actually a probably a tailwind to the
5:51
economy and that we've gotten a little bit of tariff relief on
5:54
top of the fundamental underlying growth in the economy
5:57
and earnings. One of the sector, by the way,
5:59
is financials. Financials all reported in Q1
6:01
and their their EPS was up 15%. So I think you're right, the
6:05
tech and financials are leading the way in the US.
6:07
Consumer spending is OK Jobs have sort of been flat or
6:10
slightly up. We had a pretty good employment
6:12
report this week. But overall, it's definitely a,
6:15
you know, tech and finance story in the US.
6:17
And you're right, other other sectors are going to struggle
6:20
and other parts of the world would probably struggle.
6:24
How does a startup founder late stage get fired by a board on a
6:30
Sunday? Mira, can you please officially
6:34
invite me to the office for a meeting?
6:37
Adam is trying to get the board to agree to a configuration.
6:42
Well, at least on the tech front, we're seeing some
6:45
positive news. SpaceX announced a big deal with
6:48
Anthropic about computes. I guess this was Anthropic
6:52
ripping and needing more compute, and SpaceX having some
6:55
excess compute from XAI that wasn't being used previously.
7:00
Although Elon Musk had called Anthropic evil 3 months ago now,
7:05
now he's quite willing to be their landlord for $4 billion of
7:08
rent. How times?
7:09
Change. Isn't it amazing how that works?
7:12
Yeah, this is AI think this is a really big deal and I think it's
7:14
really good for both sides. Let's just go through what what
7:17
they said. It is interesting that Elon and
7:19
Dario have been fighting and going at it on X and Elon even
7:23
called them misanthropic at at one point, which is cute.
7:28
But you know, I guess when it comes down to money, we're we're
7:30
all on the same side, which is which is great, right.
7:32
So we're as we know we're shareholders or viewers know
7:35
we're shareholders and or economically exposed to SpaceX.
7:38
So not investment advice. This is just our opinion, but
7:41
here's the nature of the deal. So it's a, it's a lease of
7:44
Colossus one which is Spacex's big supercomputer in Memphis,
7:48
TN. They're leasing it to Anthropic.
7:51
Why does Anthropic need compute? Well, they've been ripping, as
7:53
you said, they've been growing their revenues at a phenomenal
7:56
rate and just announced at the end of April that they're at a
7:59
$44 billion ARR run rate. That means they added 14 billion
8:04
in the month of April on top of adding ten in the month of
8:07
March. And they seem to be on track to
8:09
go to 100 by the end of the year, which would put them in
8:11
the league of the the mag. 7/1 of the issues they've run into
8:14
though is just they're constrained on compute.
8:16
And So what does that mean? They need capacity from AI data
8:20
centers that they just don't have.
8:21
And so SpaceX has Colossus 1. Colossus one has the computing
8:25
capacity that they need. And so that helps Entropic to
8:27
now essentially double the rate limits for cloud code and cloud
8:30
Mac subscribers. They're raising their API limits
8:32
for cloud Opus. They've now secured over 12
8:35
gigawatts of combined capacity through this deal and a few
8:38
others. So I think that sets them up for
8:40
the rest of the year. It's actually great for SpaceX,
8:42
as you said, because SpaceX has this compute they're not using
8:45
in XAI. They have rock that has
8:48
underwhelmed user expectations and said the fact they can lease
8:50
out some of this excess capacity for three to $4 billion in in
8:55
revenue is is fantastic. I mean with that estimate on
8:58
revenue from Brad Gerstner who's investor in the company.
9:00
So that also helps with their IPO, which is much better
9:03
revenue story. They've also by the way gotten
9:05
an expression of interest on code development of data centers
9:08
in space, which is also an important initiative in the it's
9:11
front and center in the roadshow.
9:12
I can't hear the words data center in space without thinking
9:15
of pigs in space that old. Pigs in space.
9:22
Yeah, it's a, it's a part of the roadshow and it's, you know,
9:25
these are these code development efforts.
9:27
They may be three to five years out, but they're an important
9:29
part of the IPO roadshow. So one last thing, if you think
9:32
about the compute capacity, they're at 44 billion in AR run
9:35
rate right now. They have something like 1.3
9:37
gigawatts stood up. That's about one through Google
9:40
Now .3 through Colossus. So that's supporting their
9:43
current revenue of 44 billion in ARR.
9:46
But if they want to go to 100 million or 200 billion in ARR,
9:49
they need to basically quintuple or even increase by 10X their
9:52
capacity. And that means 5 to 10 gigawatts
9:55
of of capacity. That is a tremendous amount.
9:58
If you don't really know what a GW is, it's just to get to put
10:01
this in context, like one nuclear reactor is a GW.
10:04
That's about, you know, a million households in the US
10:07
required a GW 1.211.21 gigawatts would also power a DeLorean back
10:13
in time. If you remember the back, that's
10:15
my translation of what is a GW. The Hoover Dam is 2 gigawatts.
10:19
The entire US is something like 1200 gigawatts.
10:21
So when you think about a company, one company like Open
10:24
AI or one company like Anthropic getting 5 to 10 gigawatts, that
10:29
is that's a lot of power given, you know, the available capacity
10:32
in the US. So the fact they can get that
10:34
with Colossus I think is a a big win for Anthropic.
10:40
He is now saying they need till end of day.
10:42
Satya and I said that doesn't work and we need to start
10:46
preparing for Plan B, Plan B, Plan B, Plan B.
10:51
Something else that came out recently as new NASDAQ rules may
10:55
allow SpaceX onto the fast entry 100.
10:58
And if so, that would require a lot of passive investors to buy
11:02
SpaceX immediately after IPO. Does that help SpaceX a little
11:06
bit, Ahmad? Yeah, that is actually a major
11:09
news item when you're taking the company public.
11:11
One of the things you think about as ACFO, it's like who's
11:14
going to who's going to buy the float that I'm putting out?
11:18
Who are the shares and where they going to go?
11:20
And one of the things that what we know about the SpaceX
11:23
roadshow right now, which I think will reveal the rest one
11:26
publicly between around May 18 and 20 seconds.
11:28
So we'll know for sure for sure. But the same people targeting
11:31
the $75 billion and float, which would be the biggest IPO of all
11:36
time by like a factor of 3. So who's going to buy the $75
11:39
billion is the that's been the question that a lot of investors
11:42
have been thinking about. It seems like they're going to
11:45
put about 33 billion in the hands of retail investors.
11:48
So moms and pops and it lets largely price inelastic.
11:52
But that's still leaves about $40 billion that you have to
11:55
sell to institutionals, right? Which would by itself 40 billion
11:59
would be the biggest IPO of all time by more than Alibaba, more
12:03
than Aramco. What they've now done is they've
12:05
convinced the NASDAQ to to change their inclusion rules and
12:09
who goes into the NASDAQ 100 index.
12:11
And there's a ton of money sitting in these index funds
12:14
that are that are tied to the NASDAQ 100, something like 600
12:17
billion in AOM tied to these indexes, tied to that specific
12:21
index. So by being included in the
12:22
index within the first few months, that means that about
12:25
$25 billion of passive investors have to buy SpaceX because
12:29
they're not included in the index and they need exposure to
12:31
the index. Well, that solves a huge part of
12:33
the IPO problem and leaves you with maybe 18 billion of
12:36
discretionary institutional that they have to sell to, to cover
12:39
the 75. So I think that actually was the
12:42
biggest news of the week for SpaceX investors now that they
12:45
are going to be part of the NASDAQ.
12:47
And it's very unusual. Usually NASDAQ requires you to
12:49
wait about six months to be included in the NASDAQ.
12:51
And then there are limit limits on floatation and there are
12:54
limits on profitability. And there's also some guidance
12:58
on on float and liquidity, all of which they're going to wave
13:01
in order to get get SpaceX into the index.
13:04
I think the reason the NASDAQ did that is they wanted the
13:05
listing. They wanted to convince Elon to
13:07
list on the NASDAQ and not the New York Stock Exchange.
13:09
So they made this big exception. And in so doing, they've
13:12
allowed, you know, SpaceX to fill maybe a third of their book
13:15
with just passive price in elastic forced buyers, which is
13:20
a huge plus for the IPO. And I guess if that happens in
13:25
the S&P 500, that might take a little bit more time, but that
13:28
could also be a way for more passive institutional buyers,
13:32
right? Yeah, That would be a huge game
13:35
changer. So the S&P 500 is another.
13:37
They've got all kinds of listing rules on the S&P 500.
13:40
Usually you've got to wait 12 months.
13:42
You have to be profitable. And by profitable I really mean
13:44
profitable like net income gap positive, not, you know, fake
13:47
EBITDA rules that trips up tech companies all the time.
13:52
I guess you have to be 20 billion in market cap and more
13:54
obviously SpaceX will do that. The other limitation I ran into
13:57
was you have to have half your company available for for float.
14:00
So if you are $100 billion company, you have to have up to
14:03
50 billion floatable and and viable to the public.
14:07
SpaceX is only floating about 5% of the market cap.
14:10
So they're going to violate a whole bunch of rules on day one.
14:14
But if over the next 12 months they can solve some of those
14:16
rules and get the S&P to include them, that would unlock, you
14:19
know, now we're talking about a trillion dollars of forced
14:22
buying to go into SpaceX stock, which for a $2 trillion company,
14:26
obviously is, is a huge built in demand and would mean they would
14:29
have to float a lot more stock and dish a lot more follow on.
14:32
But that would be if, if the S&P does that, it's probably 12
14:35
months away. And I think that's that's
14:36
another, you know, another huge win in catalyst for that stock
14:39
price to go up. I think there are S&P 500 rule
14:43
changes that are being considered and that might allow
14:46
IP OS to index after only six months instead of 12 months.
14:50
There you go. So it's possible could fast
14:51
track that before the end of the year maybe, I don't know.
14:57
Yes, I will. Do you have an update you can
14:59
share? Have an update, let me know when
15:01
you can talk. On with them yet.
15:03
Are you on with them? Not yet, just in a quiet room
15:06
because I didn't want all the outside theater.
15:11
Directionally very bad. Directionally very bad.
15:14
Sam, this is very bad. Sam, this is very bad.
15:21
In some other news, as you mentioned, it seems like
15:24
Anthropic is now hitting a $44 billion run rate.
15:27
This post by Peter Walker at Carta shows a graph that looks
15:32
pretty hyperbolic. I don't think we've ever seen a
15:34
company doing this much revenue trend up and accelerate in
15:38
revenue. And now we're even hearing word
15:41
about Anthropic Secondary is being traded way higher than
15:45
that $900 billion valuation, some estimates at 1.6 trillion
15:49
implied by crypto derivatives, certainly north or trillion
15:51
dollars. That's a pretty huge spread from
15:55
the primary round financing that's being discussed and where
15:58
it's being traded in the secondary market.
16:00
I I don't think we've ever seen this amount of FOMO for any kind
16:04
of company, at least not that I can remember in recent history.
16:08
It's just insane how many people are trying to find Anthropic
16:11
shares at almost any price. Well, if they're at $100 billion
16:14
at the end of this year, indulge me for a second.
16:17
And let's say they can double into next year's at 200 billion.
16:20
In 2027, though, they could, they could do far more than
16:22
that. Like that's a MAG 7 company.
16:25
I mean, Google's at 400 billion revenue, Apple's at 400 billion
16:27
revenue, Microsoft 300 billion, Meta's 200 billion.
16:30
So they're in the MAG 7. And I think you could ask, well,
16:34
why are they raising at a $900 billion evaluation if they are
16:37
about to be a MAG 7? And some of these crypto side
16:41
bats have them at 1.6 trillion. I guess the answer is they're
16:45
holding the evaluation at 900 in order to get a lead investor
16:48
like a general catalyst has been rumored to leave that round.
16:50
Lightspeed has been rumored to leave that round and then
16:53
Dragoneer. So they want those guys to lead
16:56
and price the round and give them a favorable deal.
16:59
They don't want to, you know, they want to, they don't want to
17:01
race evaluation too far too fast.
17:02
They want to step into it and give one of those key anchor
17:05
investors a a pre IPO price that they can get into.
17:09
I do wonder if you're Anthropic, do you just, do you just forget
17:12
about the next round and go public?
17:14
Like why raise the 50 billion now if you can just go public
17:17
and, and raise that, raise the money in the public markets?
17:19
Why do one more round with the general catalyst for Lightspeed?
17:22
I don't know. I guess if, I guess if there's
17:24
demand coming in and they can price the shares and get the,
17:26
get the deal done, you know, take, take the money and, and
17:29
move on. And if the IPO happens, but it
17:31
gives you more space to, to on the IPO, whether you do it now
17:34
or at the end of the year, early next year gives us more
17:36
flexibility. But it certainly seems like
17:38
demand is going to come in north of 900 billion I would imagine.
17:40
And if the Iran gets done there, it's it's as a favor to
17:43
investors. Pretty crazy numbers.
17:48
Can I come in? What do you want to make it
17:51
better? I'm still willing to just walk
17:52
away if that helps. If they are ramped up for crazy
17:55
lawsuits against me then I'm not sure.
17:58
What? Not sure.
17:58
What not sure. What, they don't want you to
18:02
They're convinced about their decision.
18:04
For me to be fired or some new thing?
18:06
Yes. For you to be gone.
18:08
For you to be gone, OK. Can I come in and talk about a
18:13
path forward with them? More time for what?
18:16
More time for what? Another case that's attracting
18:21
the attention is the Elon Musk Sam Altman trial article by Max
18:25
Shafkin talks about how everyone's appears to be losing.
18:29
I guess probably not anthropic and probably probably benefiting
18:33
from that. Story You're in a party to the
18:34
case. If we're going to.
18:36
Talk. If we're going to talk about
18:37
Elon and Sam now, I got to get right of here.
18:39
I got my popcorn. I got my popcorn here.
18:41
Yeah, I got my soda right. This is this is this is too
18:44
good. Pull up a chair, my friend.
18:46
This is going to take a little while.
18:48
Well, as as we had reported last week, a lot of not so flattering
18:53
profiles, both Elon Musk and Sam Altman, I guess a lot of quotes
18:58
in the courtroom from Elon that were contradicted by his
19:01
previous testimony. A lot of stories about Sam
19:05
Altman and particularly a piece by Ronan Farrow in The New
19:10
Yorker a few weeks back about Sam Altman.
19:13
Can he be trusted? And lots of different things
19:15
that he said at different points in conversation with open AI
19:18
execs, him being fired by open AI and then brought back in.
19:23
And then even some more recent stuff.
19:25
The second week, Siobhan Zillis had revealed that Musket tried
19:30
to poach Sam Altman. I guess that's not really
19:33
surprising that, you know, he might have tried to grab Sam at
19:36
some point. Siobhan Silas herself is, is
19:39
quite an interesting figure. She's the head of Neurolink had
19:45
previously been a venture capitalist with Bloomberg Beta
19:48
really early on AI and and also involved with Elon Musk.
19:54
She's the father of four of his children.
19:57
So I guess you could say involved, she had previously
19:59
been on open AI board. She's more recently on the
20:02
shield AI board. Kind of an amazing story about
20:05
all the people that are involved in, you know, this whole
20:08
timeline here. I don't I don't really like to
20:11
say about this other than like the headlines are as juicy as
20:14
you could possibly get. What do you what do you expect
20:16
to see happen out of this trial? A month?
20:19
I don't know, it's like watching TMZ.
20:22
So Siobhan zealous is an interesting case.
20:24
She said she's former Open Alley board member, but definitely
20:27
team Elon, right? So had some not nice things to
20:31
say about Sam and his leadership style and and what the board's
20:35
concerns were about him. I think it kind of gets back to
20:38
witness credibility and there's a lot of sparring going back and
20:40
forth. I don't think either Elon or Sam
20:42
are going to come off looking very well, but I guess that's in
20:45
the spirit of ruining witness credibility.
20:48
My expectation was at the start, I thought this was a tough case
20:51
for Elon to prove because of the merits of it.
20:53
I think you have a breach of contract and a charitable trust
20:56
breach claim, but without really obvious contracts written down
20:59
that were violated, it's more about implied promises and I
21:03
think those are hard to prove. You've got a very tough, no
21:05
nonsense judge. A couple of inside baseball
21:08
things, just, you know, I've litigated cases before and went
21:10
to law school and a couple of things I would look for.
21:12
One, there is a jury, but it's an advisory jury.
21:15
This is a bench trial. So the judge will make the
21:17
decision, not the jury. So you can bash the credibility
21:20
of the witnesses and and all kinds of juicy stuff come up and
21:23
the judge, if she's doing her job and she's a very tough
21:25
judge, we'll look past a lot of that stuff to the merits of the
21:28
case. So that's one point.
21:30
I think there are a couple of issues where Ilan's case could
21:33
really still fall apart on the technicalities.
21:36
The statute of limitations claim in California, he is way past
21:39
the normal 4 year statute of limitations for these kinds of
21:42
cases. There's also a standing case.
21:44
You you'd appreciate this, Dave. He put most of his money into
21:46
open AI through a DAF, not personally.
21:49
So the DAF has standing to sue, but I don't know if he has
21:52
standing to sue. So the case could fall apart on
21:55
either one of those. I thought week one kind of went
21:58
towards Elon because there's some testimony in Greg
22:01
Brockman's diary that wasn't very good for open AI and for
22:04
Greg and what they were thinking at the time.
22:07
I think this last week was maybe a draw.
22:08
So I feel like this is maybe a 5050 coin flip.
22:11
I don't think the remedies which will go the the judge will
22:13
determine the remedies. The really nasty part for open
22:16
AI is if the remedy changes the governance of open AI or undoes
22:20
the Microsoft deal, which I think is a very long shot.
22:23
I think more likely the the remedy would be like Elon gets
22:26
some money for, you know, if he becomes a shareholder in open
22:29
AI, which would be ironic, but a passive shareholder.
22:32
And then maybe, you know, Elon and Sam kiss and make up like
22:35
after like Elon and Mario kissed and made-up apparently as a as
22:40
hopefully as a member of the tech ecosystem.
22:42
I hope that's where this lands. Oh, but doesn't become everybody
22:44
loses thing. But it's definitely all kinds of
22:46
negative nasty stuff coming out about both parties.
22:48
And that's, that's not good publicity when you're an IPO
22:51
roadshow, right? Walked me through all the
22:56
reasons and the issues with you and why you can't be CEO.
23:01
Can't be CEO. Can you ask why all weekend they
23:07
wanted me back? Can you say you will call back
23:10
in 10 minutes? Do they know who?
23:13
Can I tell Satya? Is this final?
23:15
They want a new CEO in place tonight, not me.
23:19
Not me. Still don't want me.
23:21
I guess moving on to more positive news, we talked about
23:25
the Cerebrus IPO last week, some news this week that it's 20
23:30
times oversubscribed. The company is raising the price
23:33
range a little bit now from 1:25 to 135 per share.
23:38
I think we're definitely going to see this IPO before SpaceX.
23:42
So whether we see anything after SpaceX, maybe it might be a
23:45
while, but this seems like the the most significant IPO that's
23:48
going to happen before space. XI think I would concur with
23:52
that. So they did their last price
23:54
round in the spring, around 23 billion in valuation.
23:59
They were at 1:15 to 125 per share.
24:02
So that would have been around a $26 billion evaluation.
24:05
They're not up in the range to more like a, what's a 125 to 135
24:09
S 30, three, $34 billion evaluation.
24:12
That's healthy progress. They're setting themselves up, I
24:15
think to be a real competitor to NVIDIA, higher performance, but
24:20
more expensive GPU's and, and in a very hot space.
24:24
And I think showing, I guess that demand is showing that
24:26
they're, as I said, oversubscribed by a lot.
24:28
So they may even reprice a little bit higher and look for
24:30
first aid pop. So that's, that's really good
24:33
news in an, you know, in advance of the big SpaceX offering,
24:36
which I'll probably suck up a lot of the time and tension out
24:39
of the market. Although I think with these new
24:41
NASDAQ rules, that takes some of the pressure off the SpaceX IPO.
24:43
So if reverse gets done, they've got a window to do it before
24:47
SpaceX hits the market. And it looks like they were
24:49
timing it perfectly. Trying to add Satya noun.
24:56
New guy, new guy. New guy is a Randall Twitch guy.
24:59
New guy is Randall Twitch guy. Directionally very bad and this
25:06
is very bad. New guy is Randall Twitch.
25:14
Guy Well, in contrast to all the AI news, the SAS apocalypse
25:19
continues and software stocks getting kind of creamed in a
25:23
couple of different sectors recently.
25:27
I guess ServiceNow, IBM may be bumped down.
25:31
There's been a little bit of negative pressure on camera,
25:33
which is a position we hold. Figma has been like cratered.
25:39
I think there's been a few places where we've seen positive
25:42
news stories where SAS companies are being used by agents.
25:45
But in general, I think we're there's still quite a bit of
25:48
concern that AI companies are going to cut the knees off of a
25:53
lot of these SAS companies or at least cut off the future
25:56
earnings and cash flow of those companies.
25:58
Yeah, I think we are probably still at maximum fear about SAS
26:02
and where it goes. I would say to the PDC SAS
26:05
index, which we watch is down something like 16% year to date.
26:09
The S&P is up 8% and the NASDAC's up a bit more.
26:12
So SAS has underperformed. I would say though, there are
26:15
three examples of companies in the last week that creamed
26:20
earnings. So at last the end was one
26:22
revenue growth of 32%. Their profit margins are over
26:24
30% and last I checked that means that they are north at the
26:28
rule of 40. There they popped by 30% after
26:31
earnings and are now at like a 14X multiple of sales.
26:34
One of your favorite companies, Dave, Twilio creamed earnings
26:38
beat, they beat their EPS by 18%.
26:40
They're growing top line at 20% year over year.
26:43
They're profitable and they're about five times sales, which is
26:46
a very reasonable sales multiple for a rule of 40 company and
26:50
then even 59. But it's in a in a terrible
26:52
category customer service call center, they beat earnings and
26:55
you know, they reaccelerated growth on the basis of AI
26:58
implementation. So I think there'll be a lot of
27:00
examples of SAS companies that turn the corner and use AI to
27:03
accelerate their business. And we may just look back on
27:06
this in 2026, the SAS apocalypse.
27:08
The way we look back on the 2016 SAS crash as like that was cute.
27:13
We thought that software was going away.
27:16
But in reality, a lot of these companies will find a new a new
27:18
leg. Those are three examples of
27:20
companies that did great last week.
27:21
So I, I think the overall category will be stretched, but
27:23
there will be lots of companies that emerge the next year, I
27:25
think with real accelerating growth and improving
27:27
profitability. How does a startup founder late
27:34
stage get fired by a board on a Sunday?
27:38
OK, OK, OK, OK. OK.
27:53
All right. Welcome back to Another
27:54
Evaluation Corner with Professor Aman Virgie.
27:57
I'm on it's Mother's Day. Happy Mother's Day.
28:00
Are you getting any retail venture capital shares for your
28:04
mom? Yes, I'm gonna get my mom one
28:07
share of Robin Hood Ventures, one share of fundraise, and
28:12
maybe one share of the Destiny Tech Index so that you don't see
28:16
which one of those which one of those she likes the best.
28:18
I guess we'll find out in in a few years which one she thanks
28:21
me for. I might get her some roses and
28:23
some chocolate as well. Wait a second, what about USVC
28:26
and Kathy Wood and anybody else? Yeah.
28:29
We're going to save those for next week.
28:31
USVC is an EVOL, it's a closed end fund, so you can't actually
28:34
publicly trade it. And Kathy Wood does ARC Ventures
28:38
and that's another closed end fund.
28:40
We'll talk about both of those. I think those are think of those
28:42
as like more long term backs where you invest in now at a
28:45
certain price and then those will pay returns over the next
28:47
couple years, not as liquid. These are the liquid ones that
28:51
are traded on the New York Stock Exchange.
28:52
So you can actually buy and and sell shares.
28:55
So when I go through strategy, who the managers are, what
28:58
they're doing, I'll ask you, Dave to rate them with me at the
29:00
end. What do you like and what you
29:02
don't like? And then we'll do the same
29:03
exercise for Naval and Kathy next week.
29:06
Terrific. So let's go into each of these.
29:08
The first thing to look for in the venture fund is who's the
29:11
manager? Do you trust the person is
29:12
making the decisions Robin Hood Ventures has been around for?
29:16
They just listed in March. They're kind of new, same with
29:20
the Fundrise. Robin Hood is not a new company,
29:22
though they've been around for quite a while.
29:24
Sarah Pinto is the is the manager and face of Robin Hood
29:27
Ventures. Vlad Tenev is very involved and
29:29
seems like, but it's mostly Sarah's show.
29:32
Ben Miller runs Fundrise Innovation Fund and then Sohail
29:36
Prasad runs the DXYZ Destiny fund.
29:40
You might know him as the founder of Forge, founder and
29:42
CEO Ford. So lot of experience with these
29:45
late stage tech companies. Let's start with Robin Hood
29:48
Ventures and we'll go through just the strategies of each one.
29:51
They have a market cap of around a billion dollars.
29:53
They are trading at about a 35% premium to the net asset value
29:57
of the companies that they hold. Their current portfolio holds
30:02
positions in Databrex and Open AIA.
30:04
Lot of fintech companies. So they lean in on companies
30:07
like Revolute and Ramp and Airwallex.
30:09
They're basically going after what I would call best in class
30:12
and pre IPO companies with a 24 month window to when they want
30:16
to go public. A little bit of a different
30:18
strategy from Ben Miller over at Fundrise.
30:21
They're much bigger. They've been around for a little
30:22
bit longer. They own about 28 companies.
30:25
So it's a broader group of companies.
30:27
Market caps over $5,000,000 and they are leaning in more on AI
30:31
and now private aerospace companies.
30:34
This one's a weird one and we'll go back to why why this matters,
30:38
but they are trading at a between A5 and 20X premium to
30:41
the net asset value, the NAV 5. To 20X.
30:45
Yeah, they were at $19.00 price per share.
30:48
That's the NAB of their fund. Meaning if I just add up all
30:50
their companies and value them at the last price round, it's
30:53
worth $19.00. They had one point after their
30:56
IPO popped to $400.00 a share and now we're at $137 a share.
31:01
So you really have to worry and, or wonder why a company that
31:05
owns a dollar is trading at four or five or $6.
31:09
And I guess the short answer is, well, the dollar is not really a
31:11
dollar. It's it's, you know, a dollar in
31:13
open AI or a dollar in SpaceX or Andrew maybe gets marked up.
31:17
And so there's a maybe an under valuation argument for what the
31:21
assets are. But I would just advise all of
31:24
our listeners and viewers, if you're on YouTube, look at the
31:27
schedule investments that these companies have and make sure you
31:30
understand why there's going to be a, a valuation premium.
31:33
So let's compare what Fundrise and Robin Hood do.
31:36
Let's just start there. Let's start with Fundrise on the
31:38
left. Their biggest position is
31:39
Anthropic. They are typically doing
31:42
quarterly evaluations on each of these companies.
31:44
So Anthropics, the company where the last price round was between
31:48
350 and 380 billion a share. It is quite possible that
31:52
Anthropic gets marked up by 3X in the next few months or maybe
31:56
more. So maybe that's one reason why
31:58
they trade at A, at a premium for that one position.
32:02
Data bricks is the number two position.
32:03
Open the eyes, number three position.
32:04
So, and then SpaceX is #4 they're obviously leaning in on
32:08
some of the biggest and best names out there.
32:10
And some of those companies may get marked up.
32:12
And so maybe that justifies some of the reason why they traded a
32:16
premium. You'll notice that there's a lot
32:18
of companies in their long tail, over 1/4 of their fund is in
32:21
smaller positions, like under 1% of the fund each.
32:24
They own about 28 different companies.
32:25
So I wouldn't call it a diversified fund because a lot
32:28
of it is in the Big Three or BIG4 names, but definitely has a
32:32
long tail. Robin Hood on the right, less of
32:35
a long tail. Their biggest position is
32:37
Databricks and then a lot of fintech companies like Revolute
32:39
and and Mercor and Airwallux and Ramp.
32:42
They have RR, they have open AI, they have Boom supersonic, a
32:45
little bit of Stripe and then they're sitting on a little bit
32:48
of cash. But it's not not much.
32:50
So that portfolio is more concentrated in 10 to 15 names
32:54
that I think have maybe a, a better path to an IPO.
32:58
Slightly different strategy, right?
33:00
So it depends a bit on, you know, how you think of these
33:02
companies and which one you want to own.
33:04
Another interesting one is Destiny Tech 100 or DXYZ.
33:07
They are big in SpaceX right now.
33:09
They have some of Shield, some data, Brexit and some other AI.
33:13
They just did a big fundraising. So they're sitting on actually a
33:15
lot of cash right now. Their portfolio is interesting.
33:18
It it is. They are the OG of the sector.
33:20
They launched in 2024. So they're at least 2 1/2 years
33:22
old, but you can think of their portfolio as 1/4 of it is SpaceX
33:26
and space air tech defense, SpaceX Axiom XAI, 15% is, is AI,
33:33
most of that's entropic and XAI open AI skilled.
33:36
And then maybe 10% is in fintech and then 50% of it now is in
33:41
cash. And so that's a lot of cash
33:44
sitting on their investment portfolio, a lot of dry powder.
33:47
And so I guess the question is where are they going to invest
33:50
all that money? And then given the given the
33:52
fact they are sitting on so much cash, do you really want to pay
33:55
a 3X premium to NAV for this company right now?
34:00
Well, if you look at where the portfolio is, you can see SpaceX
34:03
is the majority of their position.
34:05
It's not majority. So the plurality, 16% of of what
34:09
they own is in SpaceX. They have positions in Shields
34:12
and their positions in a few other, you know, data bricks and
34:14
a few other top companies. But if you look right at the
34:17
very bottom of their portfolio, 47% is cash equivalents right
34:20
now. So.
34:22
A lot of that money has just not been deployed and there's a
34:24
concern if you look at the gap between the historical market
34:27
value and NAV, they've, it is typically been between 2:00 and
34:31
3:00 X. So they do tend to trade at a
34:33
premium. But in the last couple of
34:34
months, that premium has really expanded the market cap, the gap
34:37
between the blue line versus the market cap and the green line,
34:39
because the NAV is, is now trading at a relatively high
34:43
level of 3X for a lot of undeployed cash.
34:45
That one, that one might be a bit of a, a bit of a red flag.
34:49
Same by the way, for Robin Hood Ventures.
34:50
The blue line is a market cap. The green line is the NAV.
34:52
You can see there's been a, a gap.
34:54
They're now trading at a premium to NAV a different at a point
34:56
last year you could buy them at a discount, which would be
34:58
great. Can't do that anymore.
35:01
Fundrise has a 6X gap right now between the blue line but just
35:04
the market cap and the green line.
35:06
But just now you can see at one point a couple of months ago,
35:08
this was a 20X gap between market value and now.
35:12
And that just tends to compress over time.
35:14
So if you are a retail investor, you you got to be worried about
35:17
the premium over now. If you got to be worried about
35:18
also the lock up period, both Fundrise and Robin Hood went
35:22
public in March. That means around September the
35:24
lock up will end and a lot of investors who are in it will be
35:27
able to sell freely. So that might put some selling
35:30
pressure on it. So I think my advice would be
35:33
wait until the lock up period ends for both Fundrise and Robin
35:36
Hood. See where the multiple is and
35:38
then, you know, figure out if that's the fund you want to jump
35:41
in on. Just finally do a comparison out
35:43
of each of these three. The Fundrise, I would call that
35:46
a kind of indexing into the top companies in the space, pretty
35:49
heavy on AI, but that's also what the market is relatively
35:52
diversified. Portfolio management fee is
35:55
around 2 1/2 percent. The total expense ratio, which
35:58
is management fee and then all the other expenses associated
36:00
with the fund or around 2.9 to 3.1%.
36:04
No carry. The manager said it's Ben Miller
36:07
and this is, you can buy this and sell this in the New York
36:08
Stock Exchange right now. RVI Robin Adventures, more like
36:12
frontier Tech, very heavy mix of fintech and AI, similar expense
36:15
ratio. That's Sarah and Vlad.
36:17
And then on the right, you've got a very cash heavy portfolio
36:21
run by Sohail Prasad, a little bit more expensive total expense
36:25
ratio around 5%, also no carry. It's also the most liquid and
36:29
the biggest 1. So it's easiest to buy and sell.
36:32
So it depends a little, I think on what you think of the
36:33
manager, what you think on the strategy.
36:36
But having seen this, Dave, do you have a feel for which one?
36:39
How would you rate these? Or if you had a dollar, if you
36:42
had to give your Mother's Day gift one share in one of these
36:44
companies, which one do, Which one do you like and which one do
36:47
you not like just based on the portfolio strategy and and what
36:50
they're buying into? Well, I think a lot of this
36:53
depends on where Fundrise is holding Anthropic.
36:56
My guess is that's probably still at the $350 billion
37:00
valuation. Yeah.
37:01
Probably, yeah, that's in the last quarter.
37:02
That would be right. So if you go back to that pie
37:06
chart view of things, let's just kind of guess that, you know,
37:10
Anthropic, there's a built in three or 4X increase in the
37:14
value of Anthropic right there that would justify that
37:19
portfolio maybe being worth, I don't know, I guess another 1X
37:24
perhaps. I don't know if it justifies it
37:26
being worth another 5X. So you'd have to really believe
37:32
that Entropic is extremely undervalued and I don't know,
37:35
maybe worth 3, four, $5 trillion, not just one to 1.6
37:39
trillion to make that case or else there's something else
37:43
under there that you think is tremendously undervalued.
37:46
I'm not sure where they're holding the positions in Anderol
37:49
or Ramp or SpaceX, but those aren't large enough to really
37:51
justify, you know, too much of an upside.
37:54
Maybe in that group of other, there's some interesting stuff,
37:59
but right now I think you'd probably say that Fundrise is a
38:02
big bet on Anthropic, a medium sized bet on data bricks, and
38:06
then a modest bet on the other companies in that category.
38:10
I don't know if I could justify 6X on that unless you really
38:13
believe Anthropic is just going to, you know, 10 or 20X in the
38:17
future. On the Robin Hood side, this is
38:20
a little bit, you know, more balanced portfolio.
38:23
I don't know if I really want to lean into Revolute or Mercore
38:26
that hard. But still, you know, you've got
38:28
positions in a bunch of other companies.
38:30
So even though the fundraise position is maybe more long
38:34
tail, it's more concentrated and Anthropic and maybe a little bit
38:39
in data bricks. Robin Hood is less concentrated
38:43
in just those couple of names, but still maybe 10 names that
38:47
make up most of it. If we think about the Destiny
38:49
XYZ portfolio, yeah, if we were looking at the SpaceX and XII
38:54
positions together, that's maybe about 20%.
38:57
You know, there might be some premium there if those go up in
39:00
value. But I guess what you're really
39:02
betting on is the cash. And you know, again, I'm not
39:05
sure I understand a 3X premium to NAV when half of the position
39:09
is in cash. So all of these seem like, you
39:13
know, optimistic bets. Yeah.
39:17
I guess you didn't give me this option, but can I short all
39:19
three? You can yeah, you, you can.
39:25
There was actually some very good short research on the XYZ
39:29
from, I'll give him a shout out. Citroen research kind of broke
39:31
down the math on the fair value of where is the DXYZ portfolio
39:36
and why they, you know, why they should not be at a multiple of
39:39
where they're at. And you could, you could decide
39:41
to go against all those, I guess if you really wanted to go,
39:44
maybe the clever Dave McClure bet would be go buy Anthropic on
39:48
your own and. And then short the you know.
39:49
And then short the the. Fundrise, I would buy, I would
39:55
either buy USVC or I would buy Anthropic, which you know
40:00
realistically is probably only available via somebody's SPV and
40:03
excessive fees and carry, but. I'd rather pay a 2X premium for
40:08
Anthropic at a 1 trillion to $1.5 trillion price.
40:12
That's not maybe is that crazy as opposed to maybe a 5X
40:16
premium, You know, for where it's being held in Fundrise.
40:20
The others I just. I can't justify a 3X premium for
40:25
Destiny XYZ when half of it's in cash.
40:27
Robin. It's probably the most
40:28
reasonably valued of of the of the bunch.
40:32
So I guess I'd probably say maybe I'd bet on Robin Hood,
40:35
short the other two and try and buy a direct position and then
40:38
Tropic or USVC. But none of these seem all that
40:43
reasonably valued at the moment. No, I think you're, I think
40:47
that's exactly where I came out actually.
40:49
I thought all these are probably benefiting from a lot of
40:52
excitement around these companies.
40:53
If you can't buy these companies directly, then I guess it's your
40:56
only bet, but then the best move is to go into the companies you
40:59
like. I don't, I don't know that these
41:02
premium valuations for sure. There's a tendency for these
41:04
valuations. So there's a gap between market
41:07
value and and NAV to close. And even if that NAV marks up, I
41:12
think there's a really good, especially coming out of the
41:14
locked up period for Robin Hood and, and for Fundrise, which is
41:18
September. I would probably wait until
41:20
after those locked up periods are done and then see where this
41:22
multiples are. But I probably wouldn't touch
41:24
either of them until then. And if you can get into
41:26
Anthropic directly, I think you should do that.
41:28
And and probably short, you know, short Fundrise and that's,
41:31
that's maybe the arbitrage you want to do.
41:33
Thanks for that analysis man. Thank you, Dave.
41:41
This week we're going to do something different.
41:43
We're going to walk through a presentation on VC secondary one
41:47
O 1. There's been a lot of
41:49
conversations about secondary in the past few years.
41:52
I think there's probably a lot of confusion about what that
41:54
really means. It actually means a lot of
41:55
different things to different people.
41:57
We're going to talk through a couple of different definitions
41:59
of secondary, why people buy and sell secondary, and then really
42:04
how we approach the market, how we assess and value different
42:08
portfolios, how we structure different deals.
42:10
For those of you who want to follow along, this presentation
42:13
is actually on our website. If you go to practicalvc.com and
42:19
actually click over to the secondary one O 1 section here
42:22
at the top and click on the overview.
42:26
This list of VC secondary examples here is actually a
42:28
clickable area that launches our VC secondary one O 1 deck.
42:33
All right, let's get started with the presentation.
42:36
So this graphic we show often to talk about the basic ideas
42:40
behind secondary. Usually secondary is involving
42:43
buying later stage companies or funds typically after the first
42:47
five to seven years, usually when companies are getting to
42:50
maybe 50 to 100 million in revenue, Series C or D or later.
42:54
If we're talking about funds, then usually those funds are at
42:57
least five, maybe even 7 to 10 years old when we're looking at
43:00
buying positions in those funds. So if you look at the growth of
43:04
the secondary market over maybe the last 10 to 15 years, it's
43:09
really expanded quite a bit. This graph is from Industry
43:12
Ventures, one of the premier investors in the secondary
43:15
market. They've they've been in it for
43:16
probably over 20 years at this point, probably 25 years.
43:19
And you'll see back in 2012, the entire market was only 25
43:22
billion. Now it's easily over 100
43:25
billion. This is slightly broken up into
43:27
direct secondaries and fund interests or LP interests in in
43:31
funds. Even though that's over $100
43:34
billion in volume, that's still a relatively small percentage of
43:38
the overall venture capital markets.
43:41
Depending on how people measure that, that might be between 4:00
43:43
to $7 trillion. Obviously, if we include more in
43:47
the PE market, it's a it's a much bigger number.
43:50
So what is secondary? Well, in general when we talk
43:53
about the primary market, we're raising capital for a company.
43:56
These are financing rounds. Sometimes even IPOs secondary
44:00
market is when we're buying shares from existing
44:02
shareholders. Those might be shareholders in a
44:05
company, either employees or founders or could be Angel
44:08
investors or early investors in the company.
44:10
If we're talking about a fund, it's usually the LP's in that
44:13
fund, but sometimes it could also be the general partners of
44:16
that fund. When you're doing direct
44:17
secondary, we're buying shares either common or preferred in a
44:21
company. When we're doing funds secondary
44:23
or strip sale, we're buying pieces of a fund and that
44:26
probably is across several companies within that fund.
44:30
So in Silicon Valley these days, usually people mean VC secondary
44:34
when they're talking about secondary and they usually mean
44:35
direct secondary. But sometimes it can also mean
44:38
buying a piece of a fund. And you'll also hear the terms
44:41
GP LED or LP LED. GP LED refers to a secondary
44:45
deal that's driven by the partners of a fund.
44:48
LP LED is driven by one of the limited partners in the fund.
44:53
Why do people buy and sell secondary?
44:55
Well, in general, it's for liquidity purposes, at least for
44:58
the sellers. That can happen for a lot of
45:00
reasons. For many employees or founders,
45:02
they might be selling some of their shares to buy their first
45:05
home. Could be because of other life
45:07
events. Death, divorce or retirement are
45:09
often common reasons. But it could also be that
45:11
they're looking for, you know, some liquidity in an asset
45:14
that's been illiquid for a while or some kind of diversification
45:16
or hedging. That's more commonly the case
45:19
when we're talking about investors.
45:21
They may have invested early. They may have, you know, waited
45:23
5 to 10 years for some increase in value.
45:26
And maybe now there's a larger value that they have on the
45:28
table. And they want to take some of
45:30
that risk off or take some of that paper gains and turn them
45:32
into liquidity if they can. On the buy side, a lot of
45:36
reasons people are looking to buy secondary is because there
45:39
might be interest from the VCs who are buying into a company
45:43
and they may not have as much available equity if they're
45:46
buying a A around where that's oversubscribed.
45:50
It could also be later stage investors buying out some of the
45:52
early stage investors or even fund to fund or institutional
45:55
folks buying equity in a company before it goes public.
46:00
These days it's a lot of retail investors who want access to,
46:03
you know, brand name companies that are on everybody's lips.
46:05
A lot of people talking about Anthropic, SpaceX open the eye.
46:09
However, you'll find out that in a lot of these high demand
46:12
names, it's probably tough for smaller investors to get into
46:15
those directly. They may end up buying in
46:18
through one or even two or three layers of SPDS in order to get
46:22
access and they may not even know if those SPDS really have
46:25
access or not. In the last few years,
46:27
secondaries have become a really big part of the market, almost
46:31
equivalent in size to IP OS or exits.
46:33
Now I think this year if we do see the SpaceX IPO and possibly
46:37
some of the others that are in the wings, we're going to have a
46:40
really big year for IP OS. But we're typically seeing now
46:43
about $100 billion worth of secondary exits every year
46:46
through a combination of direct secondaries and maybe also GP
46:49
LED secondaries or continuity vehicles.
46:52
However, although there's a lot of talk about secondaries, most
46:55
of that activity is in a very small number of companies.
46:58
Probably the top five that people talk about a lot are
47:01
SpaceX, Open AI, Anthropic, maybe also Androl and Stripe,
47:06
possibly Databricks and a few others there.
47:09
There's kind of this concentration of attention and
47:12
capital into a very small number of companies.
47:15
Some people call that kind of a private equivalent of the
47:18
public, you know, mag seven that people talk about in public
47:21
markets. A lot of those private mag 7 and
47:24
really even the top, you know, 30-40 fifty companies.
47:27
These are large companies valued at over $10 billion.
47:30
These are companies doing, you know, maybe a billion or more in
47:33
revenue. These are high demand names.
47:36
They're probably being packaged into multiple layers of SPDS and
47:40
sold the premiums. A lot of the secondary really
47:42
isn't secondary. It's actually really the primary
47:45
market that's been, you know, oversubscribed, marked up and
47:49
then sold to the retail market in smaller chunks through
47:53
multiple layers of people. The market that we tend to focus
47:56
on a lot more is what we call secret Stallions.
47:58
These are companies that are maybe outside those top 3040
48:01
fifty names, still great companies doing maybe 50 to 200
48:05
million in revenue, maybe even more than that.
48:08
These are companies we do think, you know, have a really good
48:10
chance of an exit or an IPO, but just not as well known as maybe
48:14
those top 50 companies, certainly not, you know, as well
48:16
known as those top 10 seven to 10 companies.
48:19
I would also caution that if you're looking for opportunity
48:22
there, you might want to stay away from companies that were
48:25
valued back in 20 or 21, might not be valued as highly now,
48:29
although the number on paper might still be high.
48:32
And also companies that are too small to ever get to an exit or
48:35
maybe growing too slowly to get to an exit.
48:37
So those other two circles, busted unicorns and slow horses,
48:40
generally not the things that we're looking for.
48:43
Hopefully, it's something kind of in the middle where it's not
48:45
well known to everybody, but it's not an overvalued asset,
48:48
not a slow growth asset. All right, we're going to talk
48:51
about 3 different general strategies in secondary.
48:54
The first, we'll talk about the direct secondary or company
48:57
secondary, where you're buying equity in a single company.
49:00
Then we'll talk about different structures that are buying
49:02
pieces of fund interests, sometimes called the strip sale.
49:07
And then third, we'll talk about a little bit of structure.
49:10
And these are different terms that might be in either of the
49:12
1st 2 deals, and they may favor either the buyer or the seller
49:15
in certain scenarios. OK, so direct secondary or
49:19
company secondary, this is where, you know, we're generally
49:21
looking to buy secondary in a single company.
49:24
We're probably buying equity from an existing shareholder
49:27
that might be a founder or employee, or it could be an
49:29
early investor or even a fund that's invested in a company.
49:33
For us, we're looking for companies doing a minimum of 50
49:36
to 100 million in revenue. This is really because we kind
49:39
of have to see a company get to 500 million in revenue more to
49:43
feel confidence when they get to an IPO.
49:45
So we're looking for typically a fast growth company, you know,
49:48
at least 30 to 50%, maybe more, at least 50 to 100 million in
49:52
revenue. We're kind of aiming for at
49:54
least a 3X exit in five years and it hopefully could be faster
49:58
than that and it might even be more than 3X.
50:01
Some questions that we asked when we're looking at these
50:03
companies is, you know, who led the last round and when was that
50:06
round? There's there's definitely a
50:08
different perspective we have on rounds of financing that were
50:12
LED maybe prior to Q2 of 22, Certainly a lot of really
50:17
optimistic valuations from the ZERP Arrow 0 interest rates
50:20
period that was in 2020 or 21. So we, we tend to be more
50:24
skeptical about those rounds and valuations that there hasn't
50:27
been something more recently valued in a more rational
50:29
market. We're still going to be looking
50:31
for, you know, at least a 20% or a greater discount to the last
50:35
round and, you know, trying to find a good deal there.
50:38
If it's priced before Q 2/22, it might be a lot bigger than just
50:41
20 to 50%. One of the things that's really
50:44
important to think about when you're buying secondary is not
50:47
just the valuation of the company and what the discount
50:49
is, but also the preference stack of capital that the
50:53
company has raised. By preference stack, we mean the
50:56
amount of equity and debt that the company has raised to date.
51:00
This is important especially if you're buying common shares, but
51:04
also if you're buying preferred shares.
51:06
It's really important to understand how much capital the
51:09
company has already raised and what they're going to have to
51:12
clear in order to return capital back to earlier stage investors
51:18
or particularly common shareholders.
51:20
So let's let's say a company was valued at a billion dollars and
51:23
has raised, you know, maybe 500 million in capital.
51:27
That might not seem like too much of A hurdle to get over.
51:32
But let's say the company was valued at a billion dollars back
51:35
in 21 and maybe today it's not valued at a billion dollars.
51:39
Maybe now it's valued at 500 million or less.
51:41
But that's actually the amount of capital that's required to
51:44
clear for any common shareholders to make money and
51:46
possibly even any early stage preferred shareholders to make
51:49
money. So a question we get asked a lot
51:51
is, hey, what's the discount that you guys are paying or
51:55
buying for secondary? And my response to that is
51:58
always, you know, discount to what we could be talking about
52:02
the last price round for a company or the last, you know,
52:05
valuation for a fund. But really we wanted to know
52:09
what the discount is to the actual value of the company,
52:12
which might not be at all what the last price round was.
52:16
And so typically we're doing our own underwriting to figure out
52:19
what the value of that company is, hopefully buying a discount
52:22
to that that value and then establishing, you know what we
52:25
think the company is going to do in terms of growth and a
52:28
potential exit in the future. OK.
52:30
When we're buying interest in a fund, typically we're buying
52:34
from the LP's who are in a fund. We might also be buying from the
52:37
GP of the fund. But in this case, we're not
52:40
buying equity in a single company.
52:42
We're really buying a strip of portfolio across multiple
52:45
companies. So a comments down here is a
52:48
limited partner might invest in the fund the very beginning and
52:52
sometime around year, maybe 7-8 or even later, there's some
52:56
markups on the fund. They might be sitting on, you
52:58
know, 3X or even more in value and they might be looking for
53:01
some liquidity. No, it's not usually that easy
53:04
to find buyers for fund interests because you don't have
53:08
direct access to a single company, has to be someone
53:10
willing to take over the entire portfolio of value or maybe
53:13
they're looking for a single name within that portfolio
53:16
that's doing well because there's fewer buyers for fund
53:19
interest. Typically these are sold at a
53:21
greater discount than just a single asset.
53:25
Again, we have the same concerns about valuation, but now we are
53:28
looking at a basket of assets. We may not be having the
53:30
diligence the entire portfolio, but we're certainly going to be
53:33
looking at the top few companies in those portfolios.
53:37
One of the things we use when we're looking at portfolios is
53:39
something we call a three bucket method.
53:41
And this is kind of just classifying the assets within
53:43
that fund into high, medium and low probability of exit.
53:47
That's usually based on the size of the company or the amount of
53:51
revenue that they have and their growth rate.
53:53
So typically we are we're looking for companies that are
53:56
already unicorns or on their way to being a billion dollar or
53:59
greater company. These are companies doing at
54:01
least 50 to 100 million in revenue or more.
54:04
Hopefully they have a chance of getting to an exit or an IPO
54:07
within the next three years. If we're looking at public
54:10
companies in the US, typically those companies are going public
54:13
at 4 or $500 million in revenue or or more.
54:16
Many companies actually a billion dollars in revenue or
54:19
more. So when we're looking at these
54:21
assets, what we're really trying to figure out is can they get to
54:25
an exit or an IPO within a short period of time, ideally within
54:28
the next three years. There's a second group that
54:31
might be smaller in size or slower in growth or some
54:36
combination of that. And these might be, you know, at
54:39
least companies doing 20 to 50 million in revenue, again,
54:42
calling these centaurs maybe not quite as big as unicorns, but
54:45
still hopefully a good chance of an exit.
54:48
And then lastly, companies that are not doing more than ten, 20
54:51
million in revenue, not so magical creatures, probably no
54:54
certainty around an exit, no certainty around when they might
54:57
get to an exit. When looking at underwriting or
55:00
valuing portfolios, we're typically going to value these
55:03
mostly based on the unicorns, maybe a little bit on the
55:06
centaurs, but we're probably going to write most of the value
55:09
of the horses down to zero and we're probably going to discount
55:12
the centaurs more significantly than the unicorns.
55:15
OK. Another thing that we might do
55:17
when we're buying interest in the fund is we might buy a piece
55:20
of the general partners carry. This is a more complex deal
55:23
structure. Now.
55:24
We're not buying a piece of the fund, we're buying a piece of
55:27
the profits of the fund. We'd have to be convinced that
55:30
that fund is going to get into carry or at least return 1X
55:35
before those partners start making money.
55:37
We talk about structure in a deal.
55:39
There's a lot of reasons why we might use structure.
55:42
One is there might be some valuation uncertainty about the
55:44
company or the assets. Another reason is that we might
55:47
be trying to avoid or defer taxable event for the seller or
55:51
preserve what's called QSPS or qualified small business stock
55:55
treatment for the seller. That's where they could save
55:57
some money on federal taxes. If we're a little bit concerned
56:00
maybe about how fast the company's growing, we might want
56:03
to be looking for some way to avoid downside scenarios that
56:07
are less than a 3X return. And we might want to also create
56:12
some kind of options to pay out more after a certain, you know,
56:15
minimum target is hit. So things that we use here are
56:19
sometimes a forward contract. This is where we're not actually
56:23
buying the asset right away, but we're agreeing to an economic
56:26
exchange in the future, either of cash when the company exits
56:29
or the shares if they go public. This is typically a scenario
56:33
that might be used when we expect there to be an exit, but
56:36
for some reason the seller needs to remain the holder of record.
56:40
Another thing we've just talked about previously is something
56:43
called 3X pref, and this is kind of a shorthand for additional
56:47
collateralization. So we might buy, you know, a
56:50
dollar's worth of assets, but we might want to ask the seller to
56:53
set aside another $2.00 worth of assets for us to hit that 3X
56:57
target that we're looking for in case, you know, the dollar that
57:00
we've bought of equity doesn't return organic 3X or better.
57:05
And then lastly, there'll be some kind of conditional payout.
57:08
This might be where we pay for a certain amount of the assets
57:11
upfront and then after a certain set of targets are hit, either
57:14
maybe an absolute dollar amount or a multiple or perhaps an IRR
57:18
target that there's some additional assets that are paid
57:20
out. This might look like a, an
57:22
escrow or, or not. OK, now we're getting into some
57:25
more advanced structures that are used in secondary.
57:29
One thing that's becoming more common for the general partners
57:31
of a fund to consider is, you know, as the fund gets older,
57:35
maybe towards 10 or 12 years of life, the fund may be getting
57:38
close to its contractual limits. But there may still be assets
57:42
within the fund that haven't gotten to an IPO or an exit yet
57:45
that are high value. And the fund managers trying to
57:48
figure out a way that they want to continue managing those
57:51
assets until they get to an exit.
57:53
In this scenario, we might see the use of an SPD or a
57:56
continuity vehicle where the top quality assets are moved out of
58:00
the initial fund structure into a new structure, might be
58:03
another five years worth of fund life in this extended structure.
58:08
And what the fund manager will then do is figure out how to set
58:12
a price for the assets and then offer their existing investors
58:16
the option to receive some liquidity for those assets or
58:19
the ability to roll into that new vehicle and continue being
58:23
an investor in the new vehicle or some combination of those,
58:26
those two options. This is great to allow the fund
58:29
manager to keep managing those assets.
58:31
And, you know, they'll continue to probably charge some amount
58:33
of fee and carry on these top quality assets, but it's also an
58:37
option for existing investors in the fund to either receive
58:40
liquidity or to roll into the new vehicle or some combination
58:44
of those two. Oftentimes this is done when
58:46
funds are 10 to 12 years old. But sometimes a lot of fund
58:50
managers are now seeing opportunities to move some
58:52
assets that they have instead of selling to a second party, they
58:56
might move them into an SPD structure out of the initial
58:59
fund. So we've talked about a lot of
59:01
scenarios on why people buy and sell secondary.
59:06
I've talked a lot about a different structures that we
59:08
use. I just want to take a step back
59:10
for a second and look at some of the numbers for venture capital
59:14
funds maybe over the last, you know, 5 to 10 years.
59:17
The term TVPI and DPI, those stands for total value to paid
59:21
in capital and distributions to paid in capital.
59:24
Those are our metrics used to assess how well a fund is doing
59:28
in terms of paper markup valuations.
59:30
That's the TVPI and actual cash return to investors.
59:34
That's DPI. You'll notice here looking some
59:36
of these graphs from Carta, that a very large number of funds
59:41
that were started after 2017 still haven't really gotten to
59:46
substantial levels of DPI, meaning not very many funds have
59:50
been able to return the initial capital invested in those funds
59:54
even after seven or eight years or or longer.
59:57
Only maybe the top 1020% have been able to do that.
1:00:01
If we look at historical numbers for funds, again, it's really
1:00:06
the top decile, top quartile funds that are returning
1:00:11
measurable capital and even top quartile funds, you know,
1:00:14
haven't always returned 1X yet. So the challenge for a lot of
1:00:18
fund managers is how do they get, you know, exits, IP, OS are
1:00:23
taking longer than ever, acquisitions, maybe not always
1:00:25
predictable. Secondary sales are a way for
1:00:29
fund managers to consider at least generating exits or
1:00:32
partial returns in some of their winners.
1:00:36
So as we kind of look at maybe some benchmarks for funds, this
1:00:40
is kind of again, the on paper marks, you know, we, we kind of
1:00:45
expected good and great funds would be approaching 3 to 5X,
1:00:49
hopefully, you know, sometime in the year 1012 and 15.
1:00:53
But really those paper marks don't really count until you
1:00:56
actually start distributing capital back to your investors.
1:00:58
So it may be that several fund managers want to start thinking
1:01:02
about secondary strategies as early as years 5 to 10 and how
1:01:06
to plan, you know, which of their winners might be worth
1:01:09
selling when they reach some significant marks.
1:01:13
So kind of thinking through how, you know, general partners might
1:01:15
be wanting planning some of their strategies for selling.
1:01:18
Not always the case that you have to sell as early as year
1:01:21
5:00 to 7:00, but you might want to be looking at opportunities
1:01:24
that happen between years 5 to 10 for you to transfer some of
1:01:27
your TVPI and the DPI. It's probably not worth doing a
1:01:31
lot until you can generate meaningful DPI at least to .5 to
1:01:35
1X. That might come from one big,
1:01:38
you know, partial sale in a position that's a win or might
1:01:40
come from a collection of secondary sales.
1:01:44
So you do have to sort of consider what trade-offs you're
1:01:46
making. You don't want to sell too much
1:01:49
of your winners before they actually create upside that you
1:01:52
can later cash in on. At the same time, you might take
1:01:55
the opportunity to take some winnings off the table if
1:01:58
companies are starting to slow their growth or, or perhaps if
1:02:01
you've lost condition in some of your, some of your better
1:02:04
positions. But in general, you, you kind of
1:02:07
want to be letting your winners ride and, and get to some larger
1:02:10
positions before you consider selling secondary.
1:02:13
But you know, typically you might see if a few funds that
1:02:15
have winners at series C or later, you know, in the year 7
1:02:19
to 10. Well, that's a lot of what I
1:02:21
wanted to cover for VC Secondary.
1:02:24
I think again, you might want to consider depending on whether
1:02:26
you're a buyer or seller, what type of scenarios you're in,
1:02:29
what the reasons you would be thinking about for selling and
1:02:33
what the reasons you're thinking about for buying.
1:02:35
Right now, there's a lot of attention on a very small number
1:02:37
of high visibility companies with brand names and
1:02:40
recognition, But there's definitely a lot of
1:02:42
opportunities to benefit from companies that are doing well
1:02:45
but not maybe known by a large number of buyers.
1:02:48
And those are really where we think we can generate bargains
1:02:50
and find opportunities as a buyer.
1:02:53
Well, thanks for spending a little bit of time listening to
1:02:55
our presentation on BC Secondary 101.
1:02:57
Again, this slide deck is available on our website at
1:02:59
practicalvc.com under the secondary 101 section.
1:03:04
Hope you guys found this presentation useful and good
1:03:06
luck out there.