Apurva Mehta and Jack Altman on Sam Altman, CalPERS, and Liquidation Preferences | E1927

David Weisburd intros Apurva Mehta, Jack Altman, and Jason Calacanis (00:00:00)

• Apurva Mehta from Summit Peak, Jack Altman from Alt Capital, and Jason Calacanis from the Launch Fund are the guests on this episode of the Liquidity Podcast.
• David Weisburd, co-founder of 10x Capital, is the moderator.
• Sam Altman, the former president of Y Combinator, has had a successful track record in investing in startups.
• His latest investments include:
  • Stripe, a payments company valued at $95 billion.
  • Instacart, a grocery delivery company valued at $39 billion.
  • Airbnb, a home-sharing company valued at $113 billion.
• The California Public Employees' Retirement System (CalPERS), one of the largest pension funds in the world, is increasing its investment in venture capital.
• CalPERS has committed $20 billion to venture capital over the next five years.
• This is a significant increase from the $5 billion that CalPERS had previously committed to venture capital.
• Liquidation preferences are a type of investor protection that gives preferred shareholders the right to be paid back their investment before common shareholders in the event of a company being sold or liquidated.
• Premium liquidation preferences give preferred shareholders the right to be paid back their investment plus a premium, typically 2x or 3x their investment.
• Premium liquidation preferences have become less common in recent years, but they are starting to make a comeback.

Reddit's IPO and Sam Altman's investment success (00:02:34)

• Sam Altman's entities hold roughly $413 million worth of Reddit's IPO shares.
• Sam Altman is known for making successful angel investments, with Reddit's IPO being one of his biggest wins.
• Sam Altman's investment success is attributed to his ability to think independently, identify non-obvious talent, and build momentum behind his ideas.
• Jack Altman believes that having strong conviction in cases where the rest of the world doesn't share the same conviction can lead to successful investments.
• Jack Altman is on his third fund, having raised $150 million while also growing Lattice to a $3 billion valuation.
• Jack Altman believes that building a big company is incredibly hard and requires unusual talent, commitment, and fortitude.
• Jack Altman looks for founders with the potential to turn into great leaders over time when investing in early-stage companies.

Apurva's investment strategy and thoughts on fund size and portfolio strategy (00:05:48)

• Apurva Mehta and Jason discuss the pros and cons of investing in operators who are also running companies.
• Apurva Mehta explains that alt capital seeks out operators with experience running companies and investing on the side.
• Jason believes that operators may be better suited to an "ADHD strategy" of having their hands in many pies, as they often lack the singular focus needed to be successful CEOs.
• Apurva Mehta and Jason emphasize the importance of product-market fit and the need for founders to be patient and not try to change their product too much.
• Sam Altman received a 20% carry on the Reddit deal, which was a great return considering it was none of his money.
• Steve Huffman and Alexis Ohanian deserve credit for coming back and shepherding Reddit to its current success.
• Reddit's growth from a small company to a publicly traded company with a valuation of five to ten billion dollars is remarkable.
• Apurva Mehta and Jack Altman discuss Sam Altman, CalPERS, and liquidation preferences.

DevSquad - Get an entire product team for the cost of one US developer plus 10% off (00:11:50)

• DevSquad provides an entire development team with elite talent from Latin America.
• The team includes 2-6 full-stack developers, a technical product manager, and specialists in product strategy, UI/UX design, DevOps, and QA.
• DevSquad collaborates to propel product success, especially for SaaS products.
• The team aligns with the client's time zone and costs 75% less than an equivalent team in the US.
• Clients can avoid the complexities of coordinating freelancers and get a ready-to-go team.
• DevSquad offers a 10% discount on engagements.

The role of SPVs and the importance of trust in the investment ecosystem (00:13:19)

• SPVs (Special Purpose Vehicles) have become popular but come with administrative burdens and complexities, especially when dealing with a large number of deals.
• SPVs can be beneficial for aligning interests between GPs (General Partners) and investors, allowing for earlier carry for GPs.
• The pandemic era saw a surge in SPV deals, but the market has slowed down due to administrative overheads and the need for proper management.
• Co-investing through SPVs can be challenging for founders as it involves navigating multiple parties and ensuring LP backing, which can be time-consuming and complex.
• Apurva Mehta and Jack Altman discuss the challenges and considerations when dealing with Limited Partners (LPs) and Syndicate members in venture capital investments.
• They emphasize the importance of having an orderly process for allocating funds and managing a large number of investors in a single investment vehicle.
• Mehta and Altman highlight the potential burden on founders when dealing with a large number of investors and the need to maintain a professional and respectful relationship with them.
• They discuss the approach to information rights and updates from portfolio companies, suggesting that investors should not expect regular updates and should be prepared for unexpected events and failures.
• Mehta and Altman emphasize the importance of building strong relationships with General Partners (GPs) to ensure access to relevant information about portfolio companies.
• Trust is essential in startup operations and investor relationships, with high trust leading to positive outcomes and low trust requiring detailed rules and documentation.

Marketing Against the Grain (00:24:53)

• HubSpot's YouTube network has a standout show called "Marketing Against the Grain" hosted by Kip Bodner (CMO of HubSpot) and Karen Flanigan (CMO of Zapier).
• The show provides practical marketing tactics, strategies, and insights from experienced professionals.
• Guests like Sam Parr share unconventional marketing ideas and strategies.
• The show is available on the HubSpot YouTube Network and major podcast platforms.

CalPERS and pension funds increasing their exposure to venture capital and private equity (00:26:19)

• CalPERS committed $580 million out of a $2.1 billion allocation to venture capital last quarter, representing 32% of their private equity allocation.
• CalPERS recently increased its private equity allocation from 133% to 177%.
• Institutional investors like pension funds are increasing their exposure to venture capital and private equity due to the potential for higher returns in the long term.
• With interest rates where they are, private equity has become more challenging, making venture capital more attractive.
• Venture capital offers the widest dispersion in returns compared to other asset classes, but access to top-performing funds is crucial.

Is it a good time to invest in venture? (00:28:11)

• The venture funding landscape has shifted, with a significant focus on AI companies.
• Despite the potential for exponential growth, there's uncertainty about whether it's the right time to invest due to the high bar for raising capital.
• Founders are cautious about dilution, governance is returning, and investors are raising standards.
• The current investment climate is more favorable compared to 2020-2021, allowing for thorough diligence and decision-making.
• Discipline is observed across the industry, resulting in thoughtful portfolio construction, mindful dilution tolerance, and longer intervals between funding rounds.
• Data from previous post-correction vintages suggests the potential for significant returns, with top-quartile venture funds achieving notable TVPIs and DPIs after 10 years.
• Proper governance and experienced board members are crucial for discipline and navigating challenges.
• Apurva Mehta's experience training founders on board meetings contributed to the success of companies like BitBot, Lead IQ, and Grin.
• Jack Altman emphasizes the value of having a smart and experienced board member with a stake in the company.
• A diverse board with members from different backgrounds can provide valuable insights and perspectives to CEOs.
• Mehta and Altman discuss the importance of a board that challenges the CEO and holds them accountable.

Fundraising and decision-making processes (00:43:02)

• Jack Altman shares his perspective on how the fundraising process and decision-making criteria change as a startup progresses through different stages.
• In the early stages (seed round), Altman emphasizes the importance of the individual partners involved, prioritizing the quality of the human relationship over the firm or deal terms.
• As the company grows, the focus shifts towards deal terms and the composition of the cap table becomes more fungible.
• In later rounds, Altman highlights the significance of rotating the cap table to include long-term holders who can provide stability and support during an IPO.
• The goal is to attract investors who can hold significant amounts of equity on their balance sheets and potentially participate in the IPO.
• Altman mentions the occurrence of "cleanup rounds" closer to an IPO to relieve sell pressure and bring in more long-term buyers.
• The focus shifts from early-stage signals to building relationships with long-only investors, such as Fidelity or Goldman, who are interested in long-term holding.

Higher liquidation preferences at the later stage (00:45:56)

• Liquidation preferences over 1X increased in 2023 after a comeback in 2022, potentially wiping out the management team's equity in a short sale.
• Participating preferred shares can result in investors receiving their initial investment back multiple times before other shareholders receive any payout.
• Apurva Mehta suggests a 20% carve-out for management to ensure they still benefit from a company's sale.
• East Coast investors prioritize downside protection, while West Coast investors focus on potential power-law home runs.
• Apurva Mehta and Jack Altman discussed concerns about liquidation preferences potentially masking true asset values in the venture capital industry.
• Despite market chaos, successful companies are expected to continue performing well, inspiring others to go public like Reddit's recent IPO.
• The lack of consistency in valuation methodologies across venture capital firms poses challenges in marking portfolio companies.
• Employees may be disadvantaged in negotiations due to information asymmetry compared to founders and investors.
• Clarity for employees is crucial as equity is a significant part of their compensation, and they should be aware of the preferred stock stack and its potential impact.

Rapid fire segment on recent investments (00:55:49)

• Apurva Mehta and Jack Altman discussed their recent investments in startups on the Liquidity Podcast.
• They invested in Retel AI, a platform for building AI-powered voice interfaces, and Haen, a company that creates personalized avatars from video clips.
• Mehta and Altman also invested in Owner, a suite of tools for restaurant owners, and Foundation Health, a platform that provides online digital health companies with pharmacy operations capabilities.
• Other investments include Marvel, an AI tool for sales professionals, OpenAI Usage Monitor, a tool for managing usage of large language models, and Ary Task, an AI-powered tool for composing and writing stories.
• Mehta and Altman discussed Sam Altman, CalPERS, and Liquidation Preferences on the podcast.
• They invested in Sam Altman's third fund and Alana Goyle's Base Case Fund Two, as well as Paragen, an enterprise software platform for sharing data between municipal and government agencies.
• Mehta mentioned they are currently in diligence on HFZ, an AI incubator, accelerator, and residency program introduced to them by Jack Altman.
• Mehta compared the acceptance rates of Y Combinator and their own fund, highlighting the need for more startup accelerators and incubators.