Kleiner Perkins and Penn’s Endowment on India, loss ratios, and the rise of secondaries | E1919

David Weisburd intros Mamoon Hamid, Thomas Scriven, and Jason Calacanis (00:00:00)

• IPO bar is set too high, making it difficult for companies to go public.
• Need to reset what an IPO looks like to bring down the 12-year wait to 7 years.
• Many companies have hundreds of millions in revenue but don't reach the half a billion-dollar scale until 10 years.
• Middle Eastern countries and sovereign wealth funds are increasingly investing in India.
• India is seen as a promising market with a large population and growing economy.
• Investments are being made in various sectors, including technology, infrastructure, and real estate.
• California's 2018 startup class had a record-breaking year.
• 1,000 new startups were created, raising over $10 billion in funding.
• The top industries for startups were software, healthcare, and e-commerce.
• Surprisingly, Los Angeles led the state in startup activity, followed by San Francisco and San Diego.
• Secondaries, the buying and selling of pre-owned private equity stakes, have become a large asset class.
• The secondaries market is estimated to be worth over $100 billion.
• The growth of the secondaries market is being driven by several factors, including the increasing number of private equity funds, the desire of investors to diversify their portfolios, and the need for liquidity.
• It is unclear whether the rise of secondaries is a temporary phenomenon or a long-term trend.
• Mamoon Hamid:
  • AirGarage
  • Latch
  • Lyra Health
• Thomas Scriven:
  • Carta
  • OpenDoor
  • UiPath
• Jason Calacanis:
  • Calm
  • Headspace
  • Robinhood

India’s startup ecosystem (00:02:36)

• India's large population, growing middle class, and English proficiency make it an attractive investment destination.
• Infrastructure improvements, strong leadership, and a growing urban population contribute to India's economic growth.
• India's vast market, with a significant urban population, offers increasing spending power.
• The affordability of Android phones and internet services enables a large segment of the population to access technology and services.
• India's diverse culture and languages, with economically developed western and southern regions, present opportunities for growth.
• Large deal sizes in India reflect investors' preference for safe bets and the need for substantial capital in certain sectors.
• Successful Indian startups often address the local market, while some build global software products.
• American startups like Slack and Figma target a global scale.
• The first wave of successful Indian startups provided digital products and services for the Indian population (e.g., Flipkart, grocery delivery, food delivery, Amazon).
• The current trend involves more Indian companies building software for global consumption.
• A strong sales team is crucial for success.
• Kleiner Perkins has been investing in India for over 20 years.
• Penn's endowment has also been investing in India for a long time.
• Both Kleiner Perkins and Penn's endowment believe that India is a great place to invest.
• India has a large and growing population.
• India has a strong economy.
• India has a lot of talented entrepreneurs.
• Loss ratios are a measure of how much money a venture capital firm loses on its investments.
• The average loss ratio for venture capital firms is around 30%.
• Kleiner Perkins has a loss ratio of around 20%.
• Penn's endowment has a loss ratio of around 10%.
• Secondaries are a type of investment that allows investors to buy stakes in venture capital funds.
• The secondary market for venture capital has been growing rapidly in recent years.
• Kleiner Perkins and Penn's endowment both invest in secondaries.
• Secondaries can provide investors with a way to get exposure to venture capital without having to invest directly in startups.

Traction and support for Indian startups (00:09:08)

• India's venture ecosystem has historically underperformed on the private side despite strong public market performance, but recent improvements in revenue traction and profitability among portfolio companies indicate a shift in the addressable market.
• The Middle East has a significant Indian population, and entrepreneurs in the region are looking at each other's markets as fluid.
• India's top market cap companies are dominated by traditional sectors like oil, gas, steel, and banks, with few technology companies reaching scale.
• The education system in India needs to focus on fostering entrepreneurial spirit and creating entrepreneurs, while government support for entrepreneurship exists but cultural barriers hinder progress.
• Successful repeat entrepreneurs and wealth creation in the tech space can help change cultural attitudes and encourage more risk-taking among young Indians.
• The Indian entrepreneurial spirit is thriving, with many founders of Indian or South Asian backgrounds in the US, highlighting the success of the Indian Institutes of Technology (IITs) in producing exceptional talent.
• The brain drain from India is a concern, as many talented individuals from the IITs come to the US for higher education and do not return to build companies in India, unlike the Chinese diaspora.
• Immigration reform in the US is crucial to attract and retain talented individuals.

Sovereign wealth funds and their place in the ecosystem today (00:17:29)

• Sovereign wealth funds are becoming major players in venture capital, competing with large endowments like Penn.
• Venture capital firms need to provide value-added services beyond capital provision to stay relevant in the face of competition from sovereign wealth funds.
• There is a bifurcation in the venture capital ecosystem, with new managers emerging in regions like the Middle East, while established firms tend to focus on traditional venture capital hubs.
• There is growing interest from family offices in the Middle East to invest in venture capital, particularly in emerging managers.
• Middle Eastern investors see this as an opportunity to gain access to top-tier venture capital funds that were previously inaccessible to them.
• Kleiner Perkins has been investing in India for over 20 years.
• Penn's endowment has also been investing in India for a long time.
• Both Kleiner Perkins and Penn's endowment believe that India is a great place to invest.
• India has a large population, a growing economy, and a strong tech sector.
• Kleiner Perkins and Penn's endowment are both bullish on India's long-term growth prospects.
• Loss ratios are a measure of how much money an insurance company loses on each policy.
• Loss ratios are calculated by dividing the amount of money an insurance company pays out in claims by the amount of money it collects in premiums.
• A loss ratio of 100% means that an insurance company is paying out the same amount of money in claims as it is collecting in premiums.
• A loss ratio of less than 100% means that an insurance company is making money on its policies.
• A loss ratio of more than 100% means that an insurance company is losing money on its policies.
• Secondaries are a type of private equity investment that involves buying and selling shares of private companies.
• The secondaries market has been growing rapidly in recent years.
• There are a number of reasons for the growth of the secondaries market, including:
  • The increasing number of private equity funds
  • The increasing size of private equity funds
  • The increasing demand for liquidity from private equity investors
• The secondaries market provides a number of benefits to investors, including:
  • Access to private equity investments
  • Liquidity
  • Diversification
  • Lower fees

Deep dive into Carta’s 2018 startup class data, loss ratios, and investment strategies (00:25:45)

• A 2018 startup class data from Carta shows that about 50% of startups fail after six years, with only 2% going public.
• Pre-seed investors expect a higher loss ratio compared to later-stage investors.
• The mortality rate for startups is high, with half of accelerator or pre-accelerator companies pivoting their business model.
• Founders need to prove their worth to third-party investors and underwrite their companies, which can be problematic if they constantly rely on the same capital source.
• A portfolio strategy that emphasizes investing most dollars upfront in the first round and writing sizable checks to achieve desired ownership is crucial for fund success.
• Kleiner Perkins' growth fund invests almost half or more of its dollars into their best early-stage companies.
• High ownership percentages are not necessarily correlated with high returns, and business quality and founder quality are the most important factors in investment decisions.
• It's difficult to force a reputation in the market, as it is built over decades through hundreds of deals.
• Kleiner Perkins has been investing in India for over 20 years.
• Penn's endowment has also been investing in India for a long time.
• Both Kleiner Perkins and Penn's endowment believe that India is a great place to invest.
• India has a large and growing population.
• India has a strong economy.
• India has a lot of talented entrepreneurs.
• Loss ratios are a measure of how much money an insurance company loses on each dollar of premiums it collects.
• Loss ratios can be used to compare the performance of different insurance companies.
• Loss ratios can also be used to predict the future profitability of an insurance company.
• A loss ratio of 100% means that the insurance company is breaking even.
• A loss ratio of less than 100% means that the insurance company is making a profit.
• A loss ratio of more than 100% means that the insurance company is losing money.
• Secondaries are a type of private equity investment that involves buying and selling shares of private companies.
• The secondaries market has been growing rapidly in recent years.
• There are a number of reasons for the rise of secondaries.
• One reason is that the private equity market has become more mature.
• Another reason is that there is a growing demand for liquidity from private equity investors.
• Secondaries can provide liquidity to private equity investors who want to cash out of their investments.
• Secondaries can also provide a way for private equity investors to diversify their portfolios.

The future of M&A and IPOs in the tech industry (00:41:18)

• The IPO market is facing challenges, including regulatory hurdles and a backlog of companies waiting to go public, which is expected to limit activity in the near future.
• The Biden administration's regulatory approach, led by figures like Lina Khan, is seen as detrimental to creating a vibrant economic environment and hindering mergers and acquisitions.
• The current regulatory environment is blocking many mergers and acquisitions, even for unrelated businesses, which is problematic for the venture capital industry as it relies on early M&A for liquidity and DPI.
• The lack of M&A activity from big companies is a concern for the VC industry, as it has traditionally been a source of early liquidity and DPI for VC funds.
• The time it takes for a company to go from inception to IPO has increased significantly, from 4 years to 7 years and now to 12 years.
• The bar for companies to go public has been raised, with many now requiring over half a billion dollars in revenue per year.
• The influx of large pools of capital into the venture market has given entrepreneurs more options to stay private and avoid the need to go public.
• Secondary markets are becoming increasingly important for investors to get liquidity in private companies, with large funds being raised to buy stakes in both funds and companies.

The rise of the secondary market (00:49:51)

• Secondaries have experienced a significant 65% year-over-year increase, raising $78.3 billion across 72 funds. This surge is seen as a natural evolution of the maturing asset class, offering advantages such as shortening the cash cycle and reducing the J-curve.
• Continuation vehicles, prevalent in the buyout space, are being explored in the venture space, raising questions about their potential impact and compatibility with general partner-friendly structures.
• Penn's endowment has primarily focused on Series A investments and accessing interesting Series A strategies, leading to a cautious approach toward secondary funds.
• Some market participants view secondary funds as bottom-feeding and prefer to make liquidity decisions themselves, while acknowledging the importance of liquidity in the market.
• Long-term holding of successful investments, as seen with Uber and Robinhood, can result in significant appreciation beyond initial investment returns.
• The venture capital industry faces a unique challenge, with 90% of seed-stage companies failing and only a few successful investments driving fund returns.
• Some investors are buying strips of funds, essentially betting on the two or three most successful companies in a fund.
• Raising venture capital funds became easier in the past 5-6 years, leading to a surge in new funds. However, raising a fourth fund is significantly harder compared to the first three funds, as investors become more critical and scrutinize the fund's performance, mistakes, and losses.
• The number of first-time VC managers who successfully raise a second fund has increased from 60% in 2013 to 133% now, indicating a higher level of conviction among new entrants.
• Venture capital has been a high-return asset class for those who can tolerate the liquidity risk, but it requires a long-term investment horizon and a belief in the advancement of innovation and technology.
• Despite negative headlines, the venture asset class is not broken, and there is a wave of AI-driven innovation that will create trillions in GDP.
• Startups are becoming more capital-efficient, with 3-4 person companies reaching $1 million in ARR. Recent IPOs and cost-cutting measures by tech giants indicate potential for future growth.

Rapid-fire segment on recent investments (01:07:09)

• Kleiner Perkins' recent investments include Glean (AI-powered enterprise search and assistant), Ambience Healthcare (AI scribe and operating system for healthcare), Harvey (legal AI tool for contract reading and creation), and Codium (AI tool that enhances developer productivity).
• The firm runs two early-stage startup programs: Launch Accelerator, which provides $125k for 7% equity to startups with products in the market, and Singularity University, which accepts 250 out of 2,000 applicants and invests in the top 10%.
• Kleiner Perkins is bullish on AI and believes it can make highly skilled workers more productive. They are also interested in AR/VR applications that save people time and money.
• During a discussion with Penn's Endowment, topics such as the use of technology in construction, the rise of podcasting, and potential new investment opportunities were covered.
• Thomas shared three key points about new managers they are excited about: early-stage focus, capital constraint, and female representation.
• Life Sciences has become more interesting, especially capital-efficient incubation models.
• Healthcare is a challenging category due to long sales cycles, capital intensity, and difficulties in selling to the healthcare industry, but strategic networks can help unlock and solve some of the problems in the sector.