Mark Suster and Samir Kaji on the 2024 Venture Market, IPOS, and Secondaries | E1899

• David Weisburd hosts Mark Suster, Samir Kaji, and Jason Calacanis for a discussion on the 2024 venture market, IPOs, and secondaries.
• Mark Suster believes the 2024 venture market will be challenging due to several factors:
  • The Federal Reserve is raising interest rates to combat inflation, making it more expensive for startups to raise capital.
  • The war in Ukraine is causing economic uncertainty, which is making investors more cautious.
  • The public markets are down, which is making it more difficult for startups to go public.
• Suster advises startups to focus on profitability and building a sustainable business model rather than relying on venture capital.
• Samir Kaji believes the IPO market will be challenging in 2024 due to the same factors that are affecting the venture market.
• Kaji advises startups to consider alternative funding options, such as private placements or debt financing, if they are unable to go public.
• Jason Calacanis believes the secondary market will be active in 2024 as investors look to exit their positions in private companies.
• Calacanis advises startups to be prepared for secondary transactions by ensuring their cap tables are clean and their financials are in order.

Thoughts on IVP raising $1.3 Billion for their 18th fund and different angles on the current fundraising market (00:01:24)

• IVP, a 43-year-old Venture Capital fund, is raising its 18th fund targeting between $1.3 and $1.5 billion, signaling renewed confidence in the venture fundraising market, particularly at the Series B stage and beyond.
• Series B and C valuations have significantly decreased compared to Q1 2021, creating a favorable investment scenario for IVP.
• Companies today have better financial discipline and are more focused on achieving better unit economics due to the challenging fundraising environment in the past two years.
• The supply of capital for Series B, C, and D rounds has decreased with the departure of crossover funds, making it a less competitive landscape for IVP.
• Capital efficiency is making a comeback, with companies not requiring excessive funding as they did in 2021.
• LP contributions to VCs have decreased by 60% in the last 12 months, leading to a market right-sizing.
• The top VC firms have raised 70% of all LP dollars, resulting in a reduction in the size of big funds and emerging managers.
• Fundraising timelines have increased from 2-3 months to 6-9 months, with many large platforms opting for multiple closes.
• The current venture market is more challenging, with increased due diligence and tough questions from investors.
• Defining exit strategies as a precondition for funding has become crucial.
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Mark's strategy today for DPI (Distributed to Paid-In Capital) (00:15:53)

• DPI (distributions per paid-in capital) represents actual cash returned to investors, while TVPI (total value to paid-in capital) includes paper holdings but doesn't reflect actual cash distributions.
• Between 2017 and 2021, there was a strong focus on DPI, resulting in $1.2 billion worth of exits for a sub-$300 million fund.
• In 2021, software companies' valuations were significantly inflated, with public companies trading at 24.6 times next 12-month revenue and private companies at 100 times NTM, compared to historical averages of 6.2 and 9.6, respectively.
• Currently, there are opportunities to buy secondaries at 60% discounts due to the market correction.
• Buying secondaries in companies where one is already on the board is preferred due to existing governing rights, visibility into management performance, and understanding of risks and liquidation stack.
• The influx of emerging managers in the market during 2020 and 2021 contributed to the lack of secondary liquidity during peak valuations.
• In the past 13 years (2010-2023), 2700 new venture capital firms have emerged in the US, ranging from small funds raising $3-5 million to larger funds raising $250 million.
• Only 20% of first-time fund managers successfully raise a second fund.
• The "J curve" effect, where venture capital funds experience negative returns in the early years due to investment costs, was absent in 2019-2021 due to a favorable investment environment.
• In periods of market uncertainty, investors are less willing to invest based solely on financial projections, leading to a return of the J curve.
• Experienced venture capital firms often engage in liquidity management by selling portions of their successful investments (e.g., secondary transactions) to generate returns for their investors.

VCs selling secondaries and best practices when disclosing selling after hitting targets (00:23:04)

• Mark Suster now establishes relationships with secondary markets and plans to deputize someone to monitor them.
• Suster suggests proactively informing other participants on the board when targets are reached and considering selling a percentage of holdings.
• Suster recommends being transparent with LPs about selling secondaries.
• Suster provides examples of companies that experienced significant run-ups in valuation, leading to profitable secondary sales.
• In one case, a company's valuation increased from $40 million to $500 million in two years, prompting Suster to sell 25% of his holdings.
• In another instance, a company's valuation grew from $850 million to $3.7 billion in three years, resulting in the sale of 150 million worth of shares.
• Suster shares an anecdote about an LP expressing concern over secondary sales.
• To address this, Suster packaged and sold his 2009 fund, generating $165 million in distributions to LPs.
• The fund included a mix of companies, ranging from those valued at over a billion dollars to those worth around $30 million.
• Suster explains the concept of strip sales, where a VC sells a percentage of multiple companies to a single investor.
• Strip sales provide liquidity to founders and other shareholders while allowing the VC to retain board membership and management of the companies.
• Suster highlights the advantages of strip sales, including the ability to send capital back to LPs and the potential for long-term gains.

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Thoughts on strip sales, continuation funds, and exotic secondary vehicles. When should GPs pursue that strategy? (00:29:21)

• Venture Capital funds are not widely using continuation funds and strip sales due to regulatory barriers and reporting exemptions.
• Venture Capitalists are considering partial exits based on return thresholds and risk-reward assessments, while founders sell portions of their positions for personal financial needs.
• Private equity firms are emerging as a viable exit option for Venture-backed businesses, offering liquidity and continued involvement to founders.
• Private equity firms use EBITDA multiples for valuation, potentially limiting exit prices compared to Venture Capital's ARR-based valuations.
• Companies with slowed growth and potential cash flow break-even may find private equity a more suitable exit option than large M&A deals.
• The increased length of time companies stay private creates a need for liquidity regardless of market conditions.
• Some venture funds may prioritize short-term gains, such as raising new funds or showing DPI to LPs, at the expense of long-term returns.
• Right-sizing funds is crucial as larger fund sizes impact investment strategies and exit requirements, with limited publicly traded tech companies to support large exits.
• The number of venture-backed unicorns has grown significantly, but many are "paper unicorns" with inflated valuations.
• Overvaluation can lead to misaligned incentives and a lack of realizable gains for management teams and investors.
• Venture capital firms like Andreessen Horowitz, Khosla Ventures, Tiger Global, and SoftBank played a significant role in pricing unicorns in 2021 but are now less active, potentially affecting the valuations of startups they funded.
• Investors should exercise caution when investing in startups with recent significant markups, as they may be overvalued.

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• Out of 1400 private unicorns, Mark Suster believes at least 1000 will never exit at a valuation of over a billion dollars.
• Many of these companies received billion-dollar valuations based on unrealistic forward-looking revenues.
• In the public markets, companies need to reach $150 million to $250 million in annual revenues to achieve a billion-dollar valuation.
• Software companies are valued between 2 to 3x net revenue, while marketplaces are valued between 2 to 3.5x net revenue.
• Founders have finally taken the medicine and are focusing on cost efficiency.
• Elon Musk, Bill Gurley, and Mark Zuckerberg have all emphasized the importance of cost control and stock-based compensation as a real expense.
• Capitalism creates better outcomes than command and control markets because it encourages competition and creative destruction.
• The discussion moves on to IPOs.

F-Prime's 2024 State of Fintech Report, the IPO market in 2024, and early stage fintech (00:45:56)

• Fintech experienced a decline in 2022, with public fintech companies' multiples crashing from 26x in 2021 to 6x in 2022.
• Despite the recovery of the public markets in 2023, many fintech companies still faced challenges and stock price declines, including Robinhood.
• Mark Suster remains optimistic about fintech due to its significant market share and inefficiencies, emphasizing the importance of investing in novel solutions that address intractable problems.
• Fintech companies face unique challenges in diligence due to regulatory oversight and compliance requirements.
• Jason, a guest speaker, is investing in infrastructure like JiKO, which enables seamless transition between cash and T-bills, allowing users to earn T-bill rates on their cash.
• In the early-stage fintech market, crypto pitches have declined, while there's a focus on AI-driven finance, such as AI tax and accounting software.
• Fintech has been overfunded, leading to a washout of some companies, but long-term value creation is expected in areas like AI in wealth management, accounting, and finance.

Kleiner Perkins and how a firm reboots (00:54:47)

• Kleiner Perkins, led by Mamoon Hamid and Ilya Fushman, has regained prominence with notable investments in companies like Figma and Rippling.
• Upfront Ventures, under Mark Suster's leadership since 2011, has experienced a successful transition with talented young investors like Kevin Zhang and Nick Kim leading healthcare and hardtech practices.
• The speaker, Mark Suster, emphasizes the importance of a mix of experienced and young investors in venture capital firms, highlighting Sequoia Capital's successful generational transition.
• Suster stresses the need for investors to gain wisdom and maturity through experience, especially in navigating economic crises, and the significance of understanding various aspects of venture capital, including portfolio construction, risk management, cash distributions, incentives, compliance, and SEC regulations.
• Suster acknowledges the contributions of experienced team members like Stuart Lander and other specialists in investor relations, finance, and legal matters, and expresses his commitment to ensuring the next generation of investors at Upfront Ventures gains comprehensive knowledge and skills.

The apprenticeship model in Venture Capital, and mistakes GPs make when interacting with LPs (01:03:01)

• Venture capital (VC) firms handle operations, hiring, and talent acquisition in addition to investing.
• Consistency and a unique belief system are key to long-term success in VC, with only a small percentage of VCs consistently outperforming.
• Some successful VCs invest in founders who don't need them on their boards, as these founders are often the most talented.
• Keith Rabois suggests investing small amounts in rounds led by other VCs without taking a board seat.
• Jason Calacanis's consistent conversations and debates on his show help him develop intuition for market trends.
• Samir Kaji's strategy involves investing in a wide net and doubling down on the most promising startups.
• Dave McClure invested in a large number of startups but lacked a system to identify which ones to double down on.
• Samir Kaji reserves 58% of his fund to invest in winners, departing from the traditional VC model.
• Understanding and approaching each Limited Partner (LP) uniquely is crucial, as they are the customers of venture capitalists.
• Building long-term relationships with LPs is essential, based on trust and mutual understanding.
• Mark Suster emphasizes the importance of founders always being in fundraising mode (ABR - always be raising).
• Suster treats fundraising as a significant part of his job and actively engages with potential investors.
• Suster sometimes co-invests with his LPs and advises them on investment decisions.