Michael Kim, Jason Calacanis, and David Weisburd on VC marks, Rabois back at Khosla, & more | E1879

And I was the bad guy for bringing, even bringing it up, you know, because it's not founder friendly.

This is in the past, though. I don't think a lot of that's happening now.

Right? Oh, none of it's happening now. Yeah.

Right. But that did happen. So that everyone knows in the past five, six years. I mean, that was. I wouldn't say it was common, but it was happening. And that's how later stage firms were competing. And they're making their best offer and they're appealing to some of the short term thinking of the founders.

If you wanted to be generous, you could say short term thinking.

It's not a criticism of the founders because they're just acting rationally.

Right.

So it's an awesome comparing.

We have multiple offers and we. We pick the one that's best for us. Yeah. So you, you don't blame it, but it's bad hygiene, I think for sure. It's as Michael saying, it doesn't exist anymore. But yeah.

Yeah.

Wow, that's a good first topic. We went deep on some inside information on how things work in Silicon Valley. This week in Startups is brought to you by Northwest Registered Agent will form your company fast, give you the documents you need to open a business bank account and more. Visit northwestregisteredagent.com twist to get a 60% discount on your next LLC dev squad. Most dev agencies only offer developers. Why? Because product management is hard. Get an entire product team for the cost of one US developer, plus 10% off@devsquad.com Twist and OpenPhone brings your team's business calls, texts and contacts into one delightful app that works anywhere. Get 20% off your first six months at openphone.com twist all right, everybody, welcome to this week in Startups and the first episode of Liquidity. This is a podcast where I'm trying to put together a little bit of a mix of GPs and LPs, and David Weisberg is going to help me moderate because I, as a gp, want to contribute. And David's done such an excellent job moderating. So, David, why don't you kick us off?

Welcome to this Week in Startups. This week we have a very exciting episode. We have, of course, the world's greatest moderator, Jason Calacanis, and a special guest, Michael Kim from Sandana Capital, one of the top LPs on the planet. Guys, welcome to the podcast.

Thank you. Great to be here.

Thanks for having me on my podcast, David. Great job moderating last week. No pressure, no pressure, no pressure.

And it's Great to see both of you on together.

Yeah, we're doing a bunch of experimentation over here at this week in startups, trying to get some new faces involved and some new formats. So here we go. A roundtable with an LP and a gp.

All right, Excellent, excellent. Well, thank you, Jason. Let's get started. The Wall Street Journal reported this week that LPs are doubting venture fund startup marks. Teresa Hager from Cambridge Associates, which advises over half a trillion in institutional capital, stated in the article that whether LPs can trust valuations from VCs today is a very relevant question. Michael, why don't you start by giving a quick bio on yourself to the audience?

Sure. I'm the founder of Sandana Capital. I started about 12 years ago. We have about 2 billion under management and we focus solely on seed and pre seed funds. So we as an LP are making commitments to these funds. We view ourselves as the lead investor not only by check size, we do write 10 to $25 million checks, but also because we work so closely with our fund managers and ultimately want to be their trusted advisor. So I think we have a pretty good perspective on how our fund managers are thinking and what they're seeing. And this is globally, so we invest predominantly in the US but also outside as well.

Tell me about this Wall Street Journal article. Do you think that this is commonplace? Is this a one off? How commonplace is it for GPS to overstate their marks?

I think it's not so much overstating it, but rather perhaps being a little bit slow on the draw in terms of marking things down. I would say that, you know, we, we talk about this a lot with our fund managers and for the most part I'd say that they're, they're quite good at marking things down, some better than others. And you know, in terms of actual the, the markdowns that came over the past two years, the bulk of it actually came by Q3 of 2022 because that's when you know, the NASDAQ was going down 33%. And especially the later stage companies, I think our fund managers did a really good job of actually sort of marking to market and doing sort of comparables analysis and saying, oh, this $10 billion company that got valued in 2021 at 100x revenue multiples, that's just unrealistic. And it's closer to like 10 times, maybe 20 times. So we saw the bulk of our markdowns come in the second half of 2022. And yeah, I'm getting confused by the Years. I know it's January.

It's going fast right now, isn't it? Yeah, it's 2024 now, Michael.

Okay, got it. And interestingly, over the past four quarters, there's been sort of low single digit markdowns. And in fact there are newer funds. We've actually had markups because, you know, these seed stage companies actually doing the series A's that brings you a markup. And so the punchline is, you know, I think the bulk of the marks came markdowns came in 2022. But to answer your question more specifically, you know, do LPs worry about this? Absolutely. And in the context actually of their asset allocation. So you might have heard about the denominator effect. What that really means is if you're a university endowment and you have a big pool of public equities, and that went down, you know, 40% in 2021, suddenly your private portfolio is overallocated. And so, you know, what generally happens is the private markets, in private markets, PE and venture, the marks start coming down. But so there's a lag time. And it's sort of that trough or that period of time where the private marks haven't really caught up to the public marks that LPs get all twisted up. So I think we're actually past that. And I think it's very rare to have a fund manager that has a deck of corn in their portfolio that hasn't at least been looked at in terms of current marks.

Let's get to brass tacks on that. Let's say you have a fund manager and they're marking up their book, or they're not marking down their book. Would this preclude you from investing in them? Is this like, you know, a deal breaker?

I think it's a red flag, maybe a yellow flag, but perhaps even a red flag. You know, it's either that they're not on top of things, they're not sophisticated enough to know that, you know, they should be looking at the valuations that they're carrying out. Just one easy example is that, you know, does the fund manager mark their safe up to, you know, for example, none of our fund managers do that. But, you know, you see that on occasion, but it is at least a yellow flag. And where we actually have the benefit of sort of our little perch is that, you know, we might have three fund managers in a specific company and then we can actually see where each one's carrying them. And then we'll actually proactively talk to each one saying, hey, These guys are carrying it at 50% markdown. Why are you carrying it, you know, at the last round? So we, we have an active discussion and we don't see it that often. I would say that in general, our fund manager's been pretty good about marking things down, but it is something that writ large, the venture capital community really needs to keep a better eye on. And I think that's why the LPs are sort of on top of it for them.

And Jason, you're an LP and 20 funds, so you both have the GP hat, but also the LP had. What are your thoughts on this?

When I'm an LP in funds, I'm, I'm a very simple individual investor. As an lp, I don't answer to an investment committee. I'm the investment committee. I don't have a CIO or a family office set up as such. So, you know, I'm just looking at the MOIC, you know, the multiple of my invested capital, the two numbers. How much did I put in? I put 100,000 into this fund and ultimately how much did I get out? Now of course you can back into the IRR and everything. And you know, I was kind of shocked as I became a fund manager, Michael, over time and started seeing reports back from the people I was helping.

Right.

Just that there was no standard here. There really is not a standard on valuations. And people were doing all kinds of cute things like, oh, somebody paid, you know, in a secondary market for shares of a company. So I invested in, the shares were worth 10, but there was a secondary transaction that occurred at 15. So where do you mark that company? Right. Yeah, exactly. Should you take the high water mark of some secondary transaction that occurred? Who knows who's buying those shares, how sophisticated they are. Do you take the public market comps that you hear Brad Gerstner talk about all the time for SaaS companies and then apply them to private market companies? Well, the private companies might have different growth rates and the amount of cash they have in the bank. All this matters. And so there doesn't seem to be a gold standard of how to do this. I'm just always in favor of being as intellectually honest and rigorous as possible and focusing on the dpi eventually, what do we distribute in terms of cash? That's what's going to matter. And I had all these funds. It was very interesting. I'm sure you had this happen, Michael as well, during this ZIRP environment. 2019, 2020, 2021, some of them hit crypto lotteries. And people would be like, oh yeah, we're 6x fund. And I'm like, okay, sell all the shares and close shop. Like, we're done here. And they're like, oh, yeah, there's no ability to do that. There's nobody buying these crypto assets at that price. You know, two years into the fund and they're 6x. If you were two years into your fund, Michael, and the fund was 6x, the correct thing to do would be start liquidating. Right.

Or start thinking about it, at least. Yeah. And you know, there's obviously a discount for private securities, Right. And especially with tokens and actual crypto positions, you know, the market in a lot of them weren't deep enough so that they can actually unload. And so the proper thing there probably should have been to carry it at some sort of discount.

Right.

Just to play devil's advocate, I've had multiple LPs. I won't state them, but I've had multiple LPs basically telling me that there is incentive for the. For. For them, for the marks to be held higher, you know, Mike. Yeah. At a lot of the top LPs, there's revolving doors. There's institutions where every two years there's a new team and many LPs actually pay a bonus based on the marks. So it's not only an issue, it's an issue of incentives. Do you not see that in some of your peers?

Yeah, absolutely. I mean, I know of different LP entities where the annual bonus is actually based on irr, which I think is. Doesn't make sense to me, because that irr, especially if you have a young portfolio, can change so drastically. Right. And I think, at least for us, we don't really look at IRRs until something's, you know, we might look at something that might be 10 years old, and then that gives you a useful metric to compare against other asset classes. But to look at an IRR right now of. Let's just use an extreme example of a secondaries fund, right? A secondaries fund is buying something, let's say at 50% discount on their books, they will mark it back up to what the NAV is. And so right there you have thousand percent IRRs. Now, obviously that comes down over time, but using IRRs for a young portfolio doesn't make sense to me.

There's tons of incentives here. And I always try to think about, do we actually understand our portfolio? This is something I've worked on as my organization has grown. We're on our fourth fund now, got 21 people just making sure we actually understand what's happening at our companies. That's the bigger issue in many cases. So sure, you might have one GP getting cute and marking things up, another GP being super pessimistic and conservative. Most are probably doing something in between the two. But the more important thing is are you on top of these companies and you know where they're headed? Because I've been, you know, I've had friends who have very large positions in $1 billion company that suddenly goes to zero. And they read about it in the press and they didn't even know what was going wrong with that company. I think we saw Envision get blown out recently. Right. And that was a company that was worth a couple of billion. I'm sure, Michael, some of your funds might have had exposure to it. And then all of a sudden some top tier firm is now in the went from the first quartile to the fourth and they didn't actually know it was happening. And I'm really examining myself as a fund manager and thinking, did I liquidate enough of these shares early? Because as a seed fund, we sometimes have opportunities to liquidate at 500 million a billion. And did we, did we do the right thing in terms of getting DPI from tvpi? Starting a business used to be a pain. You needed a lawyer. There were hidden fees. It was a mess. Now with Northwest registered agent, it only takes 10 clicks and 10 minutes. Northwest provides everything you need to start and maintain your business. Every llc, corporation or nonprofit at Northwest forms comes equipped with registered agent service, a business address, a website and hosting email, a phone number. And this is all covered by Northwest's privacy by default. Again, your full business identity will be live in 10 minutes and in 10 clicks. So here's your call to action. For $39 plus state fees, they'll form your LLC, corporation or nonprofit and launch your business in just minutes. Visit northwestregisteredagent.com twisttoday that's northwestregisteredagent.com twist today.

Jason, you have a pretty prolific and large portfolio. What's your best practice? What's your cadence and follow up? And how do you like to follow up with entrepreneurs?

We're building software to do it actually. So we did two things that are unique. It's a great question. Number one, we put into our side letters that we expect 10 updates a year from founders. Most founders do five. We then put in our firm the past year a primary and a secondary contact for every single startup. We then have every single Startup in a slack room and we have in our database their cell phone numbers if we don't get an update. We've also started to build software for this. And so this year we started deploying the software. Very simple. We ask people to answer five questions if they don't send updates. Number one, how many employees do you have currently? You know, on January 1st, what's the cash balance on January 1st? What was your spend in December? What was your revenue in December? And then answer a question, when are you planning to raise money next? We're raising money, we're not planning to raise money. Three months, six months next year. And when we just get the answers to like those five questions, we can do a lot of math and we can look at over time. How many employees does this company have and what's the burn and what's the growth rate, et cetera. And once we get compliance on that, it works out pretty well. And so it might take us five contacts with the founder to get an update. And we just tell them, hey, just give us these, answer these five questions and then I'll call them on the phone, I'll text them. Or, or can you imagine like I call somebody on the phone and it's a, you know, a startup and I'm like, hey, it's jcal. And they're like, oh, this is the first time you've ever called me on my phone. And I'm like, yeah, hey, we sent like five emails. I know you're super busy. I don't want to be a pest. I know what it's like to run a company. But sometimes when people don't respond, it's because they're really struggling with something. We're here to help. So are you struggling with something? Is there anything we can help with? And man, people open right up, right? They open right up. Ah, yeah. You know, we lost our salesperson, I lost my ops person, I lost my co founder, we lost this big client. Everything's a disaster. We're thinking about shutting down and we can just have an honest conversation.

Right.

And I think that's kind of the best practice I've come to in my second decade, which is just giving founders permission to speak freely and not and then build a little software around it to scale it. It's a great question.

It's a two sided relationship. If you want founders to be honest with you, you have to be willing to take their honesty and to be productive and helpful.

Michael, you were going to say something about this approach?

Yeah, well, yeah, I mean I think that's a very smart approach and we do some of that as well. You know, we structurally, we have monthly calls with each one of our fund managers. They're 30 minutes. There are no agenda, it's not a portfolio review. So you know, we let the fund manager talk about what they're thinking, about what they're seeing in the market. VCs being VCs, they want to talk about their best company. So we get a lot of qualitative information around that. You know, new hires, new contracts, what the revenue is tracking to. We actually have a rolling list of companies that are coming up for funding over the next quarter or two. And so, you know, and we have a, actually a salesforce based database. So we use that and we capture a lot of qualitative data that way. But I think that discipline of doing monthly or bi monthly calls is important for us to stay on top of where our fund managers are and actually where all the portfolio companies are, at least the value drivers.

Yeah, there was another company, Pitch.com I think that was in the news this past week. And I, you know, I hate to pick specific companies and you know, beat up on them, whatever, but the co founder and the founder were sort of talking publicly about it. But they had raised, they were valued at a big number raised, you know, somebody and had, I think, you know, a small amount of money left and you know, sometimes these things look really great on paper and then when you dig under the hood and you're looking at the reality of it, you know, somebody got really frisky with that last valuation and they didn't grow into it and you just have to sort of accept that. And man, it sucks when you have to mark things down or remove things from the portfolio. But we're in a power law game. So once you accept this is a power law, you're going to hit, you know, two or three winners in your fund and they're going to represent what, Michael, 99% of the returns.

Yeah, vast majority.

Yeah. So you just, you have to understand the game that's being played on the field and manipulating these numbers or tweaking them, massaging them. It's short term thinking.

Yeah. I mean, David, just bring it back to your original question. I think it buys a lot of goodwill for fund managers to err on the side of conservatism, being proactive in marking things down and being transparent to their LPs. I think LPs really appreciate it when the fund manager is telling them that we proactively mark this down and here are the reasons why. And that is an order of magnitude better position to be in an order of magnitude better dynamic than the lp having to look at a statement of investments and say hey, what's this mark? And then calling that GP up and saying how come you didn't mark this down? What are you thinking? The other point I'd want to make is that none of our fund managers mark things up unless it's a new round led by an outside lead. You can argue that companies that raised in 2018 or 19 and they just are doing so well, they haven't needed to mark up and now they're doing 500 million in revenue and they're profitable, but they're being held at 200 million valuation. You could argue that maybe you should mark that up.

What do you do in that situation? Yeah, I haven't seen that happen too often.

We've seen it in just basically two companies out of 4,000 that we were in and we told the fund manager that they should talk to their accounting firm firm and get their thoughts on whether they should actually mark to market. But our fund managers actually ended up not marking things up. So I appreciate that we had that.

Happen with com.com, that we invested at four and a half million. We bought 6% of the company and they just kept going up and to the right. But they were so capital efficient they didn't need to raise money. The second round was 250 million. So between those two moments in time we had it at four and a half million on the books and three or four years, maybe it was four years later, boom, all of a sudden they had his $250 million round where we were able to sell some shares, modest amount, but we locked in like a 5x for our investors selling 10% at 250. It was quite nice. Yeah.

Nice.

Yeah. It never came across our minds to mark it up. We're always just focused on helping the companies and not playing any games with the marks.

Yep.

How do you look at that? Michael, you mentioned over 4,000 underlying portfolio companies. What do you want your GPS ideally to do when it comes to secondary?

That's a really interesting question because historically our fund managers have been pretty active with secondaries. And we were thinking about what's kind of like the right framework for this. Is it like are you a 10x MOIC on your original investment or on your total investment including the follow ons, or is it a percentage of the fund that know it'll return where the games can start? Creeping in is where, you know, they're very close to being 1x DPI and they can, they can get into carry by being, by selling some shares of a company. Then we actually have to worry about are they selling too early. But in general, I think our fund manager has been pretty good about actively thinking about how to get liquidity. And I would say that at minimum they would be, they would start considering selling a portion, not all of it, but a portion at least a 10x. And you know, in general it's returned sort of 10 to 20% of their fund perhaps.

I think that's pretty good numbers. We, we look to pair our position when we're 10, 20, 30, 40x by just 10%. And we did that with calm at 250 and then I think a billion and change. And on that 376, $378,000 investment, you always remember the winning numbers. 378 in a, you know, we wound up selling 20% of our position. I think it wound up being about 12 or 13 million in total between those two transactions. Like a million at the first one and 12 of the second. And I remember having a conversation with one LP Michael and they said, oh my God, this is the best investment I ever had. Congratulations or whatever. And I said yeah, we still have 80% of our shares. And they said, oh, I don't understand. And I said we just sold a portion of our position. And they're like, I still don't understand, what do you mean? I'm like okay, we have this many shares, a hundred thousand shares, let's say a million shares. We sold 200,000. We still have the. He's like, what you're telling us there's we could do five times that. And I was like, yeah. He just, it kind of broke the LP's brain that we, you know, had this happen. And it happened with, you know, another SaaS company we had in peak Zerp. They went through our accelerator, became a unicorn. I think we're able to clear 16 or 17 million on a million dollar cost basis by selling 14 or 15% of our position.

Amazing.

You really have to take advantage of those moments. And I kick myself. With Robinhood, we had so many opportunities at $30 and $40 before they went public. I really believe in that team. I still do. I've personally held all my shares. But when we distributed I think we wound up distributing between maybe at 15 or $20 or something in that range. And it did go to 60 or 70 when it was public. And so it's very hard to time the markets and you do the best you can.

The other advice I would always give our fund managers is don't sell your entire position. So we've had two cases where our fund managers, one of them sold their entire position at a $300 million valuation. High fives all around. But then we were thinking, oh, why did they sell their entire position? No, but they're currently their last round was at 9 billion and they are filing to go public. This would have made a 20x fund into 100x fund which never happens.

Yeah, it's.

Yeah, that would have been very rarefied territory. We have another fund manager who was basically the co founder of a company. He sold his entire position at 1 billion 5. The company's most recent round was done at 25 billion. You could argue that maybe it's the true value is somewhere between six and eight. But again, he missed out on multiple turns of dpi. So you got to have schmuck insurance. You can't sell your whole position.

Just to talk personally about my personal Uber position, I still have a large portion of it. It's trading today. It broke a record. But I sold a little bit back to the company years before the moss around at $32 a share. Then I sold a little bit to Moss at I think $40 a share, you know, so I was able to pair the position, take care of my family, buy a home, you know, and do all that important stuff.

Awesome, right?

And still have so much skin in the game. And I don't know that I'll ever sell another share of Uber. I just had Dara on the pod and I just have so much faith in that company that I, and I was talking to Freeberg about Google and I was like, what if you held onto your entire position? Or Chamath, what if he held onto his entire Facebook position? You know, it's. You have to think these things through, you know, keep some portion of your position because it's so rare to be on a rocket ship. Right. Going from an idea sketched on the back of a napkin to a robust, stable product requires a wide range of skills. You can spend ages looking for a one in a million developer who can do it all. Or you can quickly ramp up an entire product team to help you build and launch your product with our partner Dev Squad. Dev Squad provides an entire development team packed with top talent from Latin America. Your elite squad will include two to six full stack developers, a technical product manager, plus experts in product strategy, UI and UX design. DevOps and QA all working together to make your SaaS product a success. You can ramp up an entire product team fast in your time zone and at rates 75% cheaper than than a comparable US based team. And with Dev Squad, you pay month to month with no long term contracts. Take the hassle out of assembling and managing a sprawling team of freelancers and work with a group that's ready to hit the ground running. Visit devsquad.com twist and get 10% off your engagement. That's devsquad.com twist well, so David, what.

I'd point out is one way we think about our fund managers is is are they sort of like starry eyed, looking to save the world, just dreamers finding great founders, or are they also, and I'm saying also, are they also hardcore investors, are they actually thinking about making money? And you know, you would think that VCs are all in it for that, but they're actually not. There are people who are just like in love with companies and what they're doing and the mission, the sort of the stereotype. But we specifically look for investors, someone who's actively thinking how am I going to make money? Does it make sense to actually think about a secondary here like Jake how described, that's ideal. You always want someone to be thinking when is the right time to exit, perhaps not the entire position but some portion of it and actually make money.

There are contemporaries of mine who I've had conversations with who who have said I don't want to sell in the secondary round. And I said why? I'm selling whatever position. And they said well I don't want to make the founders feel bad and I don't want them to think I don't have faith in them. And to Michael's point, there are big hearted folks in vc. What he's describing is not a rare case. I think a lot of people feel this sense of loyalty. And when we had a group of founders say to us, hey we're selling in secondary, will you pass on selling in secondary so that we can sell more?

What'd you say to that?

And I talked to my team and I said let me get back to you on that. I talked to a couple of my mentors, very high profile VCs who've been in it for multiple decades and they said, well you also work for the LPs. And so the language I came up with was listen, we're pari parsu with you. Whatever percentage you sell will sell. It's really in your best interest is what I told them for the community, for me to be able to liquidate so I can raise future funds so that I can help the next group of entrepreneurs. So I have to take advantage of this opportunity for my LPs. Just so, you know, for the ecosystem, it's good. And the founders like, yeah, we totally get it, no problem. But you know, the founders took a shot. They went to all their investors and said please don't, please decline selling secondary. And they put a little pressure, not a lot. And I think, you know, probably worked with half the investors and the other half were like the LPs need to get a taste here too. They trusted us with those early investments and took the risk. So you have to be thoughtful and.

J. Cal secondary has been controversial subject for, for decades in Silicon Valley. Founders secondary. Is there a specific amount of money that you, you think is good for founders to take off? Like, you know, I would feel very uncomfortable if they were taking large positions.

Off giving number Michael?

Yeah, give the exact number two founders.

What could they take off each. Without you being worried, I have a number in mind. I want to hear Michaels first though.

I think that if a founder would take say 2 million off the table by the time companies sort of at the series B stage, that makes sense. I think a secondary at series A is utterly crazy.

That's nice.

So generally you see founder secondaries, it's sort of series B maybe, but typically even later stage right, Series C or later. I mean, ultimately what you want to avoid is demotivating that founder. They have to maintain that hustle. And suddenly if they have $100 million in their bank account, they may not wake up every morning worried about the company. They may not go to bed every night worried about the company. And I think there is, to Jason's point, there is. And to David, your question, there is probably a number and depends perhaps even on geography, but let's just say Bay Area. I would say that, you know, 2 to maybe 3 million maybe helps reduce your mortgage payment or eliminates it helps ensure that you have. You're comfortable that you can cover your kids, schools and your living expenses. But you know, double digit millions is just ridiculous.

Yeah, my upper bound is 10 million because after taxes is, you know, seven, six and a half, whatever it winds up being again. It really does. Based on geography, as Michael correctly pointed out. That was exactly what I thought of. What is your primary residence going to cost if it's a family, if it's in the Bay Area, it's Two to five million dollars for a home. I know that sounds crazy to some people who are living outside of New York L. A and the Bay Area. When you start talking about private aviation or a second home, that's when a founder is completely, completely off the reservation. They've jumped the fence, they're distracted because I can tell you, you know, and I'm 53 now. When I got my second home at the age of 50 and I had a ski house, my life became like super complex. Oh, there's a second house. And I have not gotten private aviation. I literally have. And I, you know, been sitting there with the jet card in my email box ready to sign and just didn't do it because I was like, you know what, I just want to stay focused and be normal. Once I start taking private jets, I'm just disconnected. I kind of like meeting people at the airport. The fact that I can fly business class is a big enough win for me. You know, it's like delightful to be in United or American Airlines business or first. Good enough for me as a kid from Brooklyn. So. And I can tell you the number that was crazy was I don't know if you had anybody with exposure, Michael, to the Hoppin founder, which my friend Gerstner had access to. He took 200 million off during COVID Great move on his part. That was insane. And then there was Bird and I think the Bird founder, somebody whispered to me that they may have taken 50 million off the table. The scooter company.

He got a nice place in Miami.

There's your point. Like how focused are you going to be as a 30 year old person with a mansion or two?

Yeah, well, you know, the other thing that was driving this, at least in the ZIRP era, was the late stage guys as a way of competing were saying, hey, let's do a founder secondary. We'll buy the shares and then post money, post close, we will give you more options. So to be honest, in a way that's bribery and that's actually how some firms were competing in order to win a competitive deal at the late stage. And you know who gets screwed in that is the early stage investors.

Right, Michael, such a good point. And this is like the dark underbelly. And we fought it and I, you know that now you put me in a really weird position. I'm trying to protect my LPs as the seed investor in the company. We own 10%. You come in and say, hey, we're going to give the founders this offer to win the deal. So we're putting 100 million and we're going to buy 25 million of their shares. And we're only going to buy the founder shares, not the other employee shares. And then who is the founder going to say they want as their new partner at the board meeting?

Exactly.

Firm A or B? Well, B is offering me $25 million and they said we'll re up you in the option pool. So that's a bribe. It's literally a bribe. I was in a board meeting, Michael saying, hey guys, we should fork this conversation. Let's make a pure fundraising decision for all shareholders and then make the secondary decision. And the re ups for founders at the first board meeting after we closed that. And you know what happened? I lost.

Oh yeah.

And I was the bad guy for bringing, even bringing it up, you know, because it's not founder friendly.

Yeah. This is in the past though. I don't think a lot of that's happening now.

Right. Oh zero. None of it's happening now. Yeah.

Right. But that did happen. So that everyone knows in the past five, six years. I mean that was, I wouldn't say it was common, but it was, it was happening. And that's how later stage firms were competing. And you know, they're making their best offer and you know, they're appealing to some of the short term thinking of the founders.

If you want to be generous, you could say short term thinking.

It's not a criticism of the founders because they're just acting rationally.

Right.

So it's an awesome comparing.

We have multiple offers and we, we pick the one that's best for us. Yeah. So you don't, you don't blame them. But it's bad hygiene, I think for sure, as Michael saying, it doesn't exist anymore. But yeah.

Yeah.

Wow, that's a good first topic. We went deep on some inside information on how things work in Silicon Valley. Are you still using your personal number for business? Well, stop. Such a common mistake that founders make. But you never have to make that mistake again because of openphone. Openphone has rethought every single detail of what a modern business phone should look like. OpenPhone makes it super easy to get a business phone number not only for you, but, but for your entire team. And here's the magic. It works through a gorgeous app that works on your phone and your desktop. I can tell you openphone is amazing because all of our sales team and ops teams use it every day. Why? I don't want people using their personal number. Then they leave the company and they're still getting phone calls from our customers, clients and partners. No, I want all of that to be professional. And Open Phone is the number one rated business phone on G2 for customer satisfaction because it's so professional and easy to use. Here's a feature I love. You can create a shared phone number with multiple employees fielding calls and texts from that number. So we want to reply to our founders, to our partners really quickly and we don't want to miss a call, we don't want to miss a text. And that's why we use openphone and it's already affordable starting at just $13 per user per month. But Twist listeners get an extra 20% off for the first six months at openphone.com twist if you got existing numbers and you're paying through the nose for some insane service, you, you can port those right over to OpenPhone at no extra cost. So here again is the offer. Go to openphone.com twist and get this all organized. Get the 20% off as well. Openphone.com twist Speaking of inside information.

No longer inside information. In a move that stunned the VC community, Keith Raboy is leaving Founders Fund and going to Khosla as a Managing director. Keith was previously at Cosa for six years prior to moving to Founders Fund in 2019 where he was a partner for five years. The announcement of Keith or boy returning came shortly after Khosa announced their $3.1 billion fundraise across their main their seat and their opportunity fund. So Keith will have a lot of capital to play with. When asked about the change, Keith stated that Khosla's culture of weekly partner meetings, which included debate and Khosla's hands on investing approach and founder mentorship, was a better fit for him than Founders Funds more individualistic approach. Jason, are you buying this? Is this the reason Keith moved to Khosla?

Well, so there's, there's two things occurring here that I think are of note. Number one, this is secession planning. I didn't see anybody mention that, but Khosla is in his 70s. He's spry, he was at the all in summit. He is sharp as attack, but you know, he's in his 70s. And so I think this will be Khosla Raboy as a firm very soon. And I think whenever Khosla decides to hang it up, this will be Keith Roboy's firm. Number two, there is something to Keith about debate. You see him on podcasts, you see him on Twitter. He made a funny comment on this podcast. You know While I was on the Internet and somebody said something that was incorrect, so I felt the need to correct them. Like literally. That's how he's wired. If somebody on the Internet says something that's incorrect, he will correct them. And you know, feel like this, you're actually explaining it's well with you know, 4 or 5 billion people on the Internet, it's a full time job. But you know, Vinod loves Keith because they're both candid and they're both like debaters. Now you go to Founders Fund and you think about Peter Thiel and obviously Peter and Keith and Sachs all went to Stanford together, Stanford Review, all that kind of stuff. They're all part of the same clique. But there does need to be a recognition of the culture at a firm. How does this firm make decisions? And that's something I've Learned being an LP in 20 funds. I always ask about that and then I've really worked on it at launch. How do we make decisions? We have deal flow locked in. We don't have to compete for deals because I have a good profile and I act at the seed stage where this generally it's not as cutthroat, just passing the hat a lot. So then what's left? Really two things I have to really solve for. Do we make great decisions and do we double down, which is also a decision. And that's what I have obsessed with. And I think at Founders Fund, Brian Singerman's approach has been hire really smart people, make bets that they have conviction on or let them start their own companies and. And then in every fund put a third or some crazy number, he's told me, into one giant bet. And you know, that's a different culture than say coleslaw's going for. And so I think it's great to have that recognition that different cultures work. There's consensus based cultures, there's solo freelancing kind of based cultures. And I don't. My question for Michael Kim is do you have a preference for the decision making culture or do you see one win more than others?

Yeah, I mean a lot of the platform firms you can say are more siloed. Partners are more siloed and they have the authority to go ahead and make a decision. A Founders Fund clearly absolutely top tier firm and they've done very, very well with their model. One example, just to amplify what Jason was saying, when they raised Founders Fund three, they immediately put a quarter of that into Palantir and that was a brilliant move.

Wow.

And In Founders Fund 2, you know, they actually sold well. So Yammer was in there. David Sacks's company, prior company, they took the proceeds from that. And then Peter went and, you know, basically took cash capital out of the different funds that he had and he put it all into Airbnb. And that was a brilliant move. Yeah, they recycled it. And you know, I think that kind of decision making and non consensus thinking and high conviction, non social proof investing is brilliant, but it's not for everybody. And you know, the typical VC firm does have their Monday meetings where they sit around and, and argue about specific companies. And that works well too, because there's that sort of pushback that a particular partner might have on a company that he or she might be in love with. And getting that feedback on additional diligence or why it won't work, I think is important. But so it really depends on the type of people and how they're making the decision, as opposed to this is.

The.

It'S one size fit all kind of decision making.

It also depends on, to your point, I think, Michael, is this firm nurturing and developing talent, which our firm is doing. We're teaching people the skill of being a vc. Because we're small, we can't afford to compete with Sequoia for partners given the scale of their fund. So we're training up talent. So we need to have more meetings, we need to have more debate. That's how people get good at the job. They put out their deal memo, they say, hey, we were having an argument today, non consensus argument. I want to put $25,000, which is our Foundry University bet, you know, first check into a company to help them form the company for 2.5%. And there was like a nice debate going on about this company. And I just came in and I said, okay, the person who wants to make this bet owns it. We're making the $25k bet. We don't have to over debate it. But I love the debate. Great debate. And the debate was so good in our organization. And we have such a high volume of companies as an accelerator and a pre accelerator, we instituted two investment team meetings a week. Every Tuesday, every Thursday, we do an investment team meeting. And 1:30 till 3:30. You know, it's. This is not a short amount of time, four hours of it a week. We now record it, transcribe it, and summarize it. That's like crazy vil. But I want to have on tape the discussions and the transcript so we can go do a postmortem. We didn't invest in Airbnb. What was the discussion? Who is the loudest person in the room saying, don't do it. Who is the loudest person in the room saying we have to do it? And so I'm very keyed into this as I go into my second decade and I try to build a firm like I'm trying to build a firm right now. Right. It's a different thing than just be great individually.

But I think, I don't know Keith personally, but my immediate thought was when I read the news, Khosla must have offered him some sort of assurance, if not an agreement, that he would be taking over the firm.

Yes, 100%.

And I think if you even go further back, Khosla was at KP back in the, in the heyday, right?

Yep.

And if you read Sebastian Malaby's book Power Law, each chapter is about different firms. The KP chapter really talks about how in the early 2000s there are KP's sort of on Mount Olympus and then they started hiring old guys like Al Gore or Colin Powell. Whereas in the chapter on Sequoia makes it crystal clear that they were very focused on generational transitions. Alfred Lynn, bringing in Alfred, and how the senior partners like Doug Leonel would specifically put them on high profile boards and mentor them and giving them more airtime, giving them more decision making and basically building their gravitas. And I think those two chapters really stand out. So my point here is that obviously Khosla left kp and I think he probably is a very wise observer of venture capital funds and so he must be thinking about succession. I would also argue that he's probably a very young 70. I don't know his exact age, but let's say he's 70. He probably has another 10 years to go. So I don't think it's an imminent kind of thing, but it shows a lot of foresight.

With all the longevity investments he's making, I think he's going to be around for a while. He also reported in the same article that he didn't want to start his own fund due to the operational intensity. How do you look at that, Michael, what are the pros and cons if Keith was to leave and start his own firm?

I mean, clearly he could do it.

How much do you think he'd be able to raise as a spin out?

You know, Lee Fixel left Tiger and raised billion dollar funds every, every year almost. So, you know, I think Keith is in that league or even above that and, or certainly peers. And you know, Keith could raise that kind of capital. I have no doubt about that. The question is, what kind of investing does he want to do? And ultimately what's the appropriate fund size? Right. If he wants to have a barbell strategy where he's investing in a bunch of early stage companies and then perhaps selectively late stage companies where he can write $100 million checks. So it really depends on the type of investing that he really likes. My sense is that he likes to be hands on and really work with founders. And that suggests to me early stage investing. So 3 to $500 million Series A fund out the gate with some seed exposure.

And the question is, when you become a fund manager and you start raising larger funds, I'm experiencing that in the last six months. I have to go to the Middle East, I have to go to New York experience, I gotta go to Europe, I gotta, you know, do phone calls at 10pm, I have to do relationship calls, you know, and maintenance calls. So when you have to take over that function, I think that's a 12 month ramp up. So then does Keith at his age want to spend a year raising that fund? And even if he did it extraordinarily quickly in six months, it's possible, it's just not probable. And the environment right now is really challenged. Even if he wanted to go raise that fund, there are people who are pencils down right now. I mean, Michael's active, but that's true too. I can tell you three out of five, maybe LPs in the United States are pencils down, 60, 70% are like, when's your closing date? Because we're done for this year, right? And that was 2023. And we're going to open up two slots in 2024 and we'll see what happens from there if we get stripe distributions or bytedance distributions, et cetera. So, you know, it's got to decide how much of that overhead. And then starting a firm, you have to do all this back office stuff. You got to hire operations. People like this is, it's, it's not de minimis, it is significant and you have to do it right. And we had some missteps as a firm, we, you know, with back office stuff and man, I had to do cleanup. And you know, if you're, if your numbers aren't clean and you go to somebody like Michael or you know, let's say the next tier up, the Calpers of the world or et cetera, it could just be a no based on you not having Your package and your data room. Correct. Like a venture fund.

Oftentimes they won't even tell you why. They'll just say, thank you very much.

Yeah. One thing I'd point out, and JKOW makes an excellent point about where LPs are today. I think with someone special starting a new firm, then you might get some fomo. And it's almost like fuel gauges. The fuel gauge might read empty, but I read somewhere that there's probably another 40 to 60 miles of range. And so, yeah, I think LPs would be able to find the capital to make a commitment to someone special. And I think Keith would probably be in that category.

Yeah, I would agree with that. They would, but it would still take three meetings and it would take a champion and it would take somebody saying to the investment board and the investment committee, hey, here's why we're making this exception. Right. And I'm sure Keith, you know, he just loves to invest. He likes to hang out with founders. I get the sense that he probably does it. In all due respect to Michael, he's delightful to hang out with. But Keith might not want to hang out with a bunch of LP all the time. It might not be his bag. He might just want to at this point in his career, he's so successful, he just might want to invest in the next company.

Absolutely.

And I don't think it's a huge loss for founders Fund. I think they're going to do great no matter what. That's one of the things, when you have that many great partners, you can afford to lose one. It's like being a team with a stack group of all stars. Right. They'll be fine too.

Yeah, I mean, Kevin Hartz was there, right. For a couple years and he moved on, started a star. Nothing against any of these groups, but that's actually the mark of a resilient firm, a very strong firm. You lose a star partner or someone who's very promising, you'll continue on. And I think Sequoia is a very good example of that.

Yeah, absolutely.

Great. Next up, Bill Ackman, everyone's favorite modern day conqueror, has decided to go after Business Insider after Business Insider went after his wife Nari. According to timeline of events, Business Insider sent Bill Ackman's wife nary a 12 page email on January 5th at 5:19pm Eastern. Business Insider then gave nary only one and a half hours to respond to a 12 page email before publishing their allegations. Jason, what do you think of this? Was Business Insider within its rights to Go after Bill ackman's wife.

There's kind of a rule, like in the mafia and in other, you know, areas where respect is important. You know, you don't go after wives and kids. Like, you would never do that. It's. It's not appropriate in this case because Bill was going after other people for plagiarism, and his wife happens to be in academia. Academia. It feels like it's fair game in a way. But I think that broadening the discussion out here for this podcast, you have some very vocal fund managers out there, and some of them have gotten very addicted, I would say, to social media and being heard. The all in podcast has become a bit of a joke to some people. Like, oh, my God, what are we going to think about what's happening in this area of the world? This conflict, this crazy thing. Oh, I know we have to ask some VCs. Like, I can imagine being an LP in Ackman's fund, you know, or anybody else's fund who is taking on these really charged issues and wondering, are they focused on their fund and their companies and their trades, or are they focused on, you know, DEI at harvard in this battle? So I think, you know, while I appreciate him defending his wife and fighting the good fight and everything like that, I do wonder, I don't know, Michael, if watching, you know, GPS be spicy on social media or their podcasts, et cetera, does that factor into the public Personas and chippiness and elbows and craziness, your decision making or how you partner with folks or just part of being.

Successful, it's part of being human. And I think, you know, people might have larger platforms than other people, and if they can use that for good, which I think bill ackman is doing, doing, I'm all in favor of that. And the thing about bill ackman and his firm, pershing square, they're activist investors. So by definition, bill is someone who's going to lead a crusade. And I think overall, his funds have done well. I think there are some notable problem childs, like valiant, for example, in herbalife. But as a person, I think it also. October 7th, a light bulb went on. And the testimony that the three presidents had in front of congress, that was another light bulb. And then he started digging in, because it's clear that he's intellectually curious and, oh, by the way, a crusader. So that's how he got onto that. And then to your point, Jason, they went after his wife, bi went after his wife, and that's verboten. You can't do that and to people's families. So he went after, he, he's, he's on a, he's on a warpath.

And Michael, if you turn the tables, limited partners, obviously there was Harvard, MIT and Penn involved on the other end with the presidents. Could limited partners in what people call an access class, could limited partners hurt themselves on their end?

I think so. I mean, I think, you know, certain firms that really have, that really have no issue raising their next fund, sort of the absolute top tier VC firms, let's just focus on VC. They can pick and choose who their LPs are. And if there is a strong belief that just to pick on Harvard, that Harvard now is completely overrun by a 200 person DEI department department. And it's insidious and it's permeating through all of the hiring that they're doing, the areas of study that they focus on and the courses that they offer their students. An absolute top tier firm who does not believe in that could say, why am I funding this? Because the fact is a large chunk of a university's operating budget comes from the proceeds of an endowment.

It has to be 5% a year. Right. Like they have to minimum.

But I know universities where it's like half or 40% annually. And so the VC returns the distributions that I'm happily sending back to my LPs. Then there's this epiphany that, well, some of that is actually ultimately funding these programs that I don't believe in.

So I think, am I going to work for.

Right?

And I think when you become elite at this job, it's such a good point. Mike, you made two really good points. Number one, thank you. Ackman's an activist. Like what do we expect him to do when he sees something that he perceives as unjust in the world? Number two, such a good point. You know, when I as a founder would go to Sequoia's, they would have a CEO dinner. It was kind of like a DL thing, but they would have all the CEOs come to the golf course over there and Michael Moritz would come up and say, oh, just would like to tell you what you're working for. And the great returns we had. The returns from Google helped in Ford foundation do the following and they'd show what the Ford foundation was working on. And here's an email we got from this foundation. Here's what they're doing in Africa, you know, with you know, malaria, whatever. And he would walk the CEOs skipping the LPs right. This is just GP to CEO. Your hard work lets us make money and give it back to these incredible causes. And you were just like, wow, capitalism is awesome. And those same people, as Michael's pointing out, they may not want to give to these endowments anymore and they might not want to make money for them anymore. So they could lose two sources of revenue, the donations and oh, I want to have my name on a building. And number two, I want to take the.

What are they?

They're usually typically 15% in VC. 10. 15%. Some of them have gotten up to 20, 25% like Yale and I think.

Certainly like 30 plus percent for private markets. Right. Including PE.

Including PE, yeah. So I mean, it's a double. That's why I think this is like an important thing to discuss here is who are you making money for and are you motivated to make money for those people? It's a really nuanced point, but an important one. Yeah.

But then also sort of a related topic is, and I'll mention it since Jason, you mentioned the Middle east. You know, how do you decide which authoritarian countries, endowment or sovereign wealth fund that you feel comfortable enough taking? And there's kind of a danger in getting on a moral high horse, to be honest. We don't have capital from any sovereign wealth funds. But I would say that I hear amongst US LPs and also US fund managers some debate about should I take money from an authoritarian country's sovereign wealth fund. So I think there's debate about that too.

And I've been very public that I've been spending time there. I don't have any announcements of efforts we have in the region, but I did meet with everybody and I was doing it more to get educated, to be totally honest. I felt when we would have these conversations on all in, and I'm kind of thrust into this position of needing to have an opinion or be at least educated. But I hadn't been to Saudi, I hadn't been to Dubai, hadn't been to Doha. And having spent time there now, two trips in the last year, basically in the spring and the fall, I feel really educated. And my first job was working at Amnesty International. Most people don't know that, but I'm very passionate about human rights. When I was in college in New York, I just felt passionate about because I had seen Peter Gabriel and Bruce Springsteen play at the Human Rights now concert and I was like, wow, I really care about human rights. It just spoke to me as an 18, 19 year old in college when I was at Fordham and I was an IT specialist there. And now I'm an adult and I'm in a position of power or writing checks and people are knocking on the door. And I've met with them and I've come to the conclusion, and people can come to different conclusions and I respect it that this group of the Monarch states, they want to have a seat at the table. They're investing, they're LPing, and they're going to be on the same boards of the companies we're all investing in. They've decided in the next 30 years and they've said this to them explicitly, we can sell oil for 30 more years is our projections. And in that time we're going to convert our economies to tourism, real estate, private equity, alternative fuel and venture capital. And venture capital is one of their favorite assets. Private equity, not so much. They did that game. They really like company formation. They have a large amount of capital and they're very smart. And these are multi generational folks who've been educated in the West. This is the other thing I learned when I was there. All the people who are our contemporaries, they went to Oxford, they went to Michigan State, they went to Georgetown, they went to Fordham, they went to nyu because they were all on these scholarships that were set up for the nationals there. They're very westernized and the countries are making massive progress on personal freedoms and economic freedoms. Now, they're not democracies, but, but they've made progress. And so then the question is, you have to ask yourself, do I want to participate with a group of people who are making massive progress and bending towards, you know, a better world, or do I not want to participate and then have them work with Putin and Xi Jinping? Because if you just take a look at what's happening in the region as well, Xi Jinping and Putin are spending a lot of time there as well. And I think we're at this very interesting moment in time where either that region is going to tip one way or the other, and it's their choice. And so if we don't participate and build companies with them, well, then they're going to build them with Xi Jinping and Putin. That's not a better scenario for humanity either. And they really want to reform. You go to Dubai now. It reminds me of New York in the 90s. I went to Riyadh and it has changed more in the last three years than in 30. And I'm pretty enthusiastic about the entrepreneurial scene there as well. People from Hong Kong Singapore, India, they're all moving their companies to Doha, Abu Dhabi, Dubai, and Riyadh because there's angel investors and seed funds there and programs there and golden visas where they'll give you a visa for 10 years. So they're going to be a player. The question is, do we want to participate, Mike, or not? And I think I'm coming to the conclusion that if you build startups together and you build businesses together, that's pretty good for the world. I think one person's belief.

I totally agree.

Absolutely.

It's an important topic, and I'll probably make an announcement later this year that we might be doing something there in relation to the things I'm known for. I'll leave it at that.

Okay.

Great.

Spicy. Well, well, Michael, really appreciate you jumping. Jumping on the podcast and discussing these topics and hope to see you soon.

Absolutely.

Yeah. Great job, Michael. Really appreciate it.

Nice to see you guys. Take care.

All right, David, great job. You've done two great episodes with me. I really appreciate it. And if you don't know about the Liquidity podcast, I used to call it the Angel Podcast, but because our conference and what I do is expanding beyond just angel investors to include LPs and GPs, decided to rebrand. So the angel summit we do in June will be called Liquidity. And we're spinning out this content and having this Liquidity podcast, which is a niche, niche broadcast for LPs and GPs. David, you did a great job today. Awesome.

Thank you. Jason. Thank. Thank you for mentorship and for, for. For being a great model for moderation.

Oh, thank you. And where can people follow you on social media? You got a social. Are you on the social media x.com for sure.

You could follow. Follow me on X D Weisberg D W E I S B U R D. And you could also follow me on my podcast where I interview limited partners, including Michael Kim, and even had jcal on the episode called the Limited Partner. So check it out.

You just had Freedberg on Great.

I did have Freeberg. That's.

Did you talk about all in at all? I looked in the chapter.

We did not. We talked about. We talked about his life as an investment banker. Did you know?

I know. I heard about that. No, all in talk. I thought for sure you were going to ask him about All In.

No, I tried to vary it up a little bit. Keep it interesting.

Very good, Very good. All right, we'll see. Oh, and so if you haven't a chance, if you get on the Liquidity feed or you search for Liquidity Podcast and your podcast player. Subscribe there probably once a week. Ish. And you'll get information about the event in June. It'll be June 2nd, 3rd and 4th. I believe in Napa for LPs and GPS only and angel investors high net worth individuals who participate in the space. And and we have a YouTube channel search for Liquidity Podcast on there. You'll probably find it. And LiquidityPod.com has all the links. So if you have a chance and you like this, subscribe to it or rate it. That would be helpful because this is episode zero and the handle everywhere Instagram, TikTok, YouTube, everywhere, Twitter. X is Liquidity Pod. Liquidity Pod. And we got a nice beautiful logo for you. All right, we'll see you next time.