01:01:03 · John Coogan, Jordi Hays
[01:01:03] S0: Got it. Yeah. [01:01:04] S1: Please. I'm very interested how new managers are, on the fund side are are pitching you today. Like, they're coming in. It feels like we are in some cases, feels like we're a decade into this cycle. Right? A lot of the big liquidity events of this last year have start have been from companies that started before anyone was brought, like people broadly were were thinking and debating and and investing in AI. A lot of people have been rewarded for backing, you know, I'm thinking of, you know, chip companies like Cerebras Yeah. That, you know, backing those companies in the 20 tens. You've been you've been doing well. But what are the new managers that are maybe coming off of building companies or operating? What what's their pitch to you around like the next five to ten years? Because you're you're betting on at the early stage, you're betting that there's gonna be a bunch of big new companies created.
01:02:00 · Hunter Somerville
[01:02:00] S3: I would say just first and foremost, it's a harder fundraising environment for new managers that are getting off of the ground. The LP capital continues to concentrate more heavily around the multibillion dollar brands that are increasingly adding strategies or other parts of their platform. Getting LP attention, I think, is tougher. If you layer that on top of the fact that a lot of seed rounds are being bypassed and going straight to larger A rounds or just larger seed rounds in general, it's harder for emerging managers to even play in a lot of those situations because most emerging managers are focused on seed or small a and are operating out of fund sizes of thirty to three hundred million. So they're not exactly going to be leading a seed round in a $100,000,000 kind of financing overall. So they need to prove their right to exist, I'd say, even more than they ever have historically. You could argue maybe that's a little bit different in hard tech and deep tech where I do think there's a bifurcation in terms of viability and where you can be an active participant, get good ownership in business like that, and then you get blessed later by the multibillion dollar brands. But in AI specific focused companies, I think seed is harder. You really need to find a way to stand out. You need to prove your ability to source or build relationships with founders very early. And certainly, if you're an operator and you come from a company where there's a diaspora of talent and proven founders and a culture that fosters that, you can make the case you're creating a new mafia that you're better suited to back than someone else that already exists. On top of that, AI founders are generally younger. GPs also increasingly have an advantage if they're younger and can relate better with that founder cohort. I think there's an argument to be made in that regard as well.
01:03:50 · Jordi Hays, John Coogan
[01:03:50] S1: Yeah. It felt like, rewind, five years and every [01:03:57] S0: it [01:03:57] S1: felt like half the people I knew were raising for at least like a a micro solo GP fund and it and it didn't it seemed like, you know, it seemed like if you wanted to raise 5 to 10,000,000, it was like very easy, you know. You did have to like do the rounds and maybe it took six months whereas but you were gonna be able to pull the money together if you were competent and you had any kind of track record. And it and the interesting dynamic is like back then, there wasn't this crazy new technology cycle. Like the the craziness in the market was a function of interest rates. And so the companies that were growing incredibly quickly were a company that was like a lending business and like they just had a bit of an arbitrage. Right? Whereas today, you have it's interesting because it seems way harder for new managers to get off the ground and even pull together, you know, the $50,000,000 fund. And yet, it actually feels like a much better time to be investing because of the the sort of like turmoil of the technology markets right now creating opportunities for new entrants.
01:05:05 · Hunter Somerville
[01:05:05] S3: Yeah. I totally agree. And I I would say it's still not that hard to raise a 5 to $10,000,000 fund. If you have any kind of network, you can cobble that together with friends and family or people that you've worked with or new minted millionaires that are out there in the ecosystem. But if you really are going to cross the chasm to being more of like a $50,000,000 plus seed fund, you do need to bring in institutional capital from endowments, pensions, fund to funds, or that kind of ilk, and getting their attention is much harder. And some high net worth capital can be rather fickle where they will come in at less obvious times and not be as consistent with continuing to re op into those managers or consistent with doing new managers. I think the opportunity set couldn't be more exciting across all of the categories that I just mentioned, deep tech, hard tech, AI, whatever it may be. But I do think it's harder to get attention from the bigger allocators that allow you to do more proactively. And I think if you're a 5,000,000 to $10,000,000 fund, you're getting really de minimis ownership and you're going to have no ability to follow on and no ability to concentrate behind your winners and just a more problematic portfolio construction math to navigate.
01:06:18 · Jordi Hays
[01:06:18] S1: Sure. How are you how are you managing all your direct opportunities? And specifically, wanna understand how you're evaluating these things when you see a company. Maybe you saw a company at the beginning of the year, you have an opportunity to go to direct. Now, later, they're raising it three, four times that. Maybe they've they've three or four times revenue, but these revenue multiples are still So it it it has been the right decision to invest in almost everything, it feels like, at least so far from a markup standpoint. But we know from history that that in the past, it's felt like the right decision to invest in everything until until it's not. And and the quality names, right, will still They might have to do a down round and then grow back into Mhmm. Into that historical valuation. But then we know that there's just hundreds of companies that get left to basically to die. Mhmm. And it didn't really matter where you invested even if it had a bunch of momentum. So how are you Like, what are you telling your managers that are bringing you opportunities or the companies that you're already in to go direct or through SPV opportunities?
01:07:31 · Hunter Somerville
[01:07:31] S3: Yeah. I mean, it's like everyone forgot the 2021, 2022 time frame where they were left with a bunch of companies that were way overvalued. They took discretionary markdowns of 25% to 50% off of last round. Books were completely underwater. I mean, you certainly could argue, and rightfully so, this is a much different, more exciting innovation cycle, but it doesn't take away the responsibility to know when you should be layering in aggressively and when you should be doing maybe pro rata or below pro rata or nothing. And I think what people will ultimately be judged on with a lot of these rounds is how aggressively they built their largest part of their positions early and the follow on rounds get scrutinized much more. And that's how we would ask our investors to evaluate us too. If you're coming in with, you know, 80% of your capital in that last crossover round that maybe the company goes public at or below that or you're not even making a 2x return off of it even if duration is shorter or things change cyclically and you're left, you know, having to take a discretionary markdown and have a a TBPI on a net basis below one because of that, that is the kind of optical look that does not age well and people need to be cognizant of that overall. That being said, follow on activity is just through the roof. I can't remember in August this busy with all of the top sort of value driving companies out there raising money even at the end of the summer. I guess it's intuitive with the expectation that IPO activity will be much more robust in the fourth quarter, but it's still crazy busy to your point around the amount of financing rounds that we're seeing right now.