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.
01:09:12 · John Coogan, Hunter Somerville
[01:09:12] S0: Yeah. Totally. What are you seeing on the spread of fee structures for early managers with the k shape? You know, we've seen reporting of funds charging not the traditional two and twenty, but you see four and forty, I think, in the most extreme case. And then you also see early managers giving on fees. How wide is the spread? Is it widening? Is there is there a k shape in fees where the next generation of managers are making zero zero? Just doing it for the love of the game? [01:09:42] S3: The the most egregious part of the entire continuum, I think, is SPVs and what people are doing on SPVs. Even separate from the funds, it's the insane, like, four to 10% management fees that people are charging and syndicating out to the long tail of investors that are out there. I mean, it's almost criminal how bad it is in terms of how some of these SPVs are being structured, then they're opaque. They're multilayers. People didn't even know what shares they own underneath of it. And so, I think that that is the worst part where there will be a reckoning and lessons learned, and I think it's well overdue. When it comes to funds, you know, there is adverse selection on fee concessions, and I don't think you see that from high quality groups in venture. The spinouts that are the most interesting with the most pedigreed people or the best operators never have to concede in that regard. [01:10:39] S0: Mhmm.
01:10:39 · John Coogan, Hunter Somerville, Jordi Hays
[01:10:39] S0: Mhmm. [01:10:39] S3: They can still raise quickly. There are certainly contrarian ideas where that may make sense, but our mentality as a partner is to not crush people on fee negotiation, you know, as long as it's within a reasonable range. [01:10:52] S0: Yeah. [01:10:52] S3: We'd rather make sure we build a robust partnership where we can do stuff more collaboratively on direct and secondary than on fighting hand to hand combat on fees overall. And I think when it comes to the carried interest piece, it's all about it being aligned and performance based. Use escalators. Make it predicated on hitting certain return thresholds, hopefully not a 2x, which anyone should do in venture in terms of what you're looking for return wise, but 3x, 5x. Even when someone puts a 10x threshold in, we love that dynamic because we know they're going to try to nuke it and really shoot for the alpha and upside that venture should provide for people that are willing to allocate that risk capital. [01:11:34] S0: I I have one more on this. [01:11:35] S1: Go for it. [01:11:36] S0: Can we stay with the humble SPV hustler? They got Miami penthouses to pay for. But I'm interested. We've had Matt Grimm on the show. He's talked about all the whack a mole he's been playing with Andoril secondary activity and shares falling in the wrong hands. What else are you seeing in the secondary market? And particularly for founders, what steps should they be taking early on to avoid the cap table getting super complex and muddy over time? Or is this just the inevitable new normal?
01:12:09 · Hunter Somerville
[01:12:09] S3: I mean, sometimes at the beginning, you have to scrape things together and do what you need to do to get things going. But from a secondary standpoint, like, there is a point in the trajectory of a business where you begin consolidating that cap table. Sure. And that's what we look to do as a We secondary go in, we build a relationship with the founder, and we try to be a helpful partner and let them lead us to who they would like to provide liquidity to, who's well suited for that, who might not make sense to continue on the journey, who's already made a great return at seed and maybe should liquidate at that point in time. You need to put the power of the decision making in the founders' hands and let them guide you in the direction of where you should be buying from. I think it's terrible practice for people to go out and cold call on LinkedIn or bother employees and try to create disruption within a company artificially and then hope that a board blesses it end of day. It's all on hopes and dreams of that happening. If you actually work hand in hand with the founders directly, they can be your Sherpa and guide to the right people you should be buying from in the first place. When it comes to SPVs and syndication, yes, smaller funds who can't do their pro rata will likely SPV at some point, but it becomes unwieldy, confusing, and complicated. Then there are multiple layers on SPVs as these companies become better well known and bigger and later stage, that needs to be cracked down on over time. You just lose complete control. Frankly, you're not even bringing in the right people into the rounds all of the time because every insider is then taking a huge percentage and syndicating it out more aggressively. You need to think of when the right time is to stop that or to be more selective and narrow around it, but you can't not have an opinion on it or not manage it with a firm hand and understand who your beneficial owners are end of day. It's just not helpful. And then your information is getting out to everyone without your control as well, which which doesn't always make sense.
01:14:13 · Jordi Hays
[01:14:13] S1: Yeah. Can you talk about the the power law in the in the secondary market? Like I you have to imagine that like OpenAI, Anthropic, Anderol, Stripe, Neuralink, Databricks, like, you have to imagine just like a handful of those names account for like 90 I would guess like 95% of the volume. But does that does that track in your experience? And then how much activity is actually happening in the in the long tail of names outside of like shares trading hands, like when financings are happening and and like little tender offers here and there.
01:14:49 · Hunter Somerville
[01:14:49] S3: Yeah. I mean, it is broadening significantly, but all of the discussion is still on those top names. And, you know, you need to be in the top names in venture, particularly as a late stage investor, but you need to be in them when it's not overtly obvious and when you're building those positions aggressively upfront before it becomes massively confusing and overly syndicated. But I think every company is realizing the value of being thoughtful in terms of offering liquidity as an option to tenured employees within a business on an annual basis, a semiannual basis. You decide who is the right level of tenure within your company and it almost becomes like a benefit within a company like anything else where they know that their shares are worth something. It's not so amorphous. You can go home and tell your spouse or significant other that this is not all paper gains. It's not going to immediately evaporate. We can realize part of our position. We can utilize that capital to live our lives and do what we need to do. We can ride the other 80% because we believe in the mission and the company that we work at more aggressively. It creates more aligned employees and I think people have realized that and there is certainly a more active buyer universe to provide that. But it requires that companies are thoughtful. They think about it not at the very beginning where it's almost absurd to be offering secondary liquidity or taking it. You need to have proof points. You need to get it to a stage and size that's relevant. But then it does become a very interesting recurring benefit to offer your employee base with strict control led by the founders.