The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
00:47:19 · Jason Lemkin, Rory O'Driscoll
[00:47:19] S0: It can. It gets... I mean, it doesn't happen that... Maybe we're working up with some examples. It does happen, but it gets expensive to do it from free cash flow. Even if you have a lot of it, it's not that simple. Right? It's not... It can be done. Right? Buffer did it. Expensify did it, but they all did it at pretty mediocre outcomes to the investors. Think Redpoint made like nothing unexpensify, but probably more than if they'd held IPO. It's tough. I like none and done better than one and done. [00:47:41] S1: The reason it's tough is because the only way you can pay... If they own a small percentage of the company, then, you know, one or two years cash flow can take care of it. But if you're trying to buy out an investor that owns 30% of their company, and you want to buy it out for six times cash flow, by definition, you're tying up two whole years cash, so it gets risky if you're doing it with debt. So you're right, these are the hard deals to negotiate. But look, if you needed a million or $2,000,000 to get going, do the deal to start. But yeah, the big picture we're saying is, there are a number of software companies that mightn't set anyone's little heart a flutter, but are kicking off cash and are extraordinarily valuable to their entrepreneurs. And I think that's great. And it just show you not everything has to be through the lens of venture. I want to make 25,000,000,000 or die trying. And it's really good that these guys are making money here.
00:48:23 · Jason Lemkin, Harry Stebbings
[00:48:23] S0: It is in my learning when I compare it to, I just picked Zapier is because they were at 300,000,000 in a generational company in their own way, but probably one IPO. It's like, I used to think this one and done was a Nirvana, right? The three of us get together. We want to start a company. We're first time founders. We don't have the money. We raise a couple million from 20 VCC or whatever, And we just keep growing our company. Right. And it's not a lot of pressure. No one, we don't have to have board members and, but we don't, we didn't, the three of us didn't have the resources to do it. I used to think that was a great outcome. Now in the AI era, I think it's a trap because you can't dividend out the profits as easily. You can't become a 37 signals that easily. Now they they took money from Bezos or others. I'm sure they figured it out. Right? But I almost wonder if no venture rounds is is the way to go rather than one in some ways. [00:49:08] S2: Rory, how do you feel about GA IPO ing? Are we gonna see many more firms IPO?
00:49:13 · Rory O'Driscoll
[00:49:13] S1: I think you have to be a critical mass. You know, I was looking at it there. You have to be 800,000,000 plus or minus a billion of fee income. But that's the real question. Look, these companies, step back, there's a bunch of, obviously everyone knows, publicly held PE backed companies like KKR, Carlyle, Apollo, TPG. And then the question is, can you do a bunch of these for the kind of growth and venture perspective? And you know, the binding constraint is the fee income. And typically, public investors give you a lot of credit for the fee management fee income and very little credit for the carry, which is really odd in a venture in a venture perspective, but be that as it's may, to get to a market cap that matters because they trade at four or five times revenues best case. So you're probably looking at having to have 800,000,000 in fee income. Now you said yourself a 2%, what's that 50 times eight fifty times that? Yeah, you got a couple $100,000,000, well more of actual AUM. So it's doable, you know, Andreessen probably could get there easily from here. But that's kind of what you're looking at here. Now, maybe you'll get to be able to go on a lower amount of AUM because venture A, get paid slightly more and B, has carry that's more meaningful. So the very largest companies will do it, but not many is the answer. And that's just purely, that was a very financial metrics answer. Let me make a totally separate comment. It's really hard to do that, and not change the culture dramatically and become a more risk averse institution, right? You know, it may well be someone like Andreessen could pull it up, but it's just very, it makes it a very different company. So a second separate and probably more important criteria is, is that what you want to do, as a venture firm? I mean, I think it's great for the founders who get to take a ton of money off the table, but then you become a corporate venture firm, and that's just a different thing.
00:51:01 · Harry Stebbings, Jason Lemkin, Rory O'Driscoll
[00:51:01] S2: I don't know if there's a difference. I'm not being a dick, but I don't know if there's a difference between at the scale GA is at now. Like, if GC became a public company, I know compliance wise, sure, there's a bit more, but just like... They're just... They're such behemoths anyway. My laugh is you get in the lift, and you're like, oh, where do you work? And the answer is here. And you both go, wow. It's the same for both. So interesting. [00:51:24] S0: Is there... You know, I should know this, Rory, from from the public comps. When you do IPO, is there more fee pressure, though? I I assume when you're not public, you can play a few more games. Right? Because it's the LP is all no. But when you're when you're when you're public, everyone's scrutinizing all of this. Right? Where every single dollar goes. [00:51:41] S1: I don't think it's scrutiny. I think the comment is you always have to grow assets. You know, you're always launching products. [00:51:46] S0: Well, you always have to grow. All you can't you can't you can't just you can't just pay yourself 80 or 100 as the as the folks running it and kind of check out. Right? You've got to grow.
00:51:46 · Jason Lemkin, Rory O'Driscoll, Harry Stebbings
[00:51:46] S0: Well, you always have to grow. All you can't you can't you can't just you can't just pay yourself 80 or 100 as the as the folks running it and kind of check out. Right? You've got to grow. [00:51:54] S1: Yeah. I'll even say that like, put it this way. And it's a silly example because they're not big enough. But if old benchmark had gone public at 450,000,000 every three years, you know, Wall Street would have had a shit fit because they're like, come on, dude. And now finally, they're giving them what they want. Oh, good. Got the growth fund. Maybe you should do a crossover fund next. That's the way it would roll. [00:52:12] S2: Boys, what about Harvard's endowment? Harvard's endowment returned 27.1% to a $68,000,000,000, helped by venture space at a state worth about 2,200,000,000. They're an awesome team. NAV CIO is amazing. Love them dearly. Work with them. They're great. Anything here? [00:52:30] S1: Yeah. I mean, if you invest in Venture when you're in the big outcomes, it's good. And, you know, they've had a few lean years, but I you're going to see that. I think one of the other universities who went in direct into SpaceX have made out even more like a bandit. I think it's Washington University, I wouldn't swear on which university, but someone did really well. So yeah, I think it's going to be a thing. It's interesting when it's concentrated in only few assets. The good news, if you're an... If you're a manager, you prob... Not a manager, but if you're an LP, you probably have some exposure to that. So, yeah, you're gonna see a lot of this weakness.
00:52:30 · Rory O'Driscoll, Harry Stebbings
[00:52:30] S1: Yeah. I mean, if you invest in Venture when you're in the big outcomes, it's good. And, you know, they've had a few lean years, but I you're going to see that. I think one of the other universities who went in direct into SpaceX have made out even more like a bandit. I think it's Washington University, I wouldn't swear on which university, but someone did really well. So yeah, I think it's going to be a thing. It's interesting when it's concentrated in only few assets. The good news, if you're an... If you're a manager, you prob... Not a manager, but if you're an LP, you probably have some exposure to that. So, yeah, you're gonna see a lot of this weakness. [00:53:00] S2: If you are an LP and you do not have exposure to anthropic OpenAI, or SpaceX, you are you are feeling a lot of FOMO right now. [00:53:08] S1: Of course, you are. Yeah. [00:53:09] S2: And and I think the venture market's about to get a lot hotter, by the way, because a lot of people are starting to get cash back now from SpaceX. They're seeing Anthropic on the horizon, and they're hoping for OpenAI on the horizon in q one, q two. And I think we'll start to see that cash recycle back into the ecosystem that provided it. And I think LPs will come in with more money intervention.