Investing in Venture Secondaries - [Business Breakdowns, EP.193]
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as this is matt Russell. And today we are covering the increasingly thematic market of venture secondary aries. My guest is robby, this one often founder and managing partner of new view capital.

And robby was an ideal guest for this topic because his career has come full circle. Around this theme, he saw the initial market for venture secondaries while a golden sex post the dot com fall out. And nearly two decades later, his fun new view uses venture secondary aries as a key piece of their overall investing strategy.

They have been at this for six years, so it's not new to them. In the conversation, I wanted to cover some of the basics around these transactions because so much of private markets are the spoke. And while robi confirmed the bespoke nature makes each individual secondary deal unique, there are some consistencies in terms of how they approach the opportunity.

We also get into the various players in the market and their motivations with both buying and selling, whether it's the VC seller, founder employee sellers, the VC buyers and this all before we get into the idea that founders might not be selling anything, the business might not be receiving any proceeds, but there are existing investors are selling. So there's a lot of interesting dynamics when IT goes into these transactions might take away here is that there are certainly of a cyclical element of what happening post the funding move earlier of this decade. But robby lays out the structural dynamics, which are likely to make this a larger and larger market well into the future.

I think as we've already seen, I hope you enjoy this episode and is always feel free to share feedback, particularly on these thematic discussions we always enjoy. IT are at roby, excited to have you here to talk about something thematic at something that I hear discussed, but you're the right person to actually cover this topic and exactly what's going on in this market. And that is the secondary transaction within the private markets, particularly around venture capital and some of these early stage businesses or middle stage businesses.

So to kick us off were going to go deep into the theme and everything happen around IT. But I thought we would just start out simple, just laying out what is actually happening in one of these secondary transactions. However, you want to lay that out the most simple terms to set the stage would be great.

Yeah, thank you. Not going to be here. I would say just in a second ary ary transaction where IT started a venture, bak startups, which have extensive capital. Les, these are privately held companies of these. These are liquid investment.

So what really happens is within that cap table, the first step is there's an intention to sell on behalf of someone that someone could be an Angel, could be an individual, could be an employee, could be an x employee, be institution. So there's an intention to sell, and you will talk about this, but that has been a significant shift in this behavior in the last six years. That intention to cells really exploded because of this need for D.

P. I. And the part of institutions and liquidity in the part of individuals. Institutions after that intention to sell IT really goes a number of ways for individuals that can go several channels, that can go broker channel.

They can go straight to the C E, O or the mature team, and same with institutions. And so that is the part that is told developing and that there is an ecosystem building. And then beyond that, sometimes it's a process to attach to primary refinancing.

Sometimes it's a one off. Many times it's a one off. And historically, it's actually been very difficult talk about this because of the there's not a lot of information for the buyers you have to get around that. And then once there's a buyer and seller that have identified each other in the Price to make sense, you still have some steps to go through those transfers, actions, information restrictions and then ultimately, you can get through that. That's when you concentrate .

the transaction. And I refuse before you're the right person to talk about this theme, lay that out. There's been a lot of people that have brought this up recently.

Many of the things that you mentioned just in terms of the dynamics within venture funds, just liquidity dynamics in general. But this isn't you just coming to this team today. You've been around IT. So cover a little bit about what you've done and how .

you've been involved. Yeah, I started in january two thousand as a VC started golden sex. That's an interesting time. And that time actually helped shaped some of the things going to talk about in this focus that we and I have on metro secondaries started in the group that didn't a lot of different things did, investing in companies in funds in secondary. And as there for four years, that period was post the dot com crash.

And whenever there's a downturn directly following that downturn, which were in right now, there is a liquidity desert, a thirst for liquidity. Have you want to call IT? And so my time they are actually spent learning venture secondaries.

IT was very much our color of backwater, just very cent market h it's about two horses among to bigger now. And so I started my career investing in technology companies with the a focus on second because of the market. And then I was spent fifteen years at na, were invested in at a Price offer and pinch can really didn't really think about the secondary market.

But then as we went through this transaction to to spin off from any a, that's when I got reacquainted, Frankly. And the problem statement, there are certain aspects that were similar. There was still very much a stigma, still very much not really well regarded, even well understood. The difference, obviously, just the scale has been two hours of montane bigger.

It's interesting to see how your career has come full circle here. I am curious in that post doc com era, what did the buyer base look like in terms of these secondary transactions where they are dedicated funds? Was that a thing at the time? Just a little bit about that moment in time because I think unique perspective that we would would otherwise get.

Yeah, I mean, back then, there was really nicer. There were secondary funds, but you eft to understand, when you think about secondaries is vastly P E N. bio.

To give you a sense, the fund IT was a the first fund of my firm, golden think. He was a four hundred and forty million fund. I think now the raising funds that are in the tens of billions, but IT was very much the practitioners were really the P E.

Of financial services firms or the private equity firms or these funded funds or these institutions that had an allocation venture. So the practitioners weren't really be, and there was a lot of information. He similarly understand the businesses or tough, and the sellar dynamic was also very different.

There was a lot of folks jumping in in the predator are thinking venture is a fast way to make a lot of money quickly and then realizing IT isn't and they needed liquidity. So IT was a lot more voluntary back then, very much in the very early innings. It's institutionalize quite a bit since then, but the venture share will talk about is still single. The digit percent of the overall secondaries market that's growing rapidly but is developing very much in this environment.

And when you think about some of the drivers of the shift, maybe we can dive into some of those a bit more. One of the things that immediately comes to my mind having history in the public markets is you see companies taking longer to IPO.

How much does that play a role? Are those the types of companies that you're seeing transact in this market? Would you say that's where there's a lot of opportunities? And just we'll start with that dynamic as one thing. How would you place that in the overall spectrum of themes in this?

Yeah, I think that's a fundamental theme and a fundamental driver of this shift. So six years ago, and I spent out, I think, the tally for the gisle tion period, ture bak companies, maybe eight to ten years, five years earlier, was sixty eight years. Now it's told to fourteen years companies are staying private longer. I think that's one there. Several other drivers.

I think this whole power law dynamic, which really has been a driver venture of last five decades, Frankly, and is one of the most beautiful aspects of that, which is in hunt for that, make a unicorn, whether it's a google or facebook, you invest a lot of company is you have a high loss ratio, but you have this top five to ten percent pay for sixty, eighty person of the returns. That power log dynamic, coupled with company is staying private longer. Couple with this massive growth in the VC asset class that we've all witness, certainly up until twenty twenty one, really has resulted in this portfolio blow issue across all adventure and then that there's been this burning need for more, more liquidity.

This downturn has really accelerated that. It's all of these things. And when you talk about the sellers is really it's not necessarily the companies, it's the funds that need liquidity.

And when you have companies that are staying private twelve, fourteen years and then you dove tail that with the size or the length of adventure foundation, ally, ten years. And even with the ten years, you have a three, four year investment period, right? Next investment period, you just do the math that just read me takes.

So you have a many, many funds that are near eight, nine, ten. You have companies are just starting to get going right. And so that liquidity, some structural in terms of heavy funds are architected. But a lot of this has been coming together and is really starting to accelerate.

And in terms of that dynamic and then thinking about pricing in this market, I think what I hear most frequently now is you've seen these incredibly high valuations through this recent period. Those do not necessary mirror reality. We need to see some type of base adjustment is IT typical to see discounts when you're doing these transactions. Is there any type of general pricing methodology that you would say tends to be the case when you're seeing these things transact?

I think you'll care me might talk a lot about analogies to private equity, how you think about this and this whole idea of discounts actually emerged from the private act, where private actor, secondary aries, there are really apples to apples. And you think about these companies, yeah, there are different companies. Obviously, eba margin and the multiples, they trade that.

So company x and company, why? But largely fungible when you go adventures, its vast ally, different, different sectors. Different profiles, different times when they raise rounds in different valuation.

So we actually think, well, secondary have been driven by discounts. We actually believe that's not the right way to think about. We actually have a peace call, the falling of discounts where we think that's really tied to a number that, that number really doesn't have any basis.

It's just that number is last round, which is whatever an investor was willing to pay for that asset. We really think of morning and trinity c value. What is the right Price given all the metrics growth, but a lot of other efficiency matrix that we would be willing to pay, they can support a return for our restaurant, obviously.

So that's how we're thinking about. So I can show you companies that are we bought at par or five percent discount that are much high quality than companies. There are fifty percent. Unless you have the number, you're going off to be a consistent number, you really doesn't hold you. Now a lot of times are intrinsic value doa pute evaluation, which many times is a discount first in this environment and we go with at that way versus a discount first approach.

And when you think about the cellars you mentioned, there's different categories of cellars here. You can have those within the business, then you can have the venture funds. Do you notice more Price sensitivity from one group versus the other when IT comes to discounts and pricing?

Yeah, I think that as this market has evolved, especially in last few years, in this whole need for liquidity, the other dynamic, as we all know, is a lot of funds are coming off this run up until twenty twenty one libraries, bigger and bigger funds invested, probably big Prices when you have a liquidity crunch, also have fund raising issue. The bid spread, if you will, is probably greater when you deal with V, C.

Firms because of the mark downs that they would have to deal with and then with individuals and use a lot of times, those folks don't not have a cost basis with which they have to market against, just they need liquidity. But I will say that certainly in the last twelve, eighteen months, the tenor of the has shifted pretty dramatically for us even with these V C firms or they're realizing the structural shift that we keep talking about. That's fundamental.

It's not we wait for IPO and emini that a drop in the bucket if you look at the numbers. So we have to think about other ways and actually, let's become Better fund managers. Again, an analogy from the P E.

Firms because they actually do fund manager pretty well. We become Better fund managers and look at our perfelly and see where we can get liquidity and use that as the guide post. And then if that means we have to sell at a Price, were not excited about that, okay.

But guess what? We also can control how much of the company we sell. That's another thing we work with in terms of our flexible capital approach to investing.

And when you're stepping in to one of these transactions involved with the business, often times venture capital funds, there is a lot of involved with the businesses are early stage businesses. They look for that guidance in that assistance. How does that play a factor here, if at all?

I think IT plays a huge factor that another tenant of new we started as we also saw this explosion of we call IT high velocity private deal making or high velocity private stock picking in when I entered the business and certainly when I learned the ARM craft of venture capital company building, IT was exactly that company building.

And so day one now day one, we had thirty one companies we had to care and feet for, right? So day one, we had this Operational value at approach. Again, another page of the P E playbook, where it's really going pretty deep into these companies in helping them, I would say episode, if you're helping them continuously, doubly something wrong with the company of the manager team, but really going in eod ally, but going in deep, that has provided a lot of positive collator.

One is you just get much closer to the manager team, you can help influence the outcome. Two, in the secondary deals, a lot of times, it's not just the buyer and seller for the buyer getting to a Price that we like. There's, as i'd mention, information issues, transfer restrictions.

And so when you really can show you can be a value additive investor or value added replacement on the captain, C, E O actually many times becomes our biggest champion, and a lot of times being A B, C. For this long, we usually know some of not all the board member. So all of that is really important because the one of the thing that we think about is we think about this is a strategic approach on a transaction, the transaction approach, which some kind firms do, that's more the trading mentality.

They're trying to see where they can get something. And so our porch is very different. IT also double tails nicely with increasingly, C, E, S really do want control over the captive or at least they want to know who's going to come in. And so our approach of being value added, of being flexible, getting close with the major team in the boards, that's been super helpful in those in situations where we get in whether to primary or secondary, and we become a lot of time to secondary buyer of choice. So that's been helpful.

And I often corporate the impact one can have to the percentage, the business or where they rank in the captain. Does that tend to be the case here? And is there a minimum threshold that you think without owning this percent? I just know I want to be able to have that same impact. Is there anything different about doing a secondary transaction then how I would think about in .

the primary market, obviously, a lot of the old city of much bigger ownership percentages, they have board seats. So when we think about that, we seek influence, not control. The way we seek influence is actually very non linearly collator with our ownership. And how we do that is, again, this building relation is Operational value ad and becoming a true partner where they want us on the cap table. And so we're able to influence very asymptotically to our ownership and that is different that that's how we've architected the firm is very intentional and that is different from conventional wisdom where a kind of correlates your point on ownership, board representation. And we've kind of turn that on its side because I think for the most part, even the situation, we don't have body, we have a very close relation because that's important for us if for no other reason, even as a for do here, making sure that we know it's going on, the company can help and add value. It's providing to have a lot of other benefits in terms of being able to get more shares or get more ownership into the company.

And you've eluted to the chAllenges with transacting. Some of those are informational related, but I imagine there's just just also the transfer process, the legal coordination. Can you just tell me if the twenty eighth fund on the captain is selling their stake to you who actually needs to sign off on that, whether it's the company, other investors, anyone else to make that transaction happen?

Yeah, I mean, I went through a significant exercise with this in buying thirty one companies a day, one for when we started new you. And the short answer to a question that is that depends every companion's dog is different. Some of them, there's roofer, right, of first refusal wear.

If you're buying chairs, other folks in the captain can buy them. There's cost sales. There's selling the other folks and sells.

So you really is company, my company. That's why I think this market has been harder to crack then in the P E. World because it's not just knowing and liking a company and going after even enough to agree on a Price.

All these veeps of IT that we've had having done IT for six years and significant number of transactions in dollar violent, we've gotten to be quite well versed in IT. But a lot of times, IT really is what are the transfer restrictions. And that's why, again, IT all goes back to the company.

Once you have buying from the company, that team has been great in helping us navigate through. And sometimes because these are high quality companies, we compete with the focus on the captain. And so a lot of time in alliance with them to say, you know what, we want to get some chairs, but to some of the existing folks, and that's when you really looked to the manager team to help us navigate through that.

It's interesting in how many different worlds standardization creates the opportunity for scale. At the same time, when you don't have send dizon, there's a lot of opportunity for the investors. And doing the work can lead to a lot of the interesting outcomes.

When you're thinking about these businesses, as you mentioned, a lot of these are good companies. Maybe they're not the power law businesses. I would imagine that some of them would still need potentially capital in the future or might not have hit that stage where they're generating cash flows.

Do you ever consider putting in primary capital? Does that happen often? What does that look like? Because I would imagine sometimes you're seeing these sales and IT might not be the best businesses. They might be OK. How does that .

work is a great way to think about the power law. Really the top to with five or ten percent those who wanted to make the funds. But there and we call the next twenty, which are really high quality businesses, this need may be a little bit more time.

They may not return the fund, but they're really high quality. This is and that's a lot times we tark. We also find that they make sense for us terms of business model.

I think that a lot of these companies IT could be just where they were invested in the live cycle of that fund. So is nothing to do with them. A lot of these could be that the lead partner or G, P, has left the firm talk about this, a massive generational transition and venture happening.

That's an opportunities. well. So it's not necessarily the fault at all, just not the right. And that was the case when the spout. It's just not the right home anymore. And so you can give liquidity to the V, C, and they can make a return and you can take IT for and the primary business for us, we do do primaries. And for us, that's been our legacy history that done that for twenty five years.

That just puts us in a different category or just viewed more as VC that have a significant secondary angle or secondary approach and that helped us with overcoming the information issues and the transnational, all the things we just talked about. So I think that primary business. Has been a real excEllent meaning we have situations we start with the primary and then do a secondary.

We have situations where we do both concurrently with situations. We build a position, a very small check and then build a position. And this business is hard enough to make outsize returns. So having that flexible approach to even deploying capital and constructing portfolio has been very powerful for us.

And on the informational side, I think when you are investing in primary, that business is going to see those dollars in their pockets. Obviously, if the secondary transactions are coming from a management team is a little bit different. But if it's a fun of fun transaction, there is certain amount of information, which I assume you can get access to be a data room.

But I would imagine getting time with the management team if it's not ultimately gna impact them directly, an obvious way, obviously, provide the support down the line. How have you bridge that gap? Or how have you found ways to close the gap in terms of information of availability and what's ready, a very information scarce market to begin with?

inventive. We've actually taken that chAllenge made into the opportunity in the following ways. First, I mean, data room.

Many of these deals don't even have a data and facilitating a secondary between of this shareholder or institution or individual. So aged that is irrelevant. But this again begins with this Operational value.

But another part of our strategy is, i'd say, ninety percent as what we do is highly thermax and a Price of erin fin tech, which is basically what are done my whole career. And we have Operators on the team that are partners that are having practitioners go to market person, a finance person, a product person. So we go and we build a relationship sometime to take three, six, nine, twelve months.

They see our value add that opens a communal for them to share more with adding value, adding value, not just an intro here and there, but helping to place people where founders would say, this is real value. Helping me build my team and build my go to market team as an example, is really powerful for me. That relationship builds over time such that we figure out what's the best way into this company.

And we have added value without even being on the capital. That's a risk to us. Obviously, we value without in capable, and that is probably the biggest determined that they realized.

Okay, there are even in the captain now trying to be help for also functions, just we try to be a scrappy firm and really act more like a started in our cadets and approach. But that's been one of the main reasons why the information is timely. We've been able to largely overcome.

And with these transactions, I know there's been several businesses that have emerged over the past few years that specialized in, in this. And I think some of them tend to target more of the retail investor. So are high networks, but not necessarily having much exposure to venture.

Now that seems like the banks are also getting involved with some of the larger transactions to use yourself. See most of these happening through these intermediaries. Are there many direct cells where there's a direct relationship with the business? How is that trended over time? And you have a view on where that goes in the future that be interesting to know as well.

Yeah, for sure. I think you're write. The market has really taken off.

If you look at the secondary market in the last ten years, it's grown from about forty billion, about one hundred and fifty thousand, three half X A O, thirteen percent cag. That's secondary. Aries, the venture peace has grown two ways.

IT has been a very small percentage called a loaded single digit ten years ago to now high single digit low teens. And that has grown from a three to about twenty billion that has grown more like twenty to twenty five percent. So you're seeing the cage over last this decade.

So those two growth levers, one, the broader secondary market is going to continue to grow as we talked about this liquidity issue. And second, the venture share of the pie is also going to expand. So that's gonna double when me positively for this market.

And with that, there's been an emergence of a lot of these brokers. I think that they play a role in the industry. There is a view by a lot of the C E, O S that when you go through the broker channel, they lose control over who goes in their captain.

And so if we get back to earlier in the conversation that they really do want control because what they don't want, someone they don't know in the captain that this may trade out the nl gy is, as you know, from the public markets, when a venture back company goes public, they really want longer term holders of the stock because that's onna just help with stability of the stock and the market value of the business. It's no different invention. A lot of these for us are very much direct now.

They could be company driven. They could also be G P driven. When we're buying from G P S became, we transacted close to about ten G P in last six years since inception. It's A G P that needs liquidity, either for a fundraiser, some other may be to bend with a capacity issue.

And we go through them and we identify a bunch companies and then invariably, because we are so sthetic tic will know a lot of those company, so becomes both. But that's been really important. But I do think, to your point, this market has a lot of likes for IT to grow.

We think that even the venture piece can be a hundred billion dollars PPT anything in the private market. Your time scale have to be five, ten years. But if you just look at the last ten years, it's actually accelerating. There's no reason to believe that IT couldn't be a significant market down the road.

It's an interesting time frame that you provide because ten years obviously extends well beyond code. And there would be a natural question of, well, how much of this is cyclical, where things were Priced at peak. And if you're seeing the slow down, maybe that's steel link a lot of the growth IT seems like this has been a secular or structural change that's LED to the growth. And did you see any major Spikes in the years? There are a lot of volatility in the number of deals or transaction secondary transactions that are done, particularly in the venture market.

Yeah, I actually think IT hasn't been a structural issue for many years. The reason for that is that just hasn't been a problem that they ve been focused on. There have been as the V C ecosystem. I think that the growth of the asset class in the fact that there were some ipos and the fact that there were such a reliance on ipos, not IPO in emini, this has not been the structural. And following the last two downturns in o one N O E O nine IT, just there's been a point time where there's been some interest.

It's gotten structural because of all the things we talked about, the power law, the growth in the asset class, the generational change adventure talent management we am talking about private twenty fourteen years, you get a lot of employees would like to see some liquidity. So I think that they're all these factors that we think it's now become a real structural opportunity and a structural problem. And the volatility you could see, if you look at the curve, certainly in the last twelve, eighteen months has been a pretty significant Spike.

And that, I think, is just by nature of the fact that IT corals would have abot. The downturn took shape. You remember twenty, twenty one was just as massively. And then you just look at exit liquidity the last ten quarters.

If you look at the curve, and you know this curve Better than I do, it's like ling off a Cliff following twenty twenty one that correlate with this explosion in interest and venture secondary aries, because of all the new liquidity and also the planning that a lot of individuals, inventor firms did in twenty twenty one, saying, you know what, we're going to go twenty two, twenty three years. We all know that obviously hasn't happened. So I say a point time Spike.

And people can argue, well, this is still maybe cyclically because of the next two, three years until maybe the markets come back. We think that this is structural because if you look at the venture overhand, we're talking close to four trillion. If you look at how much goes out of the system of year, a few hundred billion, and if you look at the number of companies, fifty six thousand, and the number to go out every year less than three thousand, how are you doing out of fifteen to twenty years back lock? So our view is that down the road, it'll be I P, O.

It'll be emma. You could be couple of into a strategic amino and financial sponsor, mina and secondary, and then borrows up another page. The p playbook is a whole sponsor sponsor deal.

So what we've done is we ve done a lot of venture sponsor to venture sponsor of being the buyers. And as you know, that's been happening in buyout wan for decades. That has not really taken off venture. I think that is gonna a new significant, rich vein of liquidity for a lot of these firms.

Yeah, was a question I had ready for the future. I think it's always interesting when you cds ecosystems mature and whether IT is the sponsor relationships with private credit or the sponsor to sponsor P E transactions. There's funny way of as these markets get bigger and bigger, there's little niches es that are created and these transactions become more and more common. I want to get into the bio mentality a bit more.

I think you reference a few things when you're thinking about entering one of these positions and you talk a little bit about the exit potentially being IPO, another secondary cell, something else M A activity can you walk through? Is your time horizon? Does that look much different than what you would say a traditional fund? Was the reset the clock and go back to the theoretical ten year time frame? Or anything else that you would point to as IT gets into as a buyer what you're looking for?

Yeah, I think our approach really, we are venture growth investors that just do along secondary. So you think about traditional venture growth equity, it's been four to six year time for rise in these are later stage businesses. certainly.

Could they be more than that lesson that, yes, it's certainly sooner than a traditional early stage bc. So our exit horizon probably approximates, I trained old guard. Growth form.

I think a lot of the growth firms now they have just come earlier, earlier because what of the valuation issues we've overcome the evaluation issues because of our secondary piece. But that's really how we think about time horizons for our business. And just in six years of our c investing, lot of companies and we ve been fortunate, have a bunch of distributions and realizations. IP strategy financial center. And when thinking .

about the variety of different options, the financial sponsor, M A, to hear that, that already been an exit example. So there's president for IT. When you think through those three options, are there any that are massively preferable to the others as you think through them?

Since the dawn of time and venture capital, the IPO has been the preferred approach. I think certainly taking companies public, that's always exciting. The one thing that people don't understand is you take a public and then you're probably another one three years getting position, lock up and concentration of the things.

I think that IT depends on the deal. But traditionally, sponsors have paid a lower multiple for deals and strategic, and a lot of times that also correlated with growth rates. That's why this intrinsic value piece is so critical for us.

We think about IT. So we're happy to look at business is a grow a hundred percent y to look at business a group thirty, forty percent. It's just that pricing this can be different. And that also call dates with the I P, O market and the M N A market.

So I will say that I think for folks said expect the twenty twenty one days of I P was getting Price twenty thirty x and those are likely not going to happen for the foreseeable l future. And you just have to look at empirical le data. We just look at a lot of the major tech I P O S in the last eighteen months since since this correction.

You is Better than I do. The public market still love venture, still love growth. They're just not gna pay twenty x know i'll pay eight x or ten x and then look, by the way, it's up to the businesses once for public, if they can beats raise, beaten raise and continue that growth, they can really go up.

If you look at the top ten SaaS multiples, which your core later or both, you're getting into fifteen to twenty x revenue. So that is possible, but it's much more a prove IT and show me which long term and how has been except for some of these pockets, I think that's how we should be. But I think for us really depends on the business. We think about the exits and what the right hole is for these companies.

Yeah, and you've reference throughout the conversation this idea of the power law and these major winners in the industry, which I think there's been so much focus there and I think it's trickle down into how some people Operate their businesses. And maybe that is on the back of guidance from venture funds. We want you to fuel growth.

We saw a little bit of an adjustment where there was a bit more focused on cash flow through the recent downturn when you're stepping in to these companies and starting to work with them, where do you sense the mentality is in terms of growth, cash flow, focus, some of those dynamics. Does there need to be this reset? And almost a question about the industry broadly, do you think there's been an adjustment versus where we were shuffler ago when, again, interest rates, the capital is coming at the track of rates and things are a little bit different now.

Where do we stand today there? No one loves a downturn, but there's a lot of positive aspects of a downturn and and it's happened or one that happen not to happen twenty two, which is VS telling the orfully companies this growth at all costs just isn't going to work and really returning to profitability and really looking at rule author, which is the growth three post Operating margin.

And we've been that way in the inception because we're much more efficiency base growth proponents versus capital base gross capital base growth is you know great interest ate environment, but even then has its laws because I can mask product market fit, just dump in cash for us. It's looking at not just growth, but the eight to ten metro to below IT that really look at every dollar that you invest. What are you getting back? So I think that's very, very healthy and the people are getting back to now.

Do we still meet the company once now they still think it's twenty, twenty one for sure. But in large, I think, by the way, this is on the board as much as on the management us. The VC need to really make sure that we're not giving bad advice.

And there's a lot of VS that talk about other VS not giving great voice, but it's really getting back to this rule forty. But the nuance is growth and profitability are not created equal. If you look at there's lots of reports that have gone publish, its like a tune to have to one type, that's the best correlation.

So a dollar of growth is worth more than a dollar profitability, meaning a rural of forty business is growing thirty percent with ten percent margins going to be far more valuable than a 2。 You can extrapolate that instance, you're growing sixty percent. And just in cash, I think the market will punish you for that.

So I actually think that's a very healthy trend. The cynics could say, okay, once you get back into the gogogo days of robust appeals, will that start to falter? Maybe I think i'm hopeful that these lessons will burn in more into this group. I also think when that really happens is when there's free flow L P. Capital, I just don't see that happening for a while.

yes. And when I think of something having a bit more efficiency, I think of that is being a natural selling opportunity to strategically, does that also change the dynamics? Do you view companies in this market as up this still has a ton of growth runway that's potential IPO candidate.

This is maybe a little bit more tapped out the the total market size that we thought they might have, maybe a little bit smaller. That makes IT more of an attractive potential for reva. I guess, how much are you thinking about the exit strategy upon entrance, if at all?

Yeah, I think it's a great question. I think we for sure think about the exit strategy. I think that generally speaking, many of the businesses, if you are going to company building in for a sale to a strategic or a sponsor, you are just limiting your appeal.

And so for us, we just look at the fundamentals of the business. If IT has really strong product market fit as empirically evidenced by the net dollar retention in turn, and some of those are good predictors of that. And it's growing well and it's growing efficiently.

Those are just great businesses. And if you pay a reasonable Price for them, we really don't even think about the exit. We just think about the point time all of these good businesses with all the prospects and we've getting in now, what's happened last years, great businesses have become media c investments because with the flow of capital, the pricing just doesn't make sense.

We all know that fifty to one hundred x err club that were formed, I say twenty to twenty twenty one. If we think about the physics of a business, the durability, that's why we look at the metrics just below the revenue growth line as well. That gives us comfort that whatever happens, if they continue, they will have a very high quality outcome that we can be proud of to deliver back to our alpes.

And I should have, as this earlier, is there a valuation range? I think you mention there's the top twenty companies you might have. You mentioned top ten, and then it's that next batch, which is most intriguing, is that tend to fall into a certain valuation range, just size IT mentally.

Yeah, I think that notional valuation is up because the revenue and growth rates are so vasily different. We've done deals that double ledge evaluations of billion evaluation, but the scale has been quite a little different. I think the unifying feature fruit, just the multiple, your pain, based on the growth rate.

So this top five percent of power law hearings, the'd really were the ones that got traded, fifty, two hundred X, A, R. Now there some of our such scale not trading at that level, but there's trading at massive multiple premiums. And for us, that next twenty there shall growing massive they're significant businesses, but the ability to get them at a reasonable Price and where is that reasonable Price?

Is that our growth that you could be eight x or could be twelve to fifteen next, whatever IT is, that's how we think about IT more. And then that will come to range. Now our second there is peace generally.

They are later stage called hundred million and above. And so you can just do them up in terms of based on the growth rates and even hundred million businesses still want help to usually go to market acceleration or something. And so that's where we can find our sweets by. I know these companies are still get in and be a good on the G.

P to G P relationship side of things. I found IT very interesting to see how tight these relationships are in the private equity world. Again, IT can be sponsor sponsor sales or the equity credit relationships between the providers.

Where do you think we are? Is that still very early innings? You suggest that you have those relationships, but how big could that ecosystem be? Because to me, IT is very interesting when you find the businesses that work really well together and they cannot only bit of each other, but it's what creates the scale for a bucket.

Yeah, let me answer in a certain way and then i'll talk about a speed bump. I think it's A I think if P E has as relation based ventures, I think far greater, I think just in twenty five years in venture. And there's a lot of books right about that.

But IT was is and we'll be very much a relation business. And I think that's really powerful, and I think that's gona be for us. That's been the number one determined when we work with A G P by their companies, have a relation with them.

It's not view as a trade or a transaction of views of partnership. Every time we do something with a fun, they want to come back to the repeat buying element is really important. So I think that's really fundamental to venture.

And that's why I think this could be they start dissolving these artificial views that IT has to be, I pure bus, and that's already happening. The stigma start to really evaporates. Then you can see an ecosystem where we actually a really great investors chasing power law, but also being great fund manager, right?

The speed bump, I think what happened a few years ago is used to have the food chain, the seed folks will will take up their companies to the series a. And then you have the evolution of man type analogy. What happened? Will series a folks started raising growth funds and the growth folks started raising early on? The elbow started getting sharpened for a few years and plex massive flex ross over.

So that was a speed bump night. It's a speed bump er of brick wall depending on how you think about. I'm still optimistic. I think that we're getting back into probably it's gonna more back to basics and the relationship peace is still gonna really, really important. That's why I think the venture sponsor adventure sponsor market could just be massive going forward.

Yeah, some of those cross over folks might be good secondary sellers based on the timing that they had.

I and many of I try do yes.

it's very interesting to think about that market. You have a preference. My assumption would be if they were selling a portion of their stake, but do you care much whether that venture fund is selling their entire stake versus only selling you a portion, therefore keeping some exposure to the business? How much is that player role?

I think that's directly correlated with the a level of information asynch we perceive. We have not being in the capable. You don't have one hundred percent information symmetry. So you're always coming from outside in.

But most of the time, we really that these companies and we try to get a sense for what their motivation is when our push because it's a partnership with these GPS and sometimes six monger, which is we're fine with, by the way, we get a sense for what they're solving for. And that helps us. That helps.

And so when IT becomes a partnership, you really get a sense and the earnings of new view five, six years ago, where their conversations were so clear than fifteen minutes that the G P. Was just trying to offload the less proceed assets. And I say this my hell, at the highest Price, sure, but those we can set out with entity months.

Now there's different conversations, I will say, which is very healthy and more indifferent. Sometimes they need to unload a big chunk, not just for the D P. I, but because of the board law.

And so just trying to understand that. But buying large IT is a tug of war in terms of hax, they want to sell in what Price. And I think this a very .

healthy dynamic at any given moment, particularly from the secondary side of things. How many companies are in your pipeline? Lets say you can be just the opportunity to cross your desk and how does that look today versus, lets say, five years ago or pick whatever arbitrary date back in time you want to to go? I'm just wondered you how many these conversations are actively going on?

Yeah I mean, we use an orator day, which is not an array a of six years, which cross six years and over three, by the way, is also great because the market has evolved significantly. We've evolved significantly as well. So i'd say in the last year, the deals we've done, it's at least from buying from GPS, it's conversations over for forty G P.

So it's pretty significant numbering into the thousands of companies. And what helps us is our thematic approach, and that's been a huge acceleration from six years ago. Now just how quickly we can dow select to these are the companies and funds that were interested in, and that just makes us a lot more productive conversations with these G.

P. S. We also have a target list because of authentic approach.

So we go after and those a long times will be competing with assigned the capable participants, investors in the capable. And we think that's a very healthy dynamic. Anyway, those conversations are numbering significantly.

The other big shift is six years ago, I would call IT in software speak an evAngelical sale. A lot of us, us educating the other G, P, S about what we just did with the spinal now is vastly different. The stigma has evaporated or evaporating.

And now we get a lot of inbound of folks saying, you know, we're thinking about doing something to talk to you. And so those are very productive conversations. And a lot of times, it's just educational and they go away.

They want do something. And then we've also had focus have done that on numerous ocasio. And six months later, twelve months later, they come back. We are all in on this market opportunity, obviously think it's massive. We're playing the long game, and long game will be a lot of relationship seating and working with them and then seeing what comes out of IT.

One of the things I might not have appreciated, but you mentioned, talk to forty GPS. Look at a thousand companies. Is this the situation where A G P conversation consist of this is the specific fund that we're looking to generate some D, P.

iron. And here is the list of companies. I know i'm probably simplifying IT way too much, but is that really how the start of some of these conversations can go?

Yeah, a lot of times they generally we've actually had all the above because we've had so many conversations. But I say a typical one is they have a point of view on its usually they're fund one or fun to the raising fund five, six, seven such fund one or fun two has been great T, V, P, I, but very little D, P, I. That's the starting point.

And then our approach is heavy creation. And so that will evolve to hear some companies are interested. But for some other companies, would you be interested in lighting your load there as part of this? And that evolves one way the other. And so that's why I think with this market, we actually think they'll be tougher to do. IT, in a transactional high value way is so much creation because are in individual companies, the way we know individual companies is of a company first approach to do diligence.

As we start to wine down, I want to get into some of the rist dynamics, which are fairly obvious with any individual transaction and a lot of the things that you reference. But one of the earliest points was just on the evolving misalignment between fund time horizon and the businesses life to IPO in that extending time horizon.

When you think about the risk to this opportunity closing up, are you seeing more venture funds extend that horizon? And obviously, you get very messed ve when you get fun. Three, to fund for sales or any that conflict to rise. But I felt like there was this really as well as you could alive capital that was meeting up with where that capital needed to go and that got thrown off track. Is that a risk that IT gets put back on track in the future?

I think there's always gonna call them short term fixes again, playing the long game. We just believe that those are short conflict is in long range. You just have to figure out how to exist.

These companies from your portfolio, they don't have to exit. That's another big chief. They just have to exit your portfolio.

They don't have to exhibit the public parks. They don't have to sell wholesale. So I think that, that is that sure.

Those we risen in risks in this business because we're investing in companies. We bear the risk of any venture backers, and these are high rises businesses. The product market fit, sustainability, the ability to execute managment issues, all of those things.

Again, spending time with these teams. That's another really powerful force for us. And then we're doing diligence or is this type of business type of entrepreneurs out der C E O that we get behind so we try to do our best and mitigating IT.

Um and I think another risk, you know, when you think about secondary long times will be buying common. That is a rest that is not there generally in the primary side. And we just have to act accordingly, whether have to think about pricing IT and many, these are later stage. We think that there isn't going to be an issue with the preferences stack, but bad is an additional risk that we bear. The secondary players that we've had to do with since inception as well.

And when you think about what you might be competing against in this market, I have you seen a lot of other funds pop up with dedicated efforts in a similar way to what you've done? And how much is out there when you think about IT and maybe you see in your conversation when you're having them? Yeah.

I think that what I would say is the macro o views of if we really believe is a hundred billion plus opportunity, then to be used to think there will be more entry. And I think there is more probably look and approximate more like we do just company first mental capitals that are trying to do this. In terms of the competition, as i'd mention, lot of the competition for these deals is capable, specific.

And some folks that are in the captain that like go, we agree with you that this is a great company. We want to own more. There are folks that have been in secondary for a long time.

There are also players. Some of them they do things are strips. They I think we don't do we don't do help secondaries and even the venture secondary players do a lot of that. That's just not a market we playing, so we don't see them. But I do think if you're trying to get into very high quality companies at reasonable Prices, IT would be foolished to not presuming is gonna competition. But it's different from us that saying early stage fund bench more competing with a korea and index and red point in such a for us, that really does its context specific and company specific. And so we've had to make sure that we we feel good about our differentiation and approach the C E O in the board that gets us in in there.

Out of curiosity, why haven't you don't L P secondaries?

I think that um part of this is you know we try to be a pretty focused farm. The runway we have in front of us is pretty massive. So we're bent on really proving at our model, and we've had six years and and really feel like on a great part of the market.

So that's why we haven't with L P S that are L P S, do a lot of that for the foreseeable future, were trying practice all the stuff we preach to our companies, focus an execute. And so we've got so much in front of us that we can go after that. We just kind of focused on that now.

Yeah, it's amazing and it's a thought ful process to make sure you're looking yourself in the beer as you have share the advice. I can fully appreciate that I know you mentioned that there's some domain expertise to what you're doing. There are individual industries that you're focused on.

Do you think the opportunity said really spends across the universe of industries? Obviously, I think your market, there's been a lot of funding, there's a lot of businesses there. So I think is from a size perspective, I imagine it's fairly right. But are there any things about other industries that don't translate to the same opportunity being there?

A great question. The first time for sure. I think that is the other. Let me take an extreme example, biotech. So in some of these deals where there's heavy capital risk and then sometimes the outcomes can be binary based on drugs being approved or not and in that can be risk with them.

I could I have my biotech B, C friends, means say, well, that's our job to Price that and risk manage that. So I would say significant able because then as a secondary player, you'd have to be sponsible for a significant of capital going forward. And I could be a business model.

But for us, we find that these two areas, by the way, there are pretty massive areas to begin with, and that's intentional. But I do think you'll see as this market, just like venture is vote, Frankly, where you get more and more specialist, I think you're going to see the same thing in the secondary side. Now I think in five, ten years, you could see sector specific or whatever specific type firms after opportunity because when you have this big an opportunity, even of IT or big lesh opportunities, that makes sense.

This has been a fascinating conversation then gotten to the detail that I was ultimately looking for. It's again, a pieces that I hear about. But to have somebody who's a practitioner and has some president to doing a of these transactions is very helpful.

We usually close our conversations out with the key lesson that stands out that you could apply elsewhere. I think it's a little bit different here. And maybe we can just pinpoint what you would identify as the key thing in this. This is that you think is most important to focus on. We can call IT a key lesson, but something that really just stands out to book in the conversation.

Yeah, I would say part of IT is not only my clear coming full circle, but also a venture capital coming full circle and really graduate to the next phase where all the things that have made a great the power law, resulting in the growth of the V C S. A class that is also resulted in the flip side of that coin, which is companies saying private, longer need for liquidity and then taking lessons from the e playbook, is really building venture into that next space where v firms can have their cake needed to that can graph for the parallel but also evolved degrade fund managers and new second areas as a sustainable solution to the structural issues that are affecting ting the industry. But I actually think an issue is just an opportunity that hasn't been attacked.

And that's how we think of IT has been an excEllent conversation. Robby, thank you very much for sharing the knowledge.

awesome. Thank you so much.

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We hope you enjoy the episode. Next, stay tuned for our conversation with kd elenora, head of investment Operations and portfolio administration, a geneve capital management. Kd gets into detail about her experience with today's sponsor ridge line and how SHE benefits the most from their offering. To learn more about ridge line, make sure to click .

the link in the show notes. K, to begin by just describing what IT is that you are focused on at geneva to make things work as well as they possibly can on the investment side.

I am the ahead of investment Operations and portfolio administration here at geneva capital, and my focus is on providing the best support for the firm, for the investment team.

He just describe what you need IT does.

We are an independent investment advisor, currently about over six billion and assets under management. We specialize in U. S. Small and mid cap growth stocks.

So you got some investors at the high and they want to buy and sell stuff, and you get all sorts of investors whose money i've collected in different ways as i'm sure everything in between. I'm interested in what are the errors of how you solve this chAllenge of building infrastructure for the investors.

We are using our previous provider for over thirty years. They've done very well for us. We had the entire sweet of products from a portfolio accounting to trade order management reporting.

The reconciliation features with been on our current system for thirty years, I didn't think that we would ever be able to switch to anything else. So IT wasn't even in my mind. And your head trader suggested that I meet with ridge line.

He got a call from nick, he who works with ridge line, and neither andy or I heard of ridge line. And I really did IT more as a favor to andy, not because I was really interested in meeting them. We just moved into our office.

We didn't have any furniture. We just move locations until I agree to meet with them. In the downstairs cafeteria, I thought, OK this, i'll be perfect for a short meeting and a sleep.

Patrick. I didn't even dress up. I was in jeans. I had my hair thrown up. I completely was doing this as a favor. I go downstairs in the cafeteria and I think i'm meeting with nick and in walks to other people with him, jack and eli. And I like now there's three of them.

One of my getting myself into really my intention was to make a quick and they started off right away by introducing their company, but who they were hiring, and that caught my attention. They were tty much, putting in place a dream team of technical experts to develop this whole software system, bringing in people from Charles river. And fact, bloomberg and I thought, how brilliant is that to bring in the best of the best? So then they started talking about this single source of data.

And I was like, what in the world? I couldn't even conceptualize that because i'm so used to all of these different systems in these different modules that sit on top of each other. And so I wanted to hear more about that.

As I was meeting with a lot of the other vendors, they always gave me this very high level sales pitch. Oh, transition to our company. It's gonna be so easy.

Accept a well, I knew thirty years of data was not going to be an easy transition. And so I like to give them chAllenging questions right away, which often times in most case is the other vendors couldn't even answer those details. So I thought, OK, i'm going to try the same approach with rich line.

And I asked them a question about our security mater file. And I was ally right away who answered my question with such expertise. And he knew right away that I was talking about these dot old securities and told me how they would solve for that.

So for the first time when I met rich line, IT was the first company that I walk back to my office and I made a note. I said, now this is a company to watch for. So we did go ahead.

And we renewed our contract for a couple of years with our vender. When they had merged in with a larger company, we had noticed a decrease in our service. I knew that we wanted Better service.

The same time, nick was keeping in touch with me and telling me updates with ridge line. So they invited me to base camp. And i'll tell you that that is where I really made up my mind with which direction I wanted to go.

And IT was then after I left that conference, where I felt that comfort in knowing that, okay, I think that these guys really could sell for something for the future. They were selling for all of the critical tasks that I needed completely intact, and impressed by everything that they had to offer. My three favorite aspects, obviously, IT is that single source data.

I would have to mention the A I capabilities yet to come client portal, that something that we haven't had before that's gonna further if make things efficient for our quarter and processing. But on the other side of IT, it's the fact that we've built these relationships with the rich line team, I mean, their experts or no longer just a number when we call service, they know who we are. They completely have our backs.

I knew that they were not gonna. Let us fail in this transition. We're able to now wish further than what we've ever been able to do before. Now we can really start thinking out of the box with where can we take this rich line is the entire package.

So when I was looking at other companies, they can only solve for part of what we had and part of what we needed bridge line is the entire package. And it's more than that in that, again, it's built for the entire firm and not just Operational. The original team has become family to us.