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mtc sem. carta peter walker | Otter.ai

mtc sem. carta peter walker

Angie.H Moon49min

Speaker 1

00:00

Your cell phones, please. I love it all right. So welcome to the first of our events for the trust center speaker series for the spring. Super excited to have you all here. We are all here to hear Peter Walker, who I will introduce in a moment. Before we jump into it, I want to give you a sense of what else you can expect from the Trust Center coming up. The next speaker series event is with Mitch Kapor. That is next week. We would love to see you there. That will be a phenomenal event. Already, tons of sign ups. And then the co founder and CEO of perplexity will be coming again. This one, tons of sign ups. It's all happening very quickly. We just announced these very excited to have you all join us. Additionally, delta V applications are opening. The deadline is coming up quickly. This is MIT's Capstone startup accelerator. We'd love to have you join us. Applications are on orbit. The deadline is March 17, at 5pm tons of companies have come through delta v, right? We've done a longitudinal study 10 years about those that have come through. 69% of those teams are still active or acquired five years later. 37% go into accelerators, and of course, so many of them successfully funded. 63% tons of examples of that here on the left side, students, just like yourselves. If you are a PG or postdoc, and you're interested in delta v, we do have this from lab to start up info session that you all are welcome to join and attend. And additionally, if you're an international student, we'd love to have you join this special international student delta V info sessions where we can give you more information and you can ask questions about what that process looks like. Lastly, on Pi Day, March 14, we'll be having an all day AMA, open office hours for anybody who's potentially interested in delta V come ask questions and get the help you need. Lastly, if you're an undergrad, spend the summer working in a startup with the Posen fellowship program. Wonderful opportunity for you all. And lastly, if you don't yet have co founders, we'd love to have you join us at the pitch to match program. That program is very short event. You get up there pitch for 60 seconds, up in front of hundreds of people here in this data center just across campus in building 32 so we'd love to have you join us for these but without further ado, I want to introduce Peter Walker, who's joined us. He's from San Francisco, works at Carta. Peter is somebody who has a deep background in data, and now has access to a massive treasure trove of data from Carta, the company where he works, where he is the head of insights. Peter has access to the data, to the cap table database for 45,000 private companies, mostly here in the US, I believe. And what he does is he takes that data, figures out how to tell stories with it, to help all of us as entrepreneurs to best understand how to think about equity, how to think about fundraising, to see what's happening out there in the market. There's tons of information out there that you can read about online, but the reality is, is that they're the ones with the source of the data, the company's actual cap tables that the founders and the investors are putting their information into. So Peter is going to share with you a whole hell of lot about what the stories are, what's happening out in the market, in the private capital company market, and we're very excited to have him here with us. So without further ado, here, welcome to MIT.

Unknown Speaker

03:32

Oh no, but I'm going to make it work. I'm

Unknown Speaker

03:36

actually going to worry. But

Speaker 1

03:40

that sounds good. No, you're good. I'm gonna steal your banking

Speaker 2

03:47

password over here. Much Is it better with a mic? Yes. Okay, cool, everyone. My name is Peter, as mentioned. I run the insights team at Carta, who's familiar with what carta is, all right. Skip my first 10 slides. I made that joke earlier. It works. I tried it again.

Unknown Speaker

04:11

Just click in,

Speaker 2

04:14

okay, all right. This is from our lawyers. Skip, if you want this. It is available to you. We can send it out afterwards. Peter.walker@carta.com There's no need to take pictures of the slides, but if you do so, you will feed my ego, and I appreciate that, so I'm happy for you to take pictures. Okay, we're going to talk a lot about this, the current state of venture backed startups in the US harden to know where that data comes from, as a data scientist myself, so we aggregated and anonymized this data from the 45,000 companies that are currently using carta to manage their cap table. To give you a sense of the split, about 15 to 16,000 of those are pre seed companies, meaning they have yet to raise from any VCs, the rest have raised at least some money for venture capitalists. We think that's 55% or so of all venture backed startups in the US. I know for a fact that we have 84% of current US unicorns on the platform. So fairly representative dataset as to what's going on in pension. We got data from price rounds, saints, convertibles, all sorts of stuff. And unless otherwise noted, we're talking about US companies here building an international company. Yes, most likely used Carta. Cool agenda today. Let's start with the thing that truly matters. If you are talking about venture backed startups, you have to start with this, the total amount of money raised by startups on carta every quarter since the beginning of 2018 the thing that stands out, I hope, because I put it in bright orange ish, is that the thing that was weird is not where we are today. The weird part, the aberration, was 2021 let's be honest. We got a little drunk in 2021 we did some silly things that perhaps we regret. $70 billion in funding to companies in a single quarter in q4 2021 low interest rates, zero interest rates. Pandemic surplus. The idea of pull forward for digital technologies. We all remember peloton. Soon we weren't going to have gyms anymore. All the gyms were going to be in our house. That same theory was represented across so many different startups then in the beginning of 2022 in the world, you look at that on a stage by state basis, this is the percent of capital invested versus q4, 2021, which was the peak. So it doesn't matter where you were. I mean, it was worse if you were close to IPO, but it doesn't matter where across the spectrum you were funding. Got way hard. Potentially many people, and many of them are VCs. Look at this chart and they get say, Oh, we returned to health. This was a good thing. They, of course, were the ones investing all the crazy money to say. But this is probably a little bit more healthy, though it isn't fun for anyone who got caught in that transition. So how many of you want to be founders? My favorite audience, okay, this is how long you're going to need to make that money last. So traditionally, in VC, they talk about this green zone that's 18 to 24 months. That's how long your money should last, quote, unquote, between venture maps. So I raised the seed round, and then I raised my series A two years later, 24 months later, and you can see that for a lot of this time period, that was actually pretty good advice. I don't like to give VCs credit too often, but that actually works these days. That's out of date companies in 2024 it took the median seed round had to last for 2.1 years between C and A, two and a half years and aie, between C's A and B. And that's the media right. There are a lot of companies that are having to make that cash last for 1000 days. If you had planned to make that cash last for 700 days, could you then tackle another 300 and stay in business, what would you have to do? You have to lay some people off. You have to cut software spend. You have to make significant changes to your business because you misallocated your capital. And that is what's happened to a lot of people. And founders today should take into consideration these new timelines, but for the ecosystem. So if you aggregate all of those extended time periods up for each individual startup, what does that mean for startups as a whole? The biggest thing that it means is that they are staying private far longer than they ever have. Used to be you might expect the companies with IPO between eight and 10 years after they were COVID. Now it's 12 or 13 or 15 years. What does that do if you're an investor? Typically, venture funds are raised on a 10 year timeline. If you promised LPS money package 10 years and it's going to take 15 they're going to be pissed. This is the underlying shift that has happened across much so what have these VCs been doing if they weren't investing into new companies as often for the last couple years? Well, it turns out from our data that they were actually continuing to invest through bridge rounds and extensions into companies they have already given money to to keep them alive that, I guess you could phrase it as altruistic from those VCs, though, of course, it wasn't. But in many cases, I'm here to tell you that this bridge round activity doesn't probably do anyone any good. It just extends the life cycle of an already dying company. That isn't always true. There are great examples of companies that just needed a bridge then they got back to growth. But what we see when we look at Bridges is we see people putting off hard decisions. So to take an example, in 2020, for the companies that did not raise a bridge round, but had raised a seed round, 66% of them got to series A for the ones that raised the price bridge. 33% ever got to series A for the ones that raised the bridge on a safe or note, 4% got to Series A. Now maybe some of you are thinking, maybe they just needed the bridge to become profit, and they don't need any more VC. That is a beautiful and optimistic thought, but it is 100% not true most of the time. So bridges in our definition, typically don't work

Unknown Speaker

10:51

most of the time.

Speaker 2

10:55

And of course, this is effectively the inversion of the chart we saw at the beginning, which was capital invested. This is the percent of all rounds that were down rounds, meaning the valuation actually fell from the prior round valuation. I could get up on my soapbox here and talk to you, how about down rounds are a good thing, and they're actually makes no sense in the world that we would be better at valuing private companies than we are at valuing Nvidia. But that doesn't really matter when you're talking about a part of the market that works on rumor and conversation. So a down round for a company. Ooh, did you hear ramp had to take down? Maybe they're not doing so well. Oh yeah, I heard their lead investor didn't even leave it down. Oh, man, screw ramp. They're probably screwed, right? That happens in venture all the time. Venture is a very small ecosystem, especially when you're talking about the mega funds, and they all talk to each other. So stigma attached to down rounds, I think there's misplaced, but is still real in the ecosystem. One in every five rounds on carta last year was a down round. That's really hard for founders. It's equally hard for employees, whose stock is probably now underwater.

Speaker 2

12:10

I like to end my first section on a that's depressing. This is kind of sucks. Team. For the last two years, venture capital startups have been really hard. But of course, we have a white knight coming to save us, and that is AI.

Unknown Speaker

12:29

We'll get to that, but I believe in a moment.

Speaker 2

12:34

Okay, so pre seed, let's talk about the earliest stage startups. We went over this a little bit for those of you that were in the class we were just in, but, um, this is another gigantic shift in what's happened to startups, how they grow at the earliest part of their life cycle. It used to be that you go to the valley, you'd have to have a real business, you'd have to have a functioning product, and you would get money from a VC, and they would stamp a valuation on your company, and you would give them a price per share. These days, you raise on a safe or a convertible note, so there's no valuation. There's no price per share. The investor is giving you money up front for the promise of equity. Whenever your company is big enough to actually value. It's actually a beautifully founder friendly instrument, the safe. It's come into vogue really in the last five years. The black line in this chart is safe, by the way, blue line is convertible notes. The only difference between them is, this one has an interest rate. This one doesn't. People don't like interest rates. Hence, there's conversion terms on a safe you know, how does this actually become real equity later on, we've got valuation caps and discounts, excuse me, discount only saves uncapped saves from your parents all that kind of stuff. But and then this is pretty imposed money, actually. Who on this chart can point to when Y Combinator where most people get their safe documents from? When did they take the pre money safe off of their website? Okay, right here, right so this is a, this is a chart that shows the type of fundraising that founders do, but it's also a chart that shows how much defaults matter in startups. Ton of startups, if they're not using Carta, or even if they're using Carta, will go to the Y Combinator website and just download documents from there. You simply remove one of those documents, and suddenly you change the way that people fundraise. Defaults really matter when it comes to starting fundraising. The question I always get asked, I am a founder, I'm starting a pre seed company. What should my valuation cap week. Right now, what we're seeing in the ecosystem is, if you're raising a million dollars, the median valuation cap on that business post money is 10 million a million raised on a 10 million cap means you just sold 10% of your business, even though nothing changed hands, really, except for the cash. Is that fair? Would you sell 10% of your business for a million bucks? Have strong nods and strong needs, good founder audience. But again, we'll go back to the Y Combinator example here. Oftentimes people talk about the valuation caps, and we get really, really deep in these numbers. And I'm here to tell you that the dilution is the thing that matters. YC invests on a safe that safe valuation cap is 1.7 8 million. You never hear 1.7 8 million associated with yc. You hear 500k for 7% it's the same math. They just don't talk about one part of it. They talk about dilution. You, as founders, should think about that illusion too. So it used to be you raise on price equity super early. Now you'll maybe stick around on safes until you're raising rounds that are two, $3 million in size. So you might stay on safes for a long time. Jump into price runs. And here we get to that white knight we spoke about before AI companies. How exciting. So AI is in the orange valuations. And this is, this is pre money valuation. This is cash raise. So again, what you would do is you would add the cash plus the pre money, and you get the post money valuation. That's the number that's always talked about in TechCrunch, etc. There is a gigantic gap opening up between AI companies and everybody else. So the median AI company on carta in 2024 was valued at $18 million pre money, the media non AI company was 13. It's a big gap. They raise more money at higher valuations. So everything that you read about AI companies is true. I have no opinion thus far on whether or not that's a bubble, and that actually makes sense, but I will tell you it's important for venture to always have a bubble. We need a hype cycle. It's what we do, and AI is definitely today's hype cycle remains to be seen whether or not it's justified or not justified. But of course, you all might be building very different businesses that use AI. You know, there's AI in boot, AI in biotech, there's AI in SaaS, all sorts of stuff. So each one of these bubbles is a seed stage industry. The further they are along the x axis, the more they are valued, the higher they are valued, and this is the more they raised in their seed round. So you can see there's typically a line. These bubbles float along this line of dilution, which is about 20% so if I sell 20% of my business that dictates the valuation and it dictates the amount of cash. These businesses are not very in favor with VCs right now you're thinking of building a DTC retail or a food or a personal product business. That's awesome. You should build it, just probably don't take venture capital for it. Warby Parker, all birds, etc. Those are relics of a different time in BC, if you are building a robotics company using AI, congrats. I just funded your business,

Unknown Speaker

18:10

good pitch

Speaker 2

18:15

series, a same thing. 50 million bucks if you're AI, 40 million if you're not and that gap is staying pretty large. Series B, same idea. The theme comes through in all of our data, which is, investors really care about AI. And before we go on, you might have a question, which is, what is an AI company? How did we define and I'm going to tell you something that you won't like we just asked, Are you an AI company and we trusted to tell us the truth? And many of them were liars, right? I'm sure that some of them were liars. But when it gets to the point of There are many kinds of ways to define AI, are you only an AI company if you are building your own model, if you're building a foundation of y company? Are you an AI company if the AI in your business is simply calling it on

Speaker 3

19:11

us? Yeah, but is there a difference between AI expert companies and AI power companies?

Speaker 2

19:18

There's no difference in this analysis, because we are not going to go and investigate all 45,000 those companies to what they're using. I will tell you that, based on what they're seeing, investors are valuing both kinds higher than non AI companies. In fact, when we talk to investors in the valley, they say it's been a while since we heard a pitch that didn't have AI. The question is, is AI on the front page of that pitch, or is AI in the tech stack? But AI is in all of these pitches. You can build a company that doesn't involve AI, but you better have a damn good story as to why you're not using it. And if you can make them believe that, and that's great, but most of them won't, but we didn't, or they'll ask you, why are you at least not automating some portion of your operations with

Speaker 2

20:15

AI? Now get to the fun stuff. How much are you as founders selling in these rounds? So the typical wisdom across venture is you're going to sell 20% in your seed round and 20% in your Series A. That's very true based on our data. AI, companies selling a little bit less, but generally, honestly, not, not a gigantic amount less, so 20% in your seed, 20% in your A, and then a decreasing amount, because obviously you're not going to sell 20% of a company that's already worth $2 billion at the late station.

Speaker 2

20:50

The really fun stuff, how much are you as founders, going to own in your business? So this data shows the percentage of the company owned by the founding team after the round is completed. So you raise a seed round. Great. You still own more than 50% of your business. Cool, everything's COVID setting. You raise a Series A round. The median founding team owns 36% of their own company after series A who is surprised by that? Raise your hand. Who thinks that's way too low? Screw those VCs right? Now, look, this is the world. Now, the point that I'm making is not that VCs own the other 64% right? Because you have employees as well. They own a part of it. The point is that founder dilution gets really big really fast, so you better be growing fast enough in valuation to outweigh the dilution that you're taking on. Basically what I should have said at the top, don't take venture capital unless you're sure you need it. Build a business without VC, and you will own a lot more of it. The vast majority of people that take venture capital do not justify the fact that they took it, if you look at the exits or the IPOs, of which there have been very few upgrades, yeah,

Speaker 4

22:12

they only sold 20% of their company. Why?

Speaker 2

22:20

Great question, because this is the first price round. So you sold on states and you sold on convertible notes and you gave some to your employees. That's where the rest of equity is going. Anticipated the next slide. Well done. So this is ownership by stakeholder type. This dark orange is founders. This is employees. This is the people that are investing, the investors in this round, and this is the investors in prior round. So when you raise your price seed, your safe investors own about 11% the price seed is 20 to 21 your employees get a little slice, and then you have the rest. And again, this isn't one founder. This is the whole founding team. And then it gets lower and lower. So this in Series A, it's about equal investor ownership versus employee founder. And then by Series B, you get to that fun moment where your VCs can fire you. And when do they fire you? Typically not when things are going well. So again, there's one thing to take away from this talk, as someone who works exclusively, almost with venture capital act startups, is it a wonderful way to build a business? If you are sure you need it, are you going to get to $100 million in revenue in six years if you're building SaaS startup? If not, don't take VC. If yes, consider taking these issues. If you're building in biotech or hardware of other industries that don't follow that growth path, it's a different sort of model. But if you're building an AI inflicted SaaS startup, $100 million in six years, that's what you need. And of course, ownership is obviously incredibly important, but the terms of those deals, the actual legal clauses in those documents, also matter. So things like high liquidation zoom under a high liquidation multiples. Typically when you make a deal with a venture capitalist, it comes along with what's called 1x liquidation preference. What does that mean? It means very simply, I the investor, get my money back before anybody else gets any money. If you make 1x liquidation seems you can quibble with that, but that's just where the market is, right. Now a high liquidation preference is anything above 1x so imagine your company gets bought, but the investors a 2x liquidation preference, meaning they get double their money back before you and your employees see any money. Those deals are happening far more often at the late stage. These days, 2x 3x I have seen 4x liquidation preference. Why would you accept that? You wouldn't, unless your business was going to die. Otherwise. The nice part is, those do not really show up at early stage. So if you have an investor who's demanding a 2x liquidation preference at seed stage, go find a different investor. Those are not real good people. One of the questions we get a lot from founders is, okay, this is all great, but when, when should I fundraise like does it matter? Is there seasonality in venture? Effectively, everyone's at Burning Man. Everyone's going to December in Italy, etc. So actually, the best month for signing deals is December. But of course, those deals are not negotiated generally in December. They're negotiated in October and November, and then they're signed or the end of the year for a lot of tax reasons. And then VCs really do take January and February mostly off, right? So if you are a founder and it is the beginning of December and you have yet to start your fundraise, probably don't start it right. Then wait until the beginning of the year and then get in touch with VCs every other time it's basically always on. I think the story that VCs don't answer email in the summer is kind of looking go answer the good ones, right? So you just gotta make sure that yours is a good one. Okay, so that was a ton of stuff about fundraising. How about teens? So to take a step back, there are about we serve about 45,000 startups. Those startups collectively employ about 1.1 million people. We have all of the equity values from those people, right? Well, if we married up with the HR system from a company, can we get the salary values too, and then we have the best database on what Startup employees are being paid anywhere in the world, which we did three years, which was awesome. So this is new hires in the black, people getting laid off in the orange, people leaving their jobs by choice in the green and layoffs, plus choice departures in the purple for total departures. So January 2022, startups on carta hired 73,000 people in a single month, awesome times, and then they stopped doing that. January 2024 that hired 32,000 people. And there are more startups on carta today than they were back then. So hiring has fallen off a cliff in startups. In fact, some months along this line, there are more people that lead startups as a whole than joint, which is basically the only time in our history where

Speaker 5

27:34

that started happening. Do you have a really rough idea of the number of startups on like a percentage basis that have increased 24 like you have twice as many startups,

Speaker 2

27:45

oh, half as many hires. Now, great question. So we have about, yeah, call it at the end of 24 we had 44,000 startups on the platform. In 21 it was more like 30. But again, a lot of those, the people that join carta these days, I can do a pitch here. Carta starts for free, so you raise a million bucks. So a lot of the companies that are joining are very, very small, and they don't outweigh some of the bigger companies that are closing down. It's a good question. So hiring way down. So what does that mean for actual team sizes. So what this bar shows you is how many full time equity holding employees worked at the startup on the day they raised this round. So in 2022 it was 22 people at the median series a company, the average today, it's 15. Is that AI or companies just being there with their cash? It's both. Obviously it's both. We got we hired tons of people that think we didn't need quite so much. In 21 we laid those people off, which sucked in 22 and 23 but there is this wave that's happening right now, of founders and small teams looking at each other and going, how fast can we grow? How far can we get with no ones just us? There are 100 million dollar ARR companies that have 10 employees, 20 employees, 30 employees. They used to be grow at all costs. You'd actually hear founders talk about how many people they employ as a vanity metric should never. Should have been a vanity metric, both because those were real people and because it's silly. But now you will hear ARR per employee. I have a million dollars for an ARR for every employee. That is the new metric, around 70 million small teams moving faster. And so what does that mean if you are all trying to get a job in startups, tough out there right now, this is salary in orange, equity in black. And what this shows you is that if you were hired in November 2022, your salary if that same person was hired at that same company in that same role. Two years later, your salary has barely changed, just the liquid. Of course, inflation has changed a lot since then, so you're actually getting paid less on a purchasing power basis. But hey, at least it didn't go down. Your equity is 36% lower. That means if you were given 100 shares today, you'd be given, what? 64 shares, 100 shares earlier, 64 shares today. So not about the valuation, literally, how many shares in the company did you get? This is a massive change in equity. If you're trying to be a startup employee. I have a whole other two hours on equity and how you should value it, but I'll give you a little gift right now, which is for any of you that are joining a startup, if you go to carta.com/friend you can get exactly what we give the HR teams at these startups, 25th 50th and 75th percentile, for your position, at Your stage, in your location for salary and housing completely for me. So don't use it once a day. If you hack it, if any of you smart people hack it and use it more than once a day, I will get fired. They have told me that explicitly. So don't carta.com/friend

Speaker 2

31:20

so this is a really big deal, right? Part of the promise of startups is wrapped up in equity, and fewer people are getting to involve themselves in super early stage startups, since probably, if you look down the line, some pretty big implications in terms of wealth generation and disparities there, etc, but it is the way that people are building today. I'm gonna make sure I wrap with a lot of time for questions, but let's talk for a second about VCs, not just founders. So we had all this turmoil that happened in startups, but how did it affect the venture funds that invested into those companies?

Unknown Speaker

32:04

Important, have it logged out two seconds? I

Unknown Speaker

32:41

what's happening in your team? I

Speaker 2

33:11

Okay, back to regular schedule. Here we go, fun performance. So we the other side of carta business. Many people know us as a cast table company, research values. We also have a completely separate business where we help venture funds manage their back ends, meaning we do audit, tax, valuation, portfolio monitoring, effectively, all the non investing stuff for VCs so that they can invest. We have about 3000 venture funds on the platform. That's, again, at least half of all the VC funds in the US. How about most of those VC funds? We talk about Andreessen Horowitz, we talk about benchmark, we talk about Sequoia. Those are the giant funds. Most venture funds are small. Most venture funds, we have over 1000 venture funds in carta that have less than $25 billion to invest into founders, and 25 to 100 and then 100 million plus. How have they been doing over this time? Not great. So this is median IRR, which is a metric that shows performance over time for venture funds. Typically, we talk about a J curve in venture fund investing, meaning you start with money, you invest that money into counters, so you're actually paying in so you are losing money on an IRR basis. And then those businesses get value more highly, and they become positive to your IRR. You can see that for vintage year 2022 so venture funds that started investing in 2022 they're still underwater. Their J curve was much steeper than usual. 2021, three years in, still underwater, right? The median venture fund, after three years is negative, has lost money. Even the media venture fund that was doing pretty well. You know, some of those IRS are pretty decent, has come down quite a lot because, of course, they can right. What happened in startups was going to show up in VC funds down the road, it just takes a lot longer to show up in VC funds. If you are thinking about being an LP into a venture fund, I think, honestly, there's better ways to use your money, but if you are just just gotta have it, then just know that there's a percentage of VC funds that will never give you any money back, and that percentage is larger than you might think. And there's an even greater percentage of VC funds that are definitely not going to outperform you putting your money into the S P, I think most won't help perform. You putting your money into the SOP, there's a power law in your sheet. Tvpi, so this doesn't care at all about time. It just says, How much are these companies worth, quote, unquote, versus how much you paid for their shares. The best venture funds of 2017 the 90th percentile, so the top 10% of venture funds prior to 3.6x so that is three times as much value in those companies currently as paid in capital. Sounds pretty good. We'll see if those companies all actually can IPO or get bought. That's not real money yet. It's not liquid. You still have to make it go on. Illiquidity is a gigantic feature of private startups. It is the feature of private startups. People talk about power law. Power law exists everywhere. The mag seven public stock markets. How much are the public stock markets driven by seven stocks? Tons of it, right? There's power laws every single place you look across the world. Illiquidity is the thing that's different about private markets, a lack of ability to take your money out. So that makes it a really big deal, if you're keeping your money in there for 10 years, or at least over the beginning, keeping your money in for 15 This is a chart that I put out on LinkedIn about a year ago, and it got picked up by a bunch of people who didn't understand venture and thrown around by people at Axios and other places. Love the reporters at Axios, but they messed this one up. So this shows, this line is the percentage of funds in this given vintage year that have returned at least $1 to investors. So after a year, no venture funds have returned any money. In fact, if you get money back after one year, that means you probably picked the wrong fund right, because they invested in a C Stage Company, and that seed stage company got bought or shut down. You don't want you wanted to IPS two years in, okay, maybe a little bit of money back is good. Three years in, getting more substantial four years in 2020 funds, only 20% of them have given any money back to investors after four years at earlier vintages that was much higher and on down the road. So again, your money's locked up for a long time, and a lot of these funds are never going to give you $1 back. This is why investing into emerging managers in VC is very, very, very hard.

Speaker 6

38:06

Yeah. Can you explain what the physics are behind the general timeline?

Speaker 2

38:15

Yeah. So we measured this at the q1 2024, so this vintage is only been around for that long, right? So these men, these started investing in the beginning of 2022 so the beginning of 2024 they're only eight quarters old. Kind

Speaker 6

38:33

of a general trend line that every year is following, and then 2021 is like

Unknown Speaker

38:37

four Delta. Yes.

Speaker 2

38:41

This is what happens when interest rates change and there's no exits, right? So 2021, vintage fund. One, they invested at the very top of the market. Everyone was super high, if the prices were very high. And two, there's been very little exit activity since then. So the companies they invested into haven't gotten but and they have an iPod, which is what you want as an investor, that's actually a great meeting exit. So the exit that nobody likes and is very sad, how many startups are shutting down? The answer is more every year. But of course, we have more startups on the platform. I think the important point to note is this one, which is we funded a ton of companies here. And unless you believe that venture investors got way better at picking companies in 2021 than they ever have been, and sneak peek, they did not, then three years later, you would expect a lot of those companies to shut down. So in some ways, this is a very sad chart reflecting terrible times for founders. But it's also expected. How about exit? Sem really matter? M and A companies getting bought, Perkin backed up in 2024 that's good to see. More M and A transactions, more small startups getting purchased by private equity, like big tech, etc, a lot of these, though, are probably not going to generate that much wealth for the people on the cap table. They were small companies. They got bought for Apple hires, for fire sales, maybe some of them got bought for less than they had invested into them, which remember that 1x liquidation preference, if you have 100 if you take $100 million in capital, you sell for 80 million bucks. The founders employees don't make any even if it says $80 million exited founder on your LinkedIn, which it will you won't talk about the other part. I have done scientific analysis, 100% the case so, but it is good to see M and A hurricane back up. I do think 2025, will be a big year for M and A the big question, Will 2025 be a big year for IPOs? Who thinks Yes, pessimists, oh, who thinks no, you're probably, sadly. So this is the number. This is technology. This isn't all IPOs. This is tech. IPOs as defined by code to so you can quit a little bit, but 14 companies going public in three years is not enough, right? That is a tone of capital locked up in those companies. When will they go public? Is a huge question around venture because when a company goes public, that money gets recycled back to LPs, and then those LPS feel confident to continue investing in venture funds. If there's no IPOs, they never get their money back, and they stop investing into new venture funds. The cycle requires IPOs to you can have as many mergers, you can have as much SECONDARY ACTIVITY, whatever, it will not replace a functioning IPO market. We need it back.

Speaker 3

41:46

Yeah, you think there's this bad performance based on the legacy of 2021 it's getting harder to 100

Speaker 2

41:58

No, it's based on bad performance in 2021 it's based on the fact that a lot of those companies that would be good candidates to IPO are actually drastically overvalued, and if they went public, the price would drop from where their last private

Speaker 3

42:10

valuation. So you need to have aI basically true. We will see in the coming years.

Speaker 2

42:19

Probably not you're rigging an interesting point. Okay, imagine a world in which we live today, and there are maybe 10 companies that you've all heard of, or private companies, SpaceX, Stripe, data bricks, except big, big, big, big private companies. Why would they? IPOs? I What is the case you are talking to the founder at stripe, John calls you like, Hey, John, it'd be really cool if you IP, he's like, Oh, that's a great point. Why? What's the case

Unknown Speaker

42:55

liquidity? Maybe better.

Speaker 2

43:00

Love that liquidity would have been the answer for every period I would go right now you would have said Your employees will leave if you don't let them sell their shares. Right? They need liquidity. You need capital. The biggest capital market in the world is public stocks. Go be a public stock. That was the way the world worked for the last 50 years. Now, John turns to you and says, Actually, I've got a lot of really, really, really rich private friends who will just keep investing in my company, and I can do secondary tenders for my employees. SpaceX has done four. Stripe has done three. That is okay you want to invest in the stripe cool. You private investors can invest in this, right? And we will allow early employees to sell some of their stock on a secondary transaction, not a public market. So now, why do I need to ideal if I have unlimited access to private capital, so that the SEC can regulate me and I can report orderly results. That sounds awesome. No, it's a problem. It's a serious problem. There isn't a gigantic bull case, in my view, for the best private companies to ever IPO, real issue if you are the American economy and if you are other startups, right? So I'm not trying to paint a dire picture in that most companies are not stripe, most companies are not SpaceX. They don't have access to this level of private capital. But the best ones do, venture capital and private assets have gotten 10 times bigger in the last decade, so there really is money out there for them, and so you might not see stripe IPO for the next half decade, maybe more. I wouldn't bet on it this year. And without somebody like that growing public, I'm struggling to see how we get back to like this kind of numbers. We'll do better. We'll do a little better, but we won't have the big ones, which is another depressing note leading to in my talk, Oh, wow. Boston surprise section.

Speaker 2

45:11

Bay Area continues to hold the top spot for a venture capital. Everyone knows this. If you read, hey, someone's going to replace Silicon Valley. That person is not credible. It's not happening. However, Boston is kind of doing great number three in all the markets that we tracked. In the US actually in 2023 actually beat New York. I was a little quirk, because there were gigantic biotech rounds. So I wouldn't say that you're on par with New York or the bay yet, but you are very clearly the most likely candidate to get there. And what is Boston, great biotech, obviously. But not just biotech. It's third in SAS, fifth in Harvard, third in health tech bio. Boston has, I actually use Boston as a lot of examples from my talk for places like San Diego. San Diego has one industry that matters, biotech, but you can build on that industry and broaden it so that you become a well diversified ecosystem. And that has happened to Boston in the last 10 years. It's pretty awesome, but a lot of it still bought over the last two years. Not a lot of crypto here. I had points or entertainment. That's not a that's not a general statement on the city, okay, but how are these companies being valued? I'd say very competitively. So this is series A valuations the bay, New York, Boston, LA, those are competitive valuations right in line The bay is, don't treat valuations as though they actually reflect the underlying value of the business. Treat valuations as they say, client demand function between investors and the best, biggest, brightest investors are in the bay, so there's usually more competition from the top rounds, so they get pushed up

Speaker 6

46:58

a lot more. Yeah, and is this entirely based on where the company is located, and not, you know, because they may raise by a VC firm the bay or something, right? 100% this

Unknown Speaker

47:07

is company, HQ, as best we can tell. Same thing on round sizes, very competitive in Boston. Well,

Speaker 2

47:16

that is the last slide, okay. Well, that was a daily mock that we just question is for everyone.

Speaker 7

47:24

Yes. Can you speak a bit to like, how much of this you think is specific to the 5pm period we're in now, versus, like, cyclical? Because I'd imagine the IPA point is like, more specific to right now. But I'm curious some of the other stuff is maybe more

Speaker 2

47:38

cyclical. The real big question is, will AI in the middle of this downturn, we've had an AI, so is AI real or not? That's the biggest question. Are the revenues that these AI companies are generating? Really real? Are they sustainable? Are they defensible? Etc. If they are, then this is typical. If they're not, then we have to look for another hub cycle, and we kind of tough to find one. The other thing to note is that there's a debate right now, a fairly academic debate about is there just too much money in private markets? Because if money, if there's too much money, then the capital competes against each other, and it like erases the alpha that happened in public markets, which alternatives, etc, that could be happening in general, the number one dating criteria in venture all VC status is not the amount of capital, it's the number of venture capital founders. There's a great VC that I love at lightspeed Angie with two ends. And he wrote this provocative piece that said, actually, if you look at it on a per capita basis, we have not increased the number of new venture backable founders at all over the last decade. We just have more money chasing the same number of people. There's only so many quality ideas. For instance, I kind of hope he's wrong, but he might not.

Speaker 6

49:02

I have a business like karda I just have that question, more or less cargo in the operations of cars. I've been building in our revenue, intelligence, Bill, that's basically.

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