All right, we have a lot to dig into.
So I'm going to go ahead and and just jump
straight in.
We can start with you, Raja.
I'm curious to know a little bit more about what
you prioritize in your decision making.
And as we all have been talking about, what role
does AI play into all of that?
Well, thanks for having me here.
Well, let me start with AI.
We spend a lot of time with emerging managers, especially
seed and precede, and we have a fair bit of,
you know, relationships on the Series A through D multi
stage firms with AI as an LP one step removed
from the action.
AI as a technology seems to me a compelling new
cycle that's, you know, potentially going to expand Tam for
a lot of businesses and have a lot of impact
in the long term.
But in the short term though, it feels to me
that 90% of AI companies might be overvalued and 10%
may be undervalued.
It's hard to know which one's which, and everybody thinks
they know.
Michelle, I think you might have a slightly different perspective.
I know when we were talking earlier, these two were
saying today AI is uninvestable.
So I want to take the counter to that.
I think from my perspective, kind of yes and no.
There are definitely companies that are overvalued.
There's a lot of capital still sloshing in the market.
There's FOMO.
I'll give a recent example.
My team pitched me on a company in the AI
application services space 60 days ago.
They raised around at 250 million and they were asking
for a $500 million evaluation.
So I'm not really sure what happened in those sixty
days, but it gives you a flavor of where we
are even in the early stage.
However, if we think that this seismic shift with AI,
this platform shift is on the order of PC, cloud,
mobile, the Internet, I think we may be undervaluing those
companies.
There will be extreme value created.
There will be disruption.
There will be $100 billion companies created.
And so at M12, we are playing the game on
the field.
We are investing in great founders, going after really big
markets.
Mark, what's your take?
So you're saying we should invest in Microsoft?
No, listen, I'm not bearish.
I just, I'm reminded of when mobile first came out
and people set up mobile funds and I don't want
to call any firm out, but there was an I
fund and you can Google it.
I for being it for being it.
There you go.
I fundamentally don't believe that AI is its own category.
AI is everything and it's going to be pervasive in
every company.
You can't afford not to be investing in AI, both
as an investor and as a startup.
Companies and and bigger companies.
If you look at the United States, we have 4.1%
unemployment, OK.
And demographics are not going to increase in this country
over the next 20 plus years probably ever again.
You have declining demographics all across Europe, China, India, you
name it.
There's almost no place in the world where populations are
growing.
So unless we have AI, unless we have robots, we
simply are not going to keep today's standard of living.
We need tools like this to allow us to do
things like provide healthcare to an aging population that we
can't do without AI.
So it's all in that positive.
I just don't think it's its own category.
And I just want to say really quickly, like if
you do a seed deal today and you slap AI
on it, investors will pay a 44% premium for that
lipstick on a pig, which is basically orchestration of other
people's tools than they will for a mere software company.
That's what the problem.
That's what makes me nervous as an LP.
There's a lot of that is, you know, happening and
that was makes me nervous.
So then zooming out and I, I would love to
hear from each of you on this.
What are the criteria that you prioritize when you think
about investing?
And Raja, for you as an LP as well as
a, as a direct investor as well, what are the
things that are really compelling and exciting to you all
right now?
Well, let me let me start.
I think the way we underwrite a seed or precede
manager, we first underwrite the person.
What is that person's superpower, unique strength?
And are they able to help the company to get
from zero to one?
That's the main criteria.
But at the same time, even even if you're in
the middle of a giant tech cycle and trillions of
dollars of value is going to be created at some
point, prices do matter.
So when I see a manager where they say we're
in this middle of a tectonic shift in technology, prices
don't matter.
It's all about finding the right company.
Then that, you know, that's a, that's a, that's an
immediate no for me, for that manager.
Well, at M12, we invested in early stage.
So that seed series A&B, we invest in cybersecurity, we
invest in infrastructure and absolutely believe that the stack below
these applications we've built will be rebuilt For AI.
When we look at enterprise applications, we actually have a,
a rubric, we call it the four DS.
So we look for companies that have access to proprietary
data.
They have dividends.
So that means they're solving a problem that customers will
really pay for in value.
They have distribution, sustainable distribution, one that can they can
either get through those channel partnerships or have a CAC
to LTV that makes sense.
And then Delight, which is kind of that user experience
that we've heard about throughout kind of the conference.
I guess 1/5 friend of mine from City Ventures mentioned
was DNA and that really does purvey everything we do.
Is that founder, right?
You mentioned kind of that, you know the person as
part of, you know, kind of your investment criteria us
as well as that founder market fit venture capitalists are
fundamentally lemmings and they all fund the same thing.
And it's all what you're talking about because it really
makes for nice cocktail parties.
To make money at venture capital, you need edge.
And to have edge, you need to invest in something
or somebody that very few people actually know or believe
in.
Not on your own, but you have to be in
advance to the market.
And the problem is that if you're saying something that's
going to happen three to five years from now, most
people look at you like you're weird or a bit
strange.
So at Upfront, we're based in LA.
We know that we don't have edge in the Bay
Area.
We do invest in the Bay Area.
It's about 20, 5% of our investments.
But in LA there's a transformation going on right now
because of SpaceX and Androl and some other hard tech
companies, because of the heritage of JPL that there's a
lot more hard tech and space oriented companies being built
in LA today, a lot more atoms plus built plus
bits being built in LA today.
So we don't put all of our dollars into that,
but disproportionately we're trying to figure out what are the
areas of innovation that will be at the and brainstorm
cocktail party five years from today.
Got it.
All of you have have mentioned at some point stage
and I'm curious what role this stage that you're investing
in impacts how you think about alpha, how you think
about edge, how you think about opportunity.
Mark Raja, I know that you've all mentioned beforehand kind
of a barbell approach, right?
Investing in pre seed and seed super early stage or
really late stage growth, right and focusing a little bit
less on everything in between.
How do you think about stage and what are you
really looking for in terms of the types of founders
that you want to back based on stage?
Do you want to start?
Yeah, sure.
So I would define it a little bit differently.
At upfront, we do have a barbell strategy.
Our barbell is seed.
We skip the entry point at A&B and then we
come in at sea.
But I don't do super late stage.
That's for people who are really experienced in pre IPO
type companies.
That's just not us.
So why do we skip the A&B?
If you look from 2010 to 2022, so that 12
year gap, the total market in A&B went from 8
billion of total capital available, available, sorry, 9 billion to
82 billion, OK, massive increase.
And the reason is that great firms in Silicon Valley
raised, they used to have $300 million funds and they
had $2 billion funds.
So they suddenly started instead of writing three to $5,000,000
checks, writing $30 million checks and you just got to
pick a lane.
You can't compete on someone else's basis.
So you either need to raise a $2 billion fund
or you need to be a little more disciplined.
So our discipline is seed first money in three to
three and a half million dollar checks.
We do 40 per fund, usually about six of those.
We've been doing this, by the way, for 28 years.
Six of those drive 80% of the returns and then
we let other people do AB.
We will do our pro rata.
The weird thing is that the C market, two things
happen, either your massive takeoff and whiz, let's say everyone
wants to give you money at any valuation or suddenly
no one cares at all about you and there's some
really good companies being built that just nobody cares about.
So we're focused also on that.
Sorry.
Yeah, I'll pick it back up.
The way we think about our portfolio, think of an
LPA large LP with multiple asset classes and the role
of VC in that portfolio of asset classes is that
VC should and historically have come, you know has come
with a pretty healthy risk premium.
And if you look at the data and that risk
premium is concentrated mostly in the smaller end of the
fund size and early stage that's sort of, you know
precede to a is where most of the alpha is.
So because of that we spend most of our times
precede to A.
And to Mark's point, I think the way we think
about selecting managers is, you know, I don't want to,
you said it the VCs, you know, so I won't
say.
So what we look for is something that is unique.
I don't want to say non consensus, but but in
a way non consensus investors where they're not chasing hot
deals, but they have some insight or some access to
a nichy sort of, you know, space of the venture
market that they're able to see it that nobody else
sees.
I want to move forward and chat with you all
a little bit about exits.
It was announced yesterday Sequoia offered to do a major
purchase of shares in Stripe.
We've talked on stage here at this conference about how
the IPO market has slowed down significantly.
As capital allocators, how do you all think about exits?
Maybe we can start with you, Michelle.
What is an optimal exit in 2024 and beyond for
your portfolio?
Yeah, I think it really depends on, you know, where
you entered, right?
So if Mark's entering kind of at the Series C,
he's looking at a different multiple.
He's looking at a different horizon then if you've your
entry point is seed and kind of Series A.
We've been around as a fund for for eight years.
We've had some phenomenal exits companies going, you know, IPO,
we had a a number of companies going through kind
of this back market.
Obviously we know that you know, isn't probably going to
return.
We've done a lot of analysis on, you know, our
our company's and what sort of the M and a,
you know, market.
We heard to also at this conference as well that
the M and a market.
Given that a lot of these companies that are going
to need and want these AI native companies, these companies
that will help propel, you know, their business forward and
are willing to kind of pay things that are above
what would a public market multiple would be.
So when we look at kind of what a good,
you know, kind of exit is at, you know, kind
of that series A&B point, of course we want sort
of you know, the 55 X the what the power
law right that does kind of return the fund.
But you know, these days sometimes even the 2X with
an M&A is is where we're at.
Let me pick up on that.
So I looked at exit data for the last 25
years.
Median outcome for a venture backed company is about $90,000,000.
So think about that $90 million is the median outcome.
There's going to be outliers like we heard this week
and on the, if you look at the public market
today in the Usus stock market, there's only 200 companies
that are valued more than a billion and that's including
everything, not just tech total, total.
So it's exceedingly difficult to produce a multi billion dollar
outcome.
So we think about that a lot.
If there's a portfolio that you know, that is so
risky, so volatile, that has to hit a multi billion
dollar outcome, that makes me a little nervous.
I want to turn over to the audience in just
a moment for audience questions to start getting those ready.
Doubling down on this first though, how do you all
think about secondaries?
Listen, the Sequoia deal itself is a secondary deal.
The biggest lie, no, not the biggest, but amongst the
biggest lies in venture capital is that we are 10
year funds.
They are not ten year funds, they're 15 year funds
and you can clap.
Yep, that's great.
So there's a jig.
My cousin or my brother got them as friends.
They clap.
Came to be here, but it is it isn't true
and there's an illiquidity to our asset class that has
caused problems I think for institutional investors.
So I will tell you, you know that I think
it was Warren Buffett who said be greedy when others
are fearful and fearful when others are greedy.
So starting in 2018, we started looking at just how
overvalued the tech markets were and we started selling little
pieces of our portfolios.
Over A5 year period of time, we sold about $1.2
billion.
Now if you raise 2 to $3 billion funds, that's
not a lot of money, but most of our funds
are between 2 to 300 million.
So that was like good cash flow sent to LP's.
And what it took was us selling 25 to 30%
of individual companies that were doing well.
And I told LP's, I'm still long, I'm majority long,
but I'm going to send you some money at a
valuation that's higher than normal.
So the figure that I like to quote is if
you look at public markets, the history of SAS companies
is they traded about 6.2 times NTM next 12 month
revenue, that's over a 20 year cycle.
Over a 10 year cycle it's 9.6.
So that's like the football field of where your exit
should come for a normal company.
In 2021, public market was 24 1/2, OK, private market
100 times NTM.
Now that is already reverted to the means.
The public markets are back at 6X, so it really
has already reverted to the mean.
So it for me, like we were selling from that.
So IN2023I flipped and I became a buyer and we
started buying secondaries.
We bought $65 million of secondaries in the last year
because suddenly there's all these people who didn't take liquidity
in those years that will sell at pretty good discounts.
So I think secondary markets are really important to venture,
and I think they will mature over the next 10
years as more people learn how to price them.
Yeah, I think it shouldn't be a taboo.
It's not in private equity.
So liquidity is not a passive activity.
So unless the money is recirculating in the market, it's
going to be very difficult for the asset class.
I think it's good portfolio management questions from the audience.
I think we have one over here and one over
there.
Maybe we'll start over here.
Where are the Stan people and say your name?
Sure.
Hey, Mark, Jeremy Bloom, integrate.
Good to see you.
I'm curious, you mentioned you're less focused on the hype
cycle now.
Yeah, and more focused on what we'll be talking about
in five years.
So what are you seeing and what will we be
talking about in five years?
Thank you.
So let me say this, which is in, you know,
the old saying is being too early is the same
as being wrong.
It's a problem if you invest in what's going to
happen in 10 years.
So you really need to be in like a four
to five year cycle.
And I can't say that I'm right, but we do
have an opinion.
One of the things we've been investing in is we
look at what are the trends in the world, One
being deglobalization and deglobalization I think is going to drive
a lot of investment.
The second thing we're looking at is aging populations and
the need to provide healthcare to aging population.
Third thing we're looking at is the impact of AI
on industries.
And one of the industries we look at is healthcare
and how much of an impact that's going to have
in like drug discovery and ability to diagnose, OK.
We also look with a deglobalization trend on what is
that?
What specifically is going to happen.
So an example, we just invested in an advanced manufacturing
company to produce ships in the United States.
And when I say that at cocktail parties, believe me,
that one, more than anyone, people look at me like
I'm like crazy.
Like, how could you invest in that industry?
But the reality is that the South Koreans have already
automated shipbuilding, the Chinese have already automated shipbuilding.
And over 90% of all welding that happens in the
United States is hand welded by human beings in a
market where we don't have enough labor.
So we're trying to look at what are the macro
themes and how can you make investments in that?
I think venture investors are a little bit scared of
hardware.
We invested in a satellite company.
A satellite cost historically about $30 million to produce.
It's come down to $6 million.
We invest in a company called Apex Space that's trying
to create standardized manufacturing process to launch a lot more
satellites.
So that interests us because it's a trend to lower
costs, increase manufacturing.
What the CEO, he said this publicly so I can
repeat it.
They get paid about 40% of the price as a
down payment before they even start building.
And then they get staged milestones.
So even though it's hardware, they're not draining cash.
There are ways to build businesses that are not cash
consumptive.
So those are the kinds of things we're looking at.
They're weird, I know.
And it's less cocktail party friendly.
If you have a question over here.
Hey, first of all, thanks so much.
Healy Cypher, CEO of Boom Pop and CEO of Atomic,
which is adventure Studio.
What question to ask Good audience.
I'll go with these.
Maybe so much time to think about.
I was taking notes, amazing quotes, you know, so one
of the things I've been actually thinking about a bunch
is ventures, a supply chain, you know, and the seed
goes A, A goes B and kind of onwards to
and IPO.
And it feels like the lockdown, a relative lockdown of
private equity has been kind of a thorn in the
side of the supply chain.
Any thoughts on that?
Am I right, am I wrong?
And what does it look like in the next couple
years?
You should say sure, I'll jump in.
You said lockdown of private equity, right?
So here's the weird thing about venture is it used
to be an A round, AB round, A MEZ round
and then you go public and the A did not
do B, the B did not do MEZ and then
the MEZ got their profit.
We make up letters now.
It's like it's almost irrelevant.
So what was the goal of any exit?
It was when I was young, it was IPO.
That's all you wanted to do.
Well, IPO market is pretty tough right now.
You really have to have phenomenal success to go public
and there will be great companies.
The 2nd is M&A and MN as kind of been
on lockdown for the last three or four years.
Sadly, it's probably going to change starting in January.
But we've kind of been on locked.
Well sad for different reasons, but so we've kind of
been on lockdown.
So that exit environment has largely been challenged.
And so, so private equity is going to be I
think an important exit market for venture capital.
But relative valuations of public companies have been better for
them because we overvalued.
Venture for so long that we're not realistic on our
exit price to private equity.
There were 1200 newly created unicorns in 2021 and 2022
alone.
60% of those were marked by just 4 firms, SoftBank,
Tiger Kochu and Insight.
So like that market is going to take five years
to work through before private equity gets more interesting.
So I think it's going to be private equity and
secondaries probably in three to five years.
I think I'll add on to that.
I think one thing that I think venture market, especially
venture ecosystem secondaries have been sort of a bad word
historically.
I think what we need as a, as a venture
industries more emulate private equity where it's OK to for
assets to change hands and market, there's data and marketplaces
need to be created and hopefully that's what will come
out of this cycle.
I kind of want to double down on on this
piece around how much has really changed in the markets
in the last three to four years.
And maybe this is a question for each of you
in your respective firms, but perhaps it's also a personal
question, which is what have you all learned about the
way you do your work, the way you view opportunities?
And how has that shifted in the last three to
four years with the ending of the Zerp era, the
IPO market and M and A market being what it
is?
We've seen cycles of course with AI, with crypto.
What have you, each of you learned through all of
that and how are you viewing the work that you
do today?
I'll start.
I think one thing that's sort of became becoming apparent
to LP's in to venture asset class is that there's
now multiple products within venture.
There's early stage products that's different and there's sort of
the classic venture C&A through D that's sort of different
product and then growth is so different LP's and different.
You know VCs will sort of self select into groups
and that's sort of sort of a personal learning for
me that you can't evaluate a seed firm using same
metrics as you.
You do a large multibillion dollar multi stage firm.
For me I will say scarcity creates clarity.
There was a lot of capital that was going to
companies early, early companies that were looking for kind of
product market fit.
And with a lot of capital, it kind of creates
these opportunities to do tons of experimentation, to not be
laser focused on getting to that product market fit, to
really understanding what the customer needs, wants, will pay for.
And so one of the things that we, you know,
learned in some cases the hard way was that, you
know, giving a ton of capital, you know, too early
can actually be in some ways pretty, you know, kind
of detrimental to the company's success.
I will also personally say that I learned I want
to meet founders in person.
I think, you know, for the last three years when
we were in the, the Zoom era, we made a
lot of investments just to based on Zoom.
And you miss so many cues and by walking the
halls, meeting, you know, the extended team in person.
So those are kind of two on a personal level,
I maybe just want to give an opportunity to talk
about what I learned through a big mistake I made
because VCs don't admit to mistakes very often.
So I think early in my venture career, I invested
a little too much with ego.
And here's what I mean is I would do an
investment.
It was early stage, I believed in it.
And suddenly it would get markups and people would write
a $30 million or $50 million round behind me.
And I thought I did not work on this freaking
company for the last three years to have that company
owned more than me just because they can throw $30
million around.
So if I wrote a $3,000,000 check, maybe I wrote
5 into that round to like maintain my ownership, purely
ego.
Now, the first time I did it, I got an
immediate outcome, positive success, sold the company for 700 million,
returned $100 million.
So I kept doing it.
So what happened was the next company I did it
on, I doubled down and that company was growing really
fast and then it went off a Cliff and it
ended up going to 0.
And I looked back at it and I said, why
did I increase my dollar average so much?
I already had a great bet and if it worked,
I was already going to make a lot of money.
So I try to teach younger partners not to invest
with ego.
So we say three things on every follow on investment.
Do we still believe there's product market fit because we
invest so early sometimes we're just wrong about that.
So if we don't believe, it's not like we're not
going to invest, but we're more cautious.
The second thing is do we still believe we backed
the best team in the market because markets operate on
winner take most and if we didn't back the winner,
we should be cautious.
Sometimes we were right about the market, sometimes we were
right.
We think about the founder.
And and the third thing is do we believe in
this valuation?
So if somebody is willing to pay an extreme valuation
to be part of this because their business model requires
them to write a 50, seventy, $500 million check, I
don't need to chase that.
I already have a position in it.
So we will invest at any stage, at any amount
of money, but we try to have that framework to
think.
So we don't invest so much with ego.
Mark Michelle Raja, thank you so much for your time.