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E10: Apurva Mehta and Jack Altman on Sam Altman, CalPERS, and Liquidation Preferences

Liquidity

Fri Apr 05 2024



Sam Altman's Investment Success and Venture Capital Landscape:

  • Sam Altman has achieved significant investment success, with entities holding roughly $413 million at the IPO price of Reddit.
  • His ability to think independently about where the world is going, identify non-obvious talent, and assemble people behind his ideas contributes to his success as an investor.
  • Jack Altman highlights the importance of having big conviction in cases where others don't share that conviction for successful investing.

SPVs in Investing and Operational VC Strategy:

  • SPVs (Special Purpose Vehicles) are used in investing to provide opportunities for investors to participate alongside GPs in specific deals.
  • The administrative burden of managing multiple SPVs can be high due to costs and complexities associated with running them over time.
  • Trust plays a crucial role in venture capital relationships, with trust being more efficient than detailed rules of engagement.

CalPERS' Increased Exposure to Venture Capital:

  • CalPERS committed $580 million out of a $2.1 billion allocation last quarter to venture capital, representing roughly 32% of their private equity allocation.
  • Pension funds like CalPERS are increasing exposure to venture capital due to challenges in private equity investments such as expensive deals and leverage costs.
  • The dispersion in returns is widest in venture capital compared to other asset classes, making it an attractive option for generating returns over the long term.

Optimism Towards Investing in Venture Capital:

  • There is optimism regarding the current landscape of startup funding, with companies growing faster than ever before across various sectors.
  • Despite potential higher prices, maintaining a high bar through thorough diligence on companies can still lead to successful investments.
  • The current environment presents opportunities for disciplined investing with founders being thoughtful about dilution and fund managers focusing on portfolio construction.

Analysis of Post-Correction Vintage Performance:

  • A post-correction vintage could potentially offer one of the best investment opportunities based on historical data showing strong performance metrics for top quartile venture investments.
  • Data analysis indicates that top quartile venture investments have shown TVPI ranging from three and a half to four, with DPI reaching two times or higher after ten years.

Board Meetings and Investor Discipline:

  • Board meetings are crucial for instilling discipline in companies, with a focus on holding quarterly meetings to provide strategic advantages.
  • A structured approach involving founders sitting in on each other's board meetings was implemented to train them on board meeting dynamics effectively.
  • The significance of having good board members is emphasized as they can offer valuable insights and long-term perspectives to a company.
  • Employees may lack full visibility into liquidation preferences during acquisitions, potentially impacting their compensation.

Liquidation Preferences Impacting Startup Valuations:

  • Liquidation preferences over 1x saw a substantial increase in 2023 after making a comeback in 2022 following the long bull market.
  • Notable growth in premium liquidation preferences was observed for Series A, B, and C companies.
  • The trend of higher liquidation preferences is influenced by investors seeking returns and founders aiming to maintain valuations.
  • Transparency around liquidation preferences is crucial to ensure fairness for all stakeholders, especially employees.

Investment Trends and Startups:

  • Retail AI from the recent YC batch enables conversational interactions using AI voices for customer support, offering an API platform for various applications.
  • Haygen creates avatars from video clips that deliver scripted content effectively, presenting numerous use cases like marketing or employee onboarding.
  • Owner provides tools for restaurant owners to efficiently manage different aspects of their business operations, resonating well within the industry niche.
  • Foundation Health offers an API-level solution for digital health companies to streamline pharmacy operations seamlessly, led by experienced industry professionals.

Market Dynamics and Future Outlook:

  • Marks are expected to catch up post-market chaos as surviving companies eye potential IPOs like Reddit's successful public offering amid strong economic indicators.
  • Concerns exist about regulatory challenges hindering acquisitions vital for industry growth while potential political changes could impact M&A activity positively but raise democracy concerns.

Venture Capital Investments and Fund Performance:

  • Investment decisions are influenced by LPs' ability to influence fund managers regarding marking valuations accurately within the asset class regulations.
  • Challenges arise due to inconsistencies across GPs in marking valuations but are manageable with clear methodologies ensuring fair practices within investments.
  • Power law dynamics drive fund performance with a small percentage of investments significantly contributing towards overall returns.