← Run the Numbers
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A
You were@ask.com, which I believe. That's Ask Jeeves, right?
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B
Yeah, I was there. In the late 90s, the classics are a dot com story. We went public, another Internet IPO. Ask Jeeves. Just ask them. I remember our first earnings call. I think we announced that they were going to burn a lot more money than they planned on burning and the stock price jumped. It was just sort of the craziest thing went up. Yeah, everybody was super excited about, yeah, go spend more money. It was just like the classic.com thing. The long story short was I had options and I was locked up. And then all of a sudden the dot com kind of bubble began to burst and that stock price went from 190 down to basically a dollar a share. It was kind of nuts, right? Who knows if we're in a bubble today? But like that dynamic I think was also something that helped me to understand, okay, there's gotta be a way to try to solve for this instead of like ending up upside down on taxes. Fascinating time and actually super interesting parallels I think between then and now is
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A
this thing on
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B
yesterday's price is not today's price.
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A
Welcome back to Run the Numbers, the show where we talk with the world's top CFOs and the investors who back them. I'm CJ, a tech CFO and my goal is to tease out the playbooks and mental models the best capital allocators rely upon to make you better at your job. On today's show, I'm speaking with Mike Zhang. Mike is the co founder and managing partner of Founder Circle Capital, a growth stage investment firm that pioneered structured liquidity solutions for founders and early employees long before secondaries or attendees became cocktail party conversations. Before founding fcc, Mike spent time as both an operator and an investor, including living through the dot com era firsthand. Poof. He's seen multiple cycles from the inside. As an employee, as a growth investor, now as a firm builder backing founder led companies, navigating later stage complexity. In this episode we go deep on the origin story of Founder Circle. The problem they saw in founder liquidity. How secondaries has evolved and why structured liquidity became a missing layer in private markets. How secondaries went mainstream, what changed structurally, where the market works, where it is broken and what CFOs need to know before running a tender offer themselves. Tune in for that part. The Goldilocks zone for liquidity balancing founders taking 50 mil off the table with employees, employees just trying to cover taxes. That was me trying to just rub two pennies Together AI and the idea of a super cycle. What is a super cycle? We I asked that question and whether all super cycles end in crashes and how to think about risks across cycles and what really drives growth stage investing outcomes. From evaluating founder CEOs versus professional CEOs to the anti portfolio lessons and the discipline behind saying no. If you like the show, I like the show. Please remember to like and subscribe. It helps us with the algorithmic overlords. And if you're looking, hire the best finance and accounting talent. Boy, oh boy, I'd love to help you. I run a recruiting service that pairs you with thoughtful qualified candidates from our warm community of finance leaders. People who voluntarily read about cap tables and tender offers on weekends. If that's of interest, shoot me an email@talentmostlymetrics.com and we can talk on to today's episode with Mike Jung. Mike, thanks for coming on the podcast. I really appreciate it.
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B
Excited to be here.
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A
I want to start at the beginning with the founding story behind Founder's Circle. That's a mouthful. What was the problem that you were solving back then and how has that evolved?
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B
Yeah, it's interesting. So we started the firm in 2013 and some of it was kind of a motivation in terms of just the experience, I think, on my own experience historically. What was interesting I think at the time was that, you know, we primarily focus on doing and providing secondary liquidity to a lot of kind of growth stage companies. We also invest in primaries and do a variety of other things. But. But that was kind of the core insight, which was how can we work with companies to help solve for liquidity as they continue to scale, stay private longer, and all that sort of stuff. I remember back before I started the firm, I've been in venture since the early 2000s. I was at JPMorgan Partners and invested. One of the first investments I ever made was actually in this company called Axiom Legal. And it was the quintessential example of founders that were, you know, basically kind of on their ramen diet, living in New York, paying themselves nothing forever. They finally figured out kind of how to scale the business and so ended up, you know, raising capital from us and from benchmark. One of the conversations with the founders was really about giving them some liquidity so that they didn't literally have to be eating like cup of noodles, right? And so that was one of the first kind of experiences. We used to realize that if you provide the, the right amount of liquidity for a founder, that could be a really great way to actually align incentives and actually kind of take some of the, the pressure off of what it takes to actually build a company. Because obviously building a company is hard. If you're doing it with zero money in the bank, that could be even harder just in terms of the stresses. And so that was kind of like the core insight. And I think what we, we realized at the time, if you go back to 2013, the only company that actually provided for liquidity broadly for employees was actually Facebook. And they said, yeah, let's allow folks to be able to kind of get some liquidity because we don't want to go public anytime in the near term, et cetera. And so, you know, that was sort of the beginning of it all. Yeah, a lot of companies that were staying private a lot longer, largely because they were choosing to stay private. You're an early 28 year old engineer at a Series A company. Seven years later, the company's doing great. But, you know, you're trying to buy a house because now you may be married, you have a kid or two, it's really hard to do that with options. Right. And so that was kind of like, I think, sort of the, the core idea around what we were trying to build at Founder Circle.
- [05:43]
A
I'm hearkening back to stories of who was it there was an early investor who would go around and grab all the shares off of Twitter employees back in the day. I think Facebook and Twitter were two of the first companies who allowed it to happen. But it's kind of like hard to put the toothpaste back in the tube if there's not always a structure in which you can do it. So it's a bit of the wild west.
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B
Totally the wild west. I think Facebook didn't really put a lot of restrictions on who the buyers were. And so I remember there were hedge funds that were kind of running around trying to find ways to buy shares in Facebook. You're right. I think in Twitter and I think also in Uber, you kind of think back to sort of that time. It actually kind of created a bit of a whiplash where a lot of companies are just like, we need to control this. Some companies actually started putting all these restrictions in their bylaws. They're like, you know, no one can transfer shares, not even preferred shareholders, unless the company consents to it. So it's kind of always been this sort of pendulum swing a little bit. Do you just let people kind of, you know, get liquidity and sort of buy and sell shares in an unfettered way or do you actually try to figure out a way to manage it? You know, and I think we've kind of hit a bit more of a happy medium kind of now, you know, given that we're about 12 years into, into this sort of cycle.
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A
It was very prescient of you at the time because, yes, companies were staying private longer relative to what it had been over the prior decade or so. The puck really went in that direction. Companies are staying private for over 20 years.
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B
Sometimes the belief was that companies would continue to stay private longer. Right, and your point is? Right, if you look at sort of the, the generation, I think, of the, you know, the dot com generation in some respects, Google, Salesforce, all these companies basically went public about six years after they started. There's this guy named Jay Ritter who's a professor at the University of Florida. He tracks kind of like IPO like, you know, timelines from founding. I think the average now is 14 years, you know, and in some respects it makes sense, right? Because like the, the private markets, especially in venture, have really matured and they've gotten way bigger than they were, you know, 10, 15 years ago. And so the perspective from a lot of founders is like, well, if I don't have to go public, if I can raise 10 billion, 20 billion in the private markets, it makes sense because going public actually, it's a lot of work, you know, and now you have these quarterly earnings reports and sort of a different constituency you have to answer to. And I think a lot of founders just simply like, that doesn't make sense to me. What that gave rise to, I think, was a recognition that, okay, if we're going to be a private company for 14 years, we need to figure out some kind of a way to allow people to be able to get liquidity so that they can kind of live their lives. Right. And that, I think is what's really kind of driven a lot of what's happened over the last 10 years. But to be honest with you, when we first started the business, I remember everyone has their market sizing kind of stuff. I remember we're talking to different LPs looking at investing in our fund and we're like, oh, we think it could be a billion dollar market, right. The last, I think, measure that PitchBook had, I think was they said that they estimated that the secondary market for venture is 150 billion this year and 25. I think we were kind of skating to where the puck was going, but I don't think we expected it would be nearly as, as big as it is today.
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A
Yeah, I mean, in 23 and 24. Hopefully this isn't apocryphal, but I think the secondary market was bigger than the IPO market.
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B
I think Tomas Tung actually posted something, you know, I don't know, last year about this, which was 70 plus percent of liquidity for VCs was actually through the secondary market versus through sort of public offerings or, or M and A. If you go back to the buyout industry, like back when it first started, you know, barbarians at the gate. Kkr, you know, buying the Biscuit. Right. There's a great book by the way, you know, that was kind of this new financial innovation where you're using debt to buy these companies. But ultimately the exit for them was we're either going to take it public or we're going to sell it to a strategic. Right. Sounds very similar. Right. To kind of sort of the venture model. If you fast forward to today, I think the number was something like 50% of all buyout transactions are actually done. Sponsor. Sponsor. Right. So that's a buyout firm buying from another buyout firm. And I remember when I was at J.P. morgan Partners and you know, we had a group in New York that was doing a lot of buyouts. That was the norm, right? Like, oh great, we'll buy this company, we'll hold onto it for three to five years and then we'll sell it to Apollo or we'll sell it to kkr. Right. I hesitate to say that it's an asset class, but it is so large now. And also because, you know, the timeframe in which companies go public or exit is much longer. The challenge is like, if I'm a seed stage investor or if I'm just an employee or an executive, I just can't wait that long. Right. It doesn't work for a seed stage investor to go and say, I can hold on to this for 14 years. Right. Because they need to go and get money back to their LPs and that's sort of the cycle. Right. So liquidity is kind of like the oil in the engine that makes the whole ecosystem kind of work. And the challenge is, especially over the last four years, you basically, for LPs had this kind of negative net cash flow environment where like they're getting capital called from all their GPS and they're getting less back. And so over the last four years that's been negative for them. And so they're like, well, I can't fund new managers. How am I going to re up if I'm actually not getting this capital back. Right. So the venture market will kind of evolve in such a way where there's going to be stage specialists. Right. I mean, set aside the seven mega funds, right. Or however many there are, you'll find seed managers and early stage folks. I think just, you know, recognizing that it's prudent for us to be thinking about taking somebody off the table, getting it back to our LPs so that we can raise a new fund, invest in new companies, you know, et cetera. And our goal is to kind of be a, you know, a part of that solution.
- [11:11]
A
We're going to get into the structural shifts and how secondaries are done. What's looked at is the cool way to do it, which way is more frowned upon. But I do want to touch upon your personal experience on the other side of the table too, because you were@ask.com, which I believe to listeners out there, that's Ask Jeeves, right?
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B
I think it still exists. Apparently there are people that still use it. Yeah, I was there in the late 90s, did investment banking and then ended up, you know, I remember talking to a lot of venture capitalists. They're like, hey, you should go and get a job working at a company to kind of understand what that's all about. So I joined Ask Jeeves in the. In the late 90s. The classics are a dot com story. So I joined the Business Development and Corporate Development Group and we went public. Stock price went up to $190 a share. I remember our first earnings call. I think we announced that they were going to burn a lot more money than they planned on burning. And it was all really around this idea that they wanted to go and sort of, you know, invest into building an enterprise offering. And the stock price jumped. It was just sort of the craziest thing where it's like, went up. Yeah, everybody was super excited about it. Like, yeah, go spend more money. It was just like the classic dot com thing, right? So the long story short was I had options that I had had to basically kind of COVID the taxes, you know, when I exercised and I was locked up. And then all of a sudden the dot com kind of bubble began to burst and that stock price went from 190 down to basically a dollar a share. I still think I might actually have some like, tax loss carryforwards from that, like way back. It was kind of nuts, right? But what you sort of realized was, you know, that also kind of drives into kind of thinking about, okay, for an employee or for a manager or someone at a company. Like, how should they be thinking about, you know, their own personal financial situation in light of working at a company where, who knows if we're in a bubble today? But like, that dynamic I think was also something that helped me to understand. Okay, there's got to be a way to try to solve for this instead of like ending up upside down on taxes because of the fact that you exercise and your stock price fell through the floor. Right? So fascinating time and actually super interesting parallels, I think, between then and now.
- [13:11]
A
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B
I mean it was crazy. And then, and then at the time I remember there were all these folks that were like, hey, we'll loan you money to exercise your shares and all this kind of stuff. And that actually I would argue ended up pretty badly for everybody in terms of just using that debt to do that kind of stuff. Like you were saying, no one really knew and understood, like what are the tax implications here? Right? And that Was, that was a, that was a tough lesson, I think that a lot of people ended up learning ultimately.
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A
So where do you think the market is today? Because there's a lot of noise around secondaries, even from people that I didn't expect it to be interested in them.
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B
The secondary market is, it's a lot of people like to believe that it's a little bit like sort of the PUG markets where you can kind of buy and sell shares. And the reality is that's not the case. Right. And, and part of the reason for that is if you're a public company and if I wanted to go and buy shares in Robinhood or Tesla, there's a whole wealth of financial information for me to go and make a decision. One of the challenges, I think that in the private markets there just isn't that requirement or that ability to kind of be able to go and, you know, figure out a space, you know, review Space X's financials and decide whether or not that's a company that you want to sort of buy. Now what I'd say is a lot of people don't care about that and so they might be motivated to go and say, I want to go get exposure to Space X or Stripe or kind of, you name it. Our approach is really about making sure that we are working closely with management where one, we can actually do the work to, you know, diligence and underwrite the company, and two, also do it in full view and support of, you know, providing liquidity. So we wouldn't want to go around a CEO or a cfo and you know, we only really want to work with those companies where they're open to us helping to solve a problem as opposed to, hey, this is a hot company, let's go and try to find a way to kind of buy shares in it. All that being said, like the secondary market is, it's a bit of a, still a bit of a wild west, right, because you have a lot of people that are still willing to say, I heard this is a great name. So how do I go find a way to go and buy shares? I think you get to the peak of bubble sort of stuff when, when, you know, we get folks outreaching to us all the time saying, hey, how would you like to buy shares in this company? It's actually a triple layer spv. So we're in an SPV that's in an SPV that's in another spv. And we're just like, that makes no sense, right? And you see a lot of that activity these days. And so, you know, it's not clear to me that everybody kind of recognizes what they're getting into. Unfortunately, our approach has always been how do we kind of make sure that we are building, you know, authentic relationships with the management teams that we want to invest in. And so in that respect, it's a little bit like acting in every respect, just like a primary investor. Right. And if we can't get access to a great company, then that's on us. Right. In terms of, you know, finding opportunities to kind of make investments.
- [19:45]
A
Can you touch more on what you're helping to solve? Because I've been a CFO in position before where there is a member of the management team and maybe a co founder who's exiting or something like that, and there is this bogey on the cap table that you have to solve for. Can you just touch on how those conversations go down with the management team? Because that's very different than just chasing momentum and trying to get in on something. Because it's a name and it's wide ranging.
- [20:08]
B
Right. I mean, ultimately what we're solving for for the company is. And it depends on the stage that they're at and kind of where they are. But I kind of think about it in a handful of different categories, right? There's kind of founder liquidity, right. So it could just be a founder who's, you know, built a business looking for liquidity, wants to buy a home, this, that and the other, there's kind of more broadly speaking, sort of management and employee liquidity. And so usually what I'd say is that's for companies that are much more mature, they're recognizing, hey, we've been in business for five to seven years or whatever kind of the timeframe is. Now is a good time for us to think about providing liquidity for our employees. One, because it's a great way for them to be able to manage their own sort of personal financial situation. Two, it helps employees understand that there's real value to the stock. In a lot of cases, you have these situations where, you know, highly coveted engineers might be getting recruited by meta or, you know, you name kind of the big companies and they're, they're, you know, in a lot of cases, dangling these very interesting sort of incentive packages. Right? So a lot of folks kind of say, well, we need to figure out a way to actually help people understand that there's actually real value to these options that they have. One of the ways to do that is to be able to provide Them with that kind of liquidity where they're like, okay, this is cash in my bank account. And I think that's kind of become, in a lot of respects for a lot of later stage companies, a very common occurrence where they just say, okay, we are going to focus on providing kind of a structured programmatic approach to liquidity like once a year, right. Or every financing that we do, right. We're going to kind of, you know, put a piece of this together. And so I think that's kind of what we see most commonly. What's increasing now beginning to happen is that because I talk about this sort of institutional kind of illiquidity, right. A lot of companies will say, well, we also need to clean up the cap table because we've got a handful of, you know, angel investors or seed investors that kind of need liquidity and we'd like to do that and we'd like to find someone who's kind of got a longer term horizon, et cetera. So we'll work with companies when it comes to also sort of investor side liquidity that's happening much more often right now. And I think part of that is just because a lot of these earlier stage venture funds, even some of the bigger funds just recognize, I can't, I can't be in this for 15 years.
- [22:16]
A
I think a question that comes up often when it comes to secondaries is what class of share are you buying? If it's a founder, you assume it's probably common shares as well as employees. But it's a, if it's an investor from the Series A, you may be inheriting preferred, right?
- [22:31]
B
We will, we'll purchase kind of up and down the cap table, so to speak. A lot of it really depends on the capital structure of the company. If you were, for example, buying secondary and Brex, most recently at the price of the last round, let's just say hypothetically. But you were buying Common, right? And the company gets acquired for what was a 5 billion or something is what they announced, chances are likely you lost money, right? Because you're not in the most senior preferred. When, whenever we kind of evaluate whatever part of the stock we're buying, you know, it's really incumbent upon us to understand what that capital structure looks like and whether or not, you know, that's a situation where you could end up potentially losing money if you're buying common at a much higher price. As an, you know, as an example, what's interesting is you mentioned Series A. Like if you buy Series A, the reality is is that over time the Series A looks a lot more like common stock than it looks like your last round of preferred. Let's say Series A was priced at a dollar a share and you have a dollar share liquidation preference, but you're buying the Series A at $10 a, you might get a dollar back but you're certainly not going to get the other nine back unless it actually, you know, the liquidation preference kind of clears and everybody looks to calm and all that sort of stuff. So I think what's really important for us is being good enough at picking the right companies where liquidation preference doesn't matter on an exit, right? Where everybody, you know, ideally it goes public or where it might be, but that the ultimate long term value to business is where everyone's like, this makes 100% sense for me to convert my shares into common stock or you know, go public or, or whatever it might be.
- [24:00]
A
That's what I have a hard time squaring. So sales guy Matthew just sent me a screenshot. He does the sales of the podcast of an offer to be in an SPV for SpaceX and it had crazy terms on it. It was 2 and 20 plus 2 and a half per year administration fee on top of it. It didn't actually specify if they were the ones holding the actual shares. So there is this like shell game going on. You don't know who has the shares but you also don't know if you're getting common or preferred. Can, can you speak to almost the memeification of I'm in like this quadruple layered SPV that is somewhere on Mars.
- [24:36]
B
What's crazy about it is that there are so many people that are trying to do this right? And so we've seen stuff where you know, folks are offering SPVs and usually kind of the very big names, right? SpaceX, Andrew Stripe, Databricks. And there's not a lot of disclosure compared to like the public markets. You're just not required to do that. So a lot of it is buyer beware. Like you just have to really understand, well, what exactly is it that I'm buying into. But like we've seen folks offering like to invest in SPV and we'll charge 10% upfront. I'm just like, wait, so basically what you're saying is you're getting a 10% commission on whatever money you raise for this SPV and it's like it's a little bit of the wild west there, right? And so we try to avoid those at all costs. I think the way you get around that. That opaqueness is actually let's work directly with companies. Let's have their, you know, full blessing and support, you know, in terms of whatever it is we're doing and whatever liquidity we're providing and obviously make sure that we're able to do the work and understand it and be directly on the cap table. Not everybody does that. You know, a lot of folks are out there just to your point, like raising SPVs like crazy.
- [25:38]
A
Hey, thanks for listening. We'll be right back after a word from our sponsors. We've all been burned. We've all bought that enterprise planning tool that promised the world, only to realize six months later that we've basically taken on a second full time job just to keep the software running. I want to talk about a company that was built specifically to kill that cycle, abacum. I actually remember my very first conversation with their founder and CEO Julio Martinez over three years ago. Back then they were just starting out in Spain. Fast forward to today. Julio moved the home base to NYC and they're the engine behind finance teams at Strava Replit and JG Wentworth. ABCOM doesn't turn you into a software admin. The integrations are actually self service. You don't need a $300 an hour consultant to plug in your ERP or HRIs. And they're doing AI in a way that actually impacts the things FP and A teams are doing every day. Things like creating variance summaries, building formulas and modeling scenarios. If you're scaling fast and you're trying to avoid that legacy platform trap, ABACOM is the move. They're building the future of our tech stack and they're doing it with a CFO's perspective. Go to Abacum AI to see it for yourself. That is Abacum AI. Well, well, well. Here's what nobody tells you about being a CFO. You'll spend 50% of your time on stuff that is killing your momentum. The best CFOs I know are business leaders who know how to drive growth in heroic fashion. But most of us end up spending our days buried in manual work. I'm talking about collecting receipts, reviewing expenses and manually reconciling spend. It's painful. That's why CFOs need Brex. Brex built an intelligent finance platform that pairs corporate cards with built in expense management. Plus a team of AI agents to handle the manual finance tasks for you. That way CFOs have more time for the high impact projects that drive growth. You know the SH T actually worthy of your CFO time. Bottom line, Brex is automating hundreds of thousands of hours of manual finance work every month across 35,000 companies like Anthropic, Coinbase and Doordash, ready to spend less time buried in expenses and more time driving results. Check out Brex app brex.commetrics it is brex.commetrics please guys, how the hell do I have three kids in daycare? Brex.commetrics. you just launched your new AI product. The new pricing page looks great. I'm talking crisp, but behind it, last minute glued code, messy spreadsheets and running ad hoc queries to figure out what to bill. Customers get invoices they can't understand. Engineers are chasing billing bugs. Finance can't close the books. Well, with Metronome, you hand it all off to the real time billing infrastructure that just works. Reliable, flexible and built to grow with you. They turn raw usage events into accurate invoices, give customers bills they actually understand and keep every team in sync in real time. Whether you're launching usage based pricing, managing enterprise contracts or rolling out new AI services, Metronome does the heavy lifting so you can focus on your product, not your billing. That's why some of the fastest growing companies in the world like OpenAI and Anthropic run their billing on metronome. Visit metronome.com to learn more. That's metronome.com and I know that you go to great lengths to collaborate with management teams and so you've seen more secondaries probably than anybody I know go down and a lot of our listeners, Mike, are first time CFOs. They may not have ever run a tender offer before. Curious to get your take. Like what are the guardrails you would tell a CFO to put in place if they're thinking about running a secondary.
- [29:15]
B
Yeah, it's interesting and I, I know you've also done some articles on that talking to CFOs. The most important in my mind is there's a right time to provide liquidity in terms of like the threshold. Meaning a lot of times like some folks will get liquidity very early, like before they've even figured out if they've got a business right, like product market fit. That can be pretty dangerous. And I think a lot of VCs will look at that and say, boy, this seems really early in terms of a founder or someone kind of getting liquidity. But amazingly, even in those situations, a lot of VCs will say if this is my only way to be able to kind of, you know, one, win the deal and two, you know, get the ownership I want, I'm willing to do it, you know, so it's risky, but I think if you're, if you're a company that's kind of reached that size and scale where, you know, you know, you've got a business, you know, you've got a market, it's really about executing and trying to continue to grow and scale the business and ideally someday go public or get acquired. Liquidity then is really more about like, okay, what is the right amount for someone to feel financially secure? So there's, there are mins and maxes in my mind, right? So on the min side, it's like, okay, well, if we let everybody exercise their options, here's their minimum tax obligation, like you talked about with amt, right? That's your floor. Right, which is we're going to give you enough liquidity to exercise your options and pay your taxes. Normally, I'd say that most CFOs will look at that and they'll say, okay, well, let's, let's allow them to get some kind of liquidity so that actually they can, you know, put some, you know, cash on the balance sheet or in the checkbook. And then on the max side of things, this is, you know, where I think it can get a little squirrely. But the question ultimately is like, well, how much is too much? A founder, an executive, you know, even a great individual contributor says, okay, well, great, I got enough liquidity. Now I can just go to check out. I'm good, right? I made enough. And so I think that varies. And I think ultimately it's, it's a question of like, okay, well, how much is it enough for someone to feel like they're still intensely motivated to want to continue to build the business and haven't made so much money where they're, it's a little bit like, well, I'm not really worried about what happens this company now because they're already been able to cash out. So I don't think there's any firm numbers necessarily. But what the, the thing about a lot of these liquidity programs, especially if you do them as tender offers, is that companies can craft them in such a way where they could say, you know, we only want to provide liquidity to people who've been here for 1, 2, 3, whatever, that, you know, that, that the tenure is. And they could say, we're only going to allow people to sell a certain percentage of their shares and what they try to solve for is what's the right percentage? That kind of across the board gets everybody in a place where, you know, they cover the minimum tax obligation. They get something on the table, but it's not so much where they're just kind of like, great, I just made $5 million. I'm out of here. I'm gonna go, you know, live in Cabo. So I think that's how we try to think about it. But again, it's really company specific and very stage specific.
- [31:57]
A
Just reflecting back, it sounds like it's more about, do you have a viable business model? More so than, are you at 100 million in revenue?
- [32:04]
B
I think that's right. I mean, I'd say usually if you're at 100 million of revenue, you probably got a pretty good business. Yeah, but yeah, but yeah, it's really like, is this a, at least for us, right? Is this a sustainable business that we believe ideally can become a top desk performing standalone public company?
- [32:22]
A
I want to get your take on what's your sweet spot. What type of companies do you like to invest in?
- [32:27]
B
The range of companies we'll invest in sort of on the early stage, it could be 20 million of revenue. And we typically think about it more in terms of revenue and less in terms of series. But just to give you a sense of it, the bulk of what we do are companies that are between 40 million and 100 million of revenue. And then you know, say on the edges, like there's companies that are 20 to 40, they're scaling, and then on the later end of companies that are doing greater than 100 million in revenue. And that's just kind of what we describe as kind of classic growth stage. But it's not so much like, oh, it's series B, series C, series D. For us, it's more okay if you're at 20 million and you're growing 200%. Right. And we believe that you're building a business that, you know, proven market or at least expanding market, great product, customer love, that's ideal for us. And ideally, it's, you know, our belief that the companies we invest in could be standalone public companies someday. Now, of course, that bar has gotten a lot higher. Like I think if you talk to investment bankers these days, you know, they'd say the bar is you kind of need to be at 400 to 500 million of revenue and still growing 30ish percent. So that's a high, high bar. I will also say from a sector perspective, we've done a lot of software investing Historically we used to do more consumer facing stuff, although we've kind of de emphasized that in part because I think it's harder to find great opportunities in consumer. And then Fintech and some health tech related investing. That's kind of been what we've done. And as exciting as semiconductors are, like we don't know anything about semiconductors. So crazy. It's like oh Grok. I'm like, that's an amazing company. Amazing outcome video. We know nothing about semis.
- [33:59]
A
The best business to be in is the one you know.
- [34:01]
B
If you rewind back to 2022, which I describe as like the tech recession, right? Like after kind of the whole zer hangover and all the insanity, you know, you had everybody kind of like cutting, burn like demand. It was harder to sell like all that kind of stuff. And it was tough, right? Finding kind of really exciting stuff. And then all of a sudden, November 22nd chat GPT comes out. All of a sudden it's like this Cambrian explosion of like oh my gosh, now we're kind of, we're going into this new and amazing sort of super cycle known and it is so much fun right now to be working with companies and investing. There's a lot of uncertainty, but there's just a lot of really interesting businesses being built right now.
- [34:40]
A
For the type of companies that you invest in and assuming that you're going after secondaries, is it easier to get at bats in down cycles when people are trying to get liquidity or during an upswing when people are leaning more into the exuberance of it all?
- [34:59]
B
There's this really weird psychology I think amongst investors that when the markets are down nobody wants to be buying and when the markets are up, everybody's excited about putting money to work. That's the hardest instinct because you know, in some respects you kind of want to be like Warren Buffett where you want to be greedy when others aren't and, and sort of, you know, the inverse of that. And so what are the businesses that we're investing in where we believe five to 10 years from now they are going to become exceptional, incredible businesses. But you know, there was always that dynamic when the markets were kind of really kind of reshaping. Everyone's like, oh I'm, I'll sell anything, right? Because I just, I need to get out of this position, this, that and the other. And when markets are hot, they'll sell for a different reason. But you know, they'll, they'll try to get the top dollar, right? So it's just. But we didn't put a lot of money to work in 22. But it wasn't so much because people didn't want to sell or that we didn't want to invest. It was more because the signals that we were seeing in companies didn't give us a lot of confidence in what the next couple of years were going to look like. In 22 and 23 there was like, for example, with enterprise software there was, there was not a lot of buying happening. Right. You know, you saw the net new ARR numbers for the public. Software companies just, you know, completely fall through the floor in terms of that growth rate. A lot of companies are like well we way over invested in software and you know, 20 and 21 and you know, kind of COVID and Zurich and all that sort of stuff anyway, so that uncertainty I think is, you know, is obviously challenging. But that was what really kind of drove our like well we're not really sure, like are we really buying, you know, investing in this company and is it going to grow 50, 60% or are we talking 20 to 30%? The bigger question is not so much about it. We see amazing companies that are growing incredibly fast. The question now is really about all right, is that sustainable? Is an AI native company going from zero to a hundred in a year? Is that sustainable revenue or not?
- [36:43]
A
I'm so glad you brought this up because I, I firmly believe that when the numbers are up everywhere, it seems you have to look into non quantitative measures to try to wrap your head around it. What are some of the things that you use to evaluate growth companies?
- [36:57]
B
So naturally the first place you're going to look when you're looking at growth stage companies, you're going to look at their financials and kind of, you know, that to me is like the first screen. Is it a company that by any sort of relative measure of other companies that's performing extremely well. But I'd say I think like more qualitatively speaking. And in fund four, it's interesting like which is our most recent fund that we're investing and we've done 22 or so investments. Every company but one is still founder led. There's just a certain kind of credibility and authority that a founder has culturally to kind of make the sort of the tough decisions. What we've typically found is that like when you have a CEO that gets hired, that's not the founder, there's a different sort of willingness to embrace risk and to kind of drive to sort of very big outcomes and then the Other is customer love, right? Where people are just like, this is an amazing product, I love it. And then the last product, velocity, like the ability for a company to ship. Because I think at the end of the day, a lot of people talk about competitive moats and differentiation of this, that the other, I think the most differentiating thing for a company that's a startup is how fast can you ship and how good are the products that you're shipping. So I just think of examples from companies that we've invested in in the past. Robinhood, great example, right. It is unbelievable the pace at which they've introduced new products to customers. We weren't investors in this company, but Datadog is another great example where they just, you know, they've got, I don't know how many products they sell now, probably like in the tens, for sure. Ultimately, it all starts with product and engineering. I mean, go to market. Execution obviously matters, but ultimately the core, right. I think is really around that product and engineering. And then the third is just, do you have a business that's really attacking an incredibly big market? Right. And do customers just buy their pocketbooks or buy what they say by their behavior, say, we love this product.
- [38:48]
A
Mike, you mentioned that you completely underestimated the size of the TAM for secondaries when you started your own business. How do you weigh TAM today? How much does it really matter?
- [38:57]
B
I think the most successful companies are ones who in some respects create their own markets. And Uber is the, you know, the quintessential example. It's like, well, how many taxis are there? And all of a sudden you're like, they grew their market, right? In an incredible way. Airbnb, you said, same thing. It's really a question of like, what does this market look like five to ten years from now? And that's really hard to figure out. Markets certainly matter, but I think the founders are the ones that figure out how to navigate and actually sort of expand into bigger markets. Right. The other great example, which is actually probably the worst company sort of pass I've ever made, but I remember meeting Sean Parker back in 2003 when he was at Facebook and they were, you know, sort of raising around their Series A. And I was a JP Morgan at the time, and I remember him saying, you know, we're going to only focus on colleges, you know, four year universities. And I, I said, well, how many, how many people is that? And he said, I forget what the number was, but it was pretty small. That doesn't make a lot of sense. Right. And so of course you know, the rest is history. Right now with AI, you know, who knows what the market's going to look like, right? There is a, there was a chart, I think that the Financial Times had actually posted what AI could do with GDP and they had this like, there were three scenarios. It was like, oh, it's going to improve GDP by like 2/10 of a percent. It's going to end humanity or it's going to, you know, create super intelligence. And everybody's. So it was kind of like, okay, well, who knows, right? But it's powerful. I mean, you know, what AI is doing for people and consumers and enterprises alike is incredibly exciting.
- [40:30]
A
Mike, I'll let you off the hook in a second here, but you mentioned Anti Portfolio here. Any others that got away?
- [40:36]
B
Oh, yeah, there's so many. It's actually kind of embarrassing to say.
- [40:39]
A
Is this what investors think about at night? They don't, they don't ever think about, you know, like an NBA player. He doesn't think about his 50 point game. He thinks about the one shot he missed at the end, 100%.
- [40:49]
B
When we were, I think our first or second year for founders Circle, I think we had spent some time with Stripe.
- [40:57]
A
Ooh.
- [40:58]
B
And it was interesting because we sort of repeated the mistake, I think in some respects with Ramp, which was payments, revenue is not exactly the highest gross margin kind of business. Right. And so.
- [41:06]
A
Not at all. No.
- [41:07]
B
Right. We're like, well, why are we excited about like these kind of low margin, you know, kind of businesses? And, and so that was because everybody uses it because it's basically an index for like, you know, basically commerce and, you know, sort of money flows across the web. There was a company called Riot Games.
- [41:25]
A
Oh yeah, I know Riot Games.
- [41:26]
B
Yeah. So for those gamers then in your audience, they, they publish League of Legends, which was like this huge kind of business. It was, it ended up becoming a billion multi dollar game. My older brother who's in the video game business actually introduced me to one of the folks there. So I went down, they were raising their Series B, I got a demo of the game and it was amazing. And, and I still didn't get there. This is kind of an interesting thing where it's like one customer piece of feedback, you know, could lead someone to pass, but that's usually not a good idea. But this was, this was when I was at J.P. morgan Partners, Frank Slootman was the CEO and they were, you know, building this kind of storage business that created a bunch of efficiencies because they would deduplicate you know, stuff and this, that and the other. I remember we were talking to a customer and one of the customers like, yeah, it's okay. And we're like, well, that doesn't sound like customer love. And so we ended up passing one. I think, you know, Frank Sluman is kind of a legend, right? So I think we missed on that. We almost paid too much attention to, I think a customer signal. That was a, that was one of, you know, we didn't talk to enough, I think. Right.
- [42:23]
A
Not to pour salt on the wound, but then you think, do you get access to ServiceNow and then get access to Snowflake after that?
- [42:31]
B
Yeah, I know, I know. And we never did get into either of those, right. So, you know, we beat ourselves up all the time about all this kind of stuff. Like, you know, CrowdStrike, I remember was one was just, you know, amazing business and we couldn't get over like, I don't know, some kind of financial question that we had and so missed that one.
- [42:49]
A
You've done pretty well for yourself though. Thank you for being honest. People respect that a lot when, when investors can do that. Mike, we're, we're friends. I gotta ask you a stupid question, man. What the super cycle.
- [43:01]
B
That's a good question. Some sort of technology innovation that creates a whole bunch of opportunity and disruption for what exists, right? So if you think all the way back to the industrial age, like electricity, super cycle, right? Railroads super cycle. Fast forward a little bit more to kind of our day and age, right? The Internet, you know, and the dot com that just opened up a whole new like world of opportunity. You know, a lot of people would say sort of mobile with kind of the advent of the iPhone created a whole new wave of companies that were just able to do business because of the, the evolution of the technology cloud. When we think about super cycles, we kind of think about like, okay, it's a technology driven change that's going to change the way in which people, you know, kind of live work. You know, as soon as Chat GPT came out, it's kind of just been this amazing sort of, you know, like I said, Cambrian explosion of like innovation, which is so fun. Incredible amounts of capital expenditure on the part of hyperscalers and folks building out these massive AI focused data centers. So there's a huge amount of investment. One of my friends described as like, it's not like dark fiber, you know, of the Internet in the late 90s. It feels like something that's much deeper.
- [44:12]
A
That's my derivative question. There. Whenever I hear super Cycle, I also hear about some sort of crash afterwards. Is there such thing as a gentle landing or do these always end in some of blood? Because at least with the railroads, you could say we could use them for something like we built all the railroads and then we're like, we can't get the train out of the station. With servers melting off the wall with a five year useful life, I'm like, I don't know what you do with those.
- [44:36]
B
Bill Gurley put it the right way. He kind of described like the venture capital being a cyclical business. You know, you have like this sort of sawtooth growth and then inevitably it gets to a point where there's so much enthusiasm and so much investment, right. That like, you know, it resets and kind of falls off a cliff, right? So you have this sawtooth and then boom. A lot of people ask the question, are we in a bubble? I think that there is absolutely sort of data out there of a bubble, right? PhD researchers raising a billion dollars for the first round and who knows if they've got a business, they haven't shipped a product, any of that sort of stuff, right? But it just costs that much to kind of be all trained. So like the Neolabs, it will be really interesting to see how many of those actually sort of get through the window. And so I think you're going to see a lot of this, right, and the same thing, right, you're going to have a ton of people over investing in sort of these data center infrastructure, energy projects, all this, that and the other. And you might find, yeah, if, if the pace of AI innovation and development is not as fast as kind of the infrastructure that's being built out, especially if you're using debt, there's going to be a lot of folks that are kind of going to be upside down on that. Right. You know, but I'd argue, I think we're still very much in the early stages. I think there's a ton of additional innovation that's going to happen. And, and so as a result, I think all that compute, et cetera, I think that's still a constraint, the sheer amount of energy that's necessary to be able to kind of build this out. Like we're way behind thinking about what it's going to look like 10 years from now. There will be companies as big, if not bigger than what you see today in Microsoft, Google, Meta, you know, Amazon, Tesla, et cetera. I mean, it's going to be amazing. Part of that is also because if you just look at, you know, OpenAI as an example. We're not investors in the company, but you know, how many companies get to 800 million users in the span of three years? It's kind of mind boggling when you think about sort of what that adoption rate looks like. And whenever I'm kind of using ChatGPT or Claude or Perplexity, I actually save all of my searches and my queries and I refer back to them and never did that with Google. So it's something to me that's much more about kind of this ability to kind of leverage AI, to kind of capture knowledge in a lot of ways and sort of just get smarter, become a super learner, all that sort of stuff. And I, I think that's palpably different.
- [46:44]
A
Mike, you mentioned you did some consumer at the start, you did less consumer over the last few years. With AI, Are you more or less bullish on consumer?
- [46:53]
B
The fact that you can have an OpenAI getting to 850 million users in three years is really interesting.
- [46:58]
A
Yeah, I don't know how you do that in the B2B world.
- [47:00]
B
Some of the consumer investments that we made, like we invest in DoorDash Dollar Shave Club, a handful of these other ones. So one is, I would say on the E commerce side of things. Part of the reason why I don't think we invest in those as much is like it doesn't feel like there's a lot of sort of room for new consumer brands to kind of be able to scale in the online way. It just feels like, feels like that market has become pretty saturated. DoorDash I think was very much one of those examples of a company like Uber that was able to take advantage of kind of this wonderful sort of new world of mobile and all of a sudden this very convenient thing. And it was obviously accelerated by Covid, but when it comes to kind of AI related consumer opportunities, I think the bigger challenging question is can you build a business where you actually kind of get this amazing customer love where people want to kind of stick with it and use it, you know. But the bigger challenge I think is going to be when you have these massive companies that already have massive consumer distribution. Google with Gemini. Right. OpenAI, Right. I think it's just harder to break through the noise. I think it will be a rare thing finding a company that can get to a billion users because to me in some respects like that's kind of like the end game. I don't know of many other consumer kind of AI focused companies that have Gotten this sort of meaningful scale yet.
- [48:07]
A
Mike, switching gears a bit. I want people to walk away from this podcast with a full picture of founder Circle. And something that drew me in to start working with you and getting to know the people that you collaborate with is your concentration on community. And so we touched on the secondary piece of the characteristics of the firm, but I feel like the community piece and the community involvement is also just as big. Can you speak to how that developed?
- [48:31]
B
So when you think about sort of as an investor, like, what is the value that you're actually going to provide to a founder, right? Or. Or a company that's sort of scaling, I think if I were to just really boil it down and one, it's capital, but everybody has capital. Two, it's you're helping a company hire, right? Or helping their team scale, or three, you're actually introducing them to customers or sort of business development, you know, kind of this, that, and the other. But fundamentally, it's like, how do we help you kind of with customers? How do we help you kind of build your team? When I talk to most founders of growth stage companies, I'd ask them a couple questions, right? The first question would be, how many VCs is the right number on your board? One of the founders of one of our companies had this really kind of funny analogy where he said, VCs are a little bit like martinis, right? He's like, if you have one on your board, yeah, it feels pretty good. Two, feels great. Three, you're gonna have a hangover the next morning. And I just kind of laughed at that, right? And we don't try to take board seats, right? So that's not really kind of been our. The. The architecture of our firm. Adding the third or fourth venture board member doesn't really do much for them. I think a lot of times investors take way too much credit for building companies when, you know, I mean, some obviously do build companies, right? Like Snowflake was, you know, famously kind of founded and incubated at Sutter Hill, right? But we've always taken the point of view that how do we figure out a way to kind of help these managing teams be more successful? And a lot of that is if you can put them in the room with other executives similarly, you know, scaled or bigger kind of stage, you know, companies where they can actually kind of leverage the sort of the. The knowledge and expertise and wisdom of others that have been in the same seat as them, they're going through the same set of challenges. That's incredibly powerful. One of the other sort of design sort of principles around that was it shouldn't just be limited to our portfolio. We probably invested in 100 companies or so since we started the firm. But there's a whole universe of people that are out there that are kind of going through the same set of challenges. So how do we think about bringing those founders and CEOs together? And then importantly, how do we actually focus not just on founders and CEOs, because everybody tries to cater to founders and CEOs, but how do we serve the CFO, right. The chief Product Officer, the Chief Revenue Officer, Chief Marketing officer, right. How do we build those communities where people can kind of leverage the wisdom of others and experience of others. So just by way of an example, our CFO circle today, which is our most mature one, I think it's something like 350 growth stage CFOs. The CFO of Snowflake is, you know, part of that group. He's Brian Robbins, he's, he's a good friend. A lot of, you know, so a lot of public companies, but then also a lot of kind of, you know, CFOs of much younger companies. And I think that the key to it is figuring out the way in which you curate that community where they can communicate with each other either through email and chat, monthly, kind of in real life get togethers, cohort based things. And so that whole essence of sort of community for us is like, you know, how do you find multiple ways to allow these folks to be able to communicate with each other as an investor, right. One is it helps us identify folks who might be open to new opportunities. From a talent perspective, there's a ton of insight. I think that when we can kind of bring people together to talk about topics or issues that they care about, that's valuable for us as investors. And then the third is, and I think probably most importantly is it allows us to build these authentic relationships, the management teams and companies. So the conversation I have with a founder and CEO is not, hey, when are you raising around? It's hey, what can we do to actually help your executives be better? Inevitably, I'd say for a lot of growth stage companies, usually that's a senior go to market executive or a senior finance professional. Because I would, I'd argue that mo, in most cases, the product engineering teams, the core of those teams are ones that are already kind of fairly well established in a lot of the companies that we spend time with and just being able to leverage kind of their, you know, the wisdom and knowledge. Now, whether or not ultimately, you know, since we do a lot of B2B investing, if those folks end up becoming potential customers or portfolio companies, that's not really kind of the reason why we're building the community. But like our just viewers, like that is a way for us to kind of be able to kind of build a much broader universe of people that are kind of close to our firm. And sometimes it translates into, you know, CFO reaching out, saying we're raising around or we're doing a secondary. And that's great, right? But it's not really actually the principle design, right? The design is how do we help these people be more successful and put ourselves in a position to kind of have a relationship with that company so that when the time comes we have a shot. The companies that we invest in are not going to have a problem raising money. And so it's really more about they get to pick and choose who their investors are going to be. You know, then the question is how do we get across that line where we're one of the investors on the list, where they're inviting us to be a part of it. You know, venture capital is a service business, right? I mean, at the end of the day it's really just about, you know, how do we sort of do that so we can kind of end up on the right side of the line right when the opportunity arises.
- [53:06]
A
Mike Someone once described community to me as a moat. And I was like, maybe it is a moat, but I look at it more as the serendipity engine where just good shit happens. If you treat people well and you're just there for them at times and don't ask for something in return. And we're both in this game where people, at least as an operator, you have multiple stops along the way, right? You don't know what's going to happen, but you have multiple at bats in your career and you will remember the people who were there to answer a question so you didn't feel dumb or referred you to somebody else who could answer it. So I think it goes a long way.
- [53:40]
B
What's that game that, that game show where it's like you can phone a friend so the community is a little bit like that where it's like I have this burning issue or this question I'm trying to figure out the answer to, or I just want to get feedback from others that are going through the same, that are trying to answer the same question. That's really, I think one of the things that a lot of CFOs in our community really take advantage of. If anyone's interested that's in a series B company doing 20 million revenue, more like, we would be happy to. You know, there's an application process and all that sort of stuff, but would welcome anyone. But it's also, I think, when you're in times of like, great uncertainty. Right. So when Covid hit, it was amazing to see the CFOs galvanizing, where they were all just trying to figure out, like, hey, what's, what's your work from home policy? How are you thinking, you know, about all these different sorts of issues? And then the other time I remember vividly was when SVB kind of imploded. The sheer amount of just kind of back and forth with everybody just trying to figure out what was going on and what they were doing was really valuable. Right. And so when you have those kind of very trying times, that's oftentimes when I think community, like when you can lean on a community of people that you trust, like, that is incredibly valuable.
- [54:46]
A
Last one I got for you. So you're an entrepreneur who invests in entrepreneurs. What have you learned about yourself in the process of building a business?
- [54:56]
B
Had a substack post on this recently where they talked about the difference between building a firm and a function. There are a lot of venture capital firms that are out there where, you know, it's an amalgamation of partners and every partner is kind of focused on their own thing, you know, but they're not really interested in investing other than just like doing their own deals and trying to make a lot of money and this, that and the other. And I thought what was really actually kind of interesting about Andreessen's approach was we are trying to build a firm that's going to last, you know, long beyond what Mark and Ben might be doing. And, you know, like, that will sort of leave a legacy. Right. And so they architect it differently. I think that makes a ton of sense in terms of how we think about trying to sort of build our firm and culture. But I think the biggest adjustment was recognizing that when you're trying to build a firm, everybody starts as an investor for the most part. But what you realize is that if you're actually trying to build a firm, it's actually more about vision, fundraising and hiring and less about the day to day of actually making new investments, which, again, I love doing that. So striking that balance of understanding, like, okay, my job is not to just be an investor, but I. I need to think about how we're actually sort of building this firm. That took a long time to figure out. Right. And a lot of investors are just not great managers. The other one was I have a huge amount of respect and humility for entrepreneurs raising money because I've, I've done that. Now, fortunately, I. I only have to do it roughly every three or four years, but it is, it is the most abnormal process. It takes a ton of time. It's not easy as a tie. You have, you know, hear a lot of no's. Right. It's just one of those kinds of things where you, where you realize, man, fundraising is hard. I don't care what anyone says. Those are the biggest things. I think trying to stay true to the vision, I think that's what ultimately helps us, I think, try to keep to that North Star. Right. So authentic relationships for us are everything. Right. Community building is really, really important.
- [56:47]
A
Yeah. What's the saying? We do this not because it's easy. We do it because we thought it was going to be easy.
- [56:53]
B
Yes, that's exactly right.
- [56:55]
A
In all seriousness, though, thanks for coming on the show, but more importantly, thanks for being supportive of me as. As I've gone out on my own. Thanks for reading my stuff and thanks for answering my questions over, over the last couple of years. So I appreciate you.
- [57:07]
B
You're building something awesome. I think it's amazing what you've done and, and thank you for having me on your podcast. I really appreciate it.
- [57:13]
A
Ear on the Numbers is a mostly media production yelling an intro by Fat Joe. Artwork by Meg d'. Alessandro. Show is executive produced by Ben Hillman. Nothing said on this podcast is intended to be business or investment advice. It's the sole opinion of me. A guy who feeds his dog way too much ice cream and has a history of net operating losses. Lol. If you like this podcast, hit subscribe and give us five stars. It will take like two seconds and our algorithm overlords love it. Drink water, call your mom and have a great day.
- [57:42]
B
Peace.