New Models for Venture Investing: Staying Private Longer - Ascent Conference New Models for Venture Investing: Staying Private Longer - Ascent Conference

New Models for Venture Investing: Staying Private Longer

Jordan Nof, Managing Partner @ Tusk Ventures; Chindeau Enekwe, CEO & Managing Director @ Affiniti; Jordan French, Executive Editor & Co-Founder @ Grit Daily

Ascent Conference 2019

Jordan French [00:00:09] Chindeau at the syndicate. One thing I want to start with and and explain is if you could sort of unpack the life cycle of how startups think about capital markets, ultimately, they’re looking for an exit. Ultimately, that’s profitability. But there’s a lot of things that they want to put in place before they’re in a position to take it. Could you just walk us through foundationally how you think about that and how you advise, especially those that are getting ready to do that?

Chindeau Enekwe [00:00:38] If they’re getting ready? So, hi, everyone. First off, like that. So I think what I would like to say first is like the default of the default version of business is to be private. Right. So once you start accepting investors’ capital, you have a new stake, a new stakeholder that you want to return capital to. So once you start doing that, you should think how you’re going to possibly return that capital either through dividends or actually an exit opportunity, M&A or IPO. So one of the things I like to start off with a founder and talk about is how would that even be possible when you’re raising capital and how much of the business you’re giving up and versus I mean, there’s always this discussion about valuation when you’re investing. And it’s really a discussion, from my standpoint, when I talk to a founder is how much of the business will you own ultimately at exit? So how valuable will it be for you? And then how valuable does it need to be for me to make that investment? So how do you need to grow whether you really signing yourself up for once, you once you were to take on some capital. So it’s really thinking through that process at the start of taking capital from others.

Jordan French [00:01:49] Certainly. And just like, you know, you’re advising startups to he spoke of valuation. One thing they’re going to have a big impact on valuation for any startup is the regulatory environment. In fact, it can in some cases bring it to zero. One thing that I wanted for you to impact, though, for us is there are many sort of strata to to the regulatory environment. I was hoping you could share with the audience sort of where you sit, especially as it relates to, for example, municipal, state and federal regulatory schemes.

Jordan Nof [00:02:20] Yeah, so so I’m one of two managing partners that tells venture partners. So we are an early stage consumer focused fund that is investing in companies operating in highly regulated markets. The key differentiator for us is that what we bring to the table to help us get access to and to win deals is in addition to the table stakes platform that most people offer. We also provide communications, political and regulatory support to companies that as they begin to scale, that becomes more of a prevalent issue. But that’s particularly on the state and the local level. So ridesharing, for example, or scooters are or something where there’s a there is no regulatory framework that exists or helping them proactively kind of go and interact at the state level to to get favorable frameworks in place.

Jordan French [00:03:11] Sure. And just to touch on that, though, a little bit more interstate commerce law. That body law is just just pervasive. It’s reached seemingly every aspect of our lives. Even this conference would evoke some of the body of interstate commerce law. Why choose to play in the municipal and state sandbox and for large part to sort of beat it back, to not be concerned so much at the federal level?

Jordan Nof [00:03:39] Well, So for private companies, we need results much faster, especially in the venture lifecycle, and getting results at the state and local level is much quicker than federal.

Jordan French [00:03:48] And why and why, why is that the case?

Jordan Nof [00:03:51] Just I mean, let’s look at the federal government right now. It’s it’s not really the easiest to get anything done. It’s just also the lifecycle of the approvals that you need is generally not one decision maker and it’s usually kind of oversight committees that you have to go back and forth between. So it’s definitely a longer cycle for sure.

Jordan French [00:04:11] And Chindeau, just to draw some more contrast, you’re in Washington, D.C., naturally, rather than in our minds. That is where most of the federal government Nuttal sits. Why focus on the federal angle?

Chindeau Enekwe [00:04:27] I think the reason why we do that is because, like the way he views the way a lot of founders also view D.C. is like a black box, like how do you figure it out? And when a founder has that moment, that’s when we find ourselves to be valuable. We don’t find ourselves to be valuable at the state and local level because that requires relationships, history, things that we don’t bring to the table. So when the founder has the challenge of understanding which oversight committee regulates their regulator and how can they translate that to understanding, then all those parties to understand? And why the regulation from 30 years ago doesn’t apply to the new technology that they want to apply to it. That takes a conversation that most of the the regulators don’t really have an interest to, you know, be well versed in. I mean, they had trouble thinking about, you know, how to regulate Facebook. Right. So it’s really helping both parties have an understanding or a conversation that they want to have with each other and, you know, sort of doing that by introducing them to the parties that know them, know the regulators well, or do the oversight committees as well and can. That’s what we’re brought in for.

Jordan French [00:05:45] Certainly. And one thing that’s on everyone’s mind, the audience, is they want to know, you know, how are you different from lobbyists because you’re not lobbyists. What role do you play?

Chindeau Enekwe [00:05:59] I think it’s the same as any venture capital fund manager would play, like you’re not there to do the job of the founder. You’re not there to have the conversations that the founders and the best place are positioned to have or and nor am I in the place to have the conversations that the regulator or someone in government should have. I’m there to help introduce them to the parties that might have those relationships or can help them unpack the the relationships or the conversations and strategies that they need to have, like plain English. When you want to create a strategy as to how am I going to talk to someone, I’m not going to write the strategy. That’s a lobbyist. I will help you introduce you to the people that can help you do it. Just like I wouldn’t be your lawyer. I would help you meet the lawyers you need to meet.

Jordan French [00:06:49] Certainly in Jordan. Earlier, you said on this note, look at at the federal government, it begs the question, why should either of you even dabble in highly regulated industries at all from an investment perspective when there are plenty of startups out there that aren’t so heavily influenced by by regulators.

Jordan Nof [00:07:10] From from our perspective, that that’s the reason why we want to go after companies that are in highly regulated markets. We think that it’s a it’s a barrier that’s artificially there, that if you have a deep understanding or access to people that do understand the specific risks that may pertain to the business or ones that that actually don’t, it can make you a much better investor than just passively saying, yeah, there could be some regulatory risk that could negatively affect the deal.

Jordan French [00:07:38] Certainly. And just to walk through some mechanics. So we’re all with you on what’s actually going on. You mentioned one of the more popular one way you got into the business was on ridesharing. Right investment. But then more recently, electric scooters are.

Jordan Nof [00:07:54] So I mean, that’s a good kind of where where the business kind of you can kind of go to that case. So we were early investors in Bird. So whenever there were 68 scooters and five people working out of the Santa Monica, we work. That’s whenever we invested because we knew that if they became relevant, no state or city government would ever know what to do with this. How would you regulate it? And really, the notion is that we’re investing before before any sort of there’s no cease and desist letter. There’s no get these out of San Francisco. Like, that’s that’s what we come in and invest ahead of time. And that’s why how we’re getting access to deals because of that. So we’re helping them grow and launching those 100 markets after they hit that growth, that growth.

Jordan French [00:08:38] Certainly. And on the note of growth, there seem to be two species. And this is not on all of our minds of how startups can approach perhaps highly regulated, regulated environments. And one might be with introducing scooters into a new city. One is the one being compliant. The rules are what they are. And if we can enter, we just don’t enter the others, the rebel, and just show up in mass and dump everything on the street. Ideally, have consumers galvanized around your product and then demand that it’s that they have it. What generally is your advice on approach to take or even perhaps give some commentary on those two approaches?

Chindeau Enekwe [00:09:16] My view when I speak to founders as to how they should like go when the rules of the road are what they are, is basically follow the rules as much as possible. And depending on you have to understand where you are, what your potential risks are. Right. When you’re putting, let’s say, a whole bunch of scooters in Santa Monica, there’s there’s a difference then, you know, speaking cavalierly when you have a public offering in the works, there’s a difference because of what you how you can be penalized. Right. And what it can ultimately do to the potential to your company and the outcomes. So that’s really my I mean, I can’t make the decision for them. But my whole advice is if you understand what the cost benefit analysis is and you choose to make that choice, especially after if I were to give you money, then that’s a whole different thing. But before I’m not going to before I we’ve already invested or we are considering investment the way that you make your decisions and our what you’re going to have to explain to your investors. So making sure that you have a reasonable way to explain to your existing stakeholders, your future stakeholders why you might have made the decision is really what my advice is, is really kind of based on.

Jordan French [00:10:37] And are there any any situations that you could share now where that rebellious approach is warranted?

Chindeau Enekwe [00:10:49] What I would say is more I can give a broader example of I often get to advise companies that are approaching the cannabis. We have not invested in cannabis, the cannabis market. But when founders talk to me about their business in the in that space, I often tell them, you know, especially about the way that they can deal with the banking regulations in that space. It’s you know, you don’t want to be on the wrong side of the banking regulators or the banks. Right. So I generally just give advice based on how how people penalize you and where you will be after that and and how that would affect the remainder of your business. So I generally that’s how I kind of house my advice of when things go wrong, how wrong can they go and where would you be at that point?

Jordan French [00:11:40] Certainly. And and you just said you don’t want to be on the wrong side of banks or maybe against them, just to paraphrase. How does that bode? Perhaps, Jordan, if you want answers, how does that bode for companies that offer a cryptocurrency or otherwise operate? And the block chain space is this space that you entirely avoid because of that reason?

Chindeau Enekwe [00:12:01] Well, it’s kind of like cannabis and block chain for me. They’re very interesting. Or cryptocurrency rather than but they’re very interesting. I would love for them to work at scale. And it just there’s a whole bunch of skepticism of if it works at scale and what happens ultimately, you know, three or four years down the road, whereas, you know, in the immediacy, it is kind of attractive and exciting. But I feel like people who made the decision to invest in companies that chose those paths are right now like two years ago. It would have been great and people felt great about making those decisions. But now just the people who hesitated feel like they’re they feel like they made the right decision. So I’m generally er on the side of, you know, how am I going to feel about this four years down the road when I have to raise capital from new investors. And those failures happened some hills. I’m not willing to die on some I am. And you know, the other ones I, I sort of just walk the line.

Jordan French [00:12:57] And Jordan, Chindeau just mentioned raising capital. Certainly as it relates to regulatory risk. One particular bucket of that risk comes with potentially preparing for an IPO, and that’s one and and and offering shares to the public. A litany or menu of regulations and rules apply. The S.E.C. governs much of that. If you could share some of your some of your advice that you give startups that are preparing or considering that option.

Jordan Nof [00:13:31] So, I mean, as far as it goes with I mean, that’s that’s pretty far down the line from whatever whenever I’m investing, that’s really not, you know, thinking about an IPO is the that’s just very, very far down the down the road. Whenever I’m writing a check at a series A, I’m more thinking, how do we get this to 10, 20 million dollars in revenue? But I think that it just, generally speaking, advises that, you know, you’re you’re not going to be able to you’re not going to be able to be really cute with your accounting. Like a lot of you can see sometimes great fundraisers that can go out and raise a series A in a really tight process, let’s say two weeks. And it’s a completely different fundraising process than raising your CRTC. That’s a you know, you cannot you cannot create your own LTV, you know, definition. You have to basically adhere to what are common, generally accepted accounting principles, which is what an S1 is trying to translate.

Jordan French [00:14:27] Certainly just just bucketing all of this to write in all of our minds. We’re hearing what you’re saying. And we’re also seeing the headlines right in the headline that accompanies some of this year’s IPOs, the share prices that are lower, perhaps when when they initially offered and in some cases like we were entirely filled IPO. So it begs the question perhaps, why should we consider offering shares to the public at all, given this is a mess?

Jordan Nof [00:14:58] Well, I mean, the ultimate reason is to raise capital. So, I mean, you have you have all the companies that you’re that you’re bringing up, actually, they did go through or trying to go through an IPO process, and that’s to raise additional proceeds for for the company itself, also to drive liquidity to venture investors and other investors that have been in these companies for quite some time. So I think that it’s you know, most companies have been staying private longer, more value accretion as occurred during the private stages. If you look at historically, companies were going public whenever, you know, they were much younger and hadn’t really realized their full potential in terms of total market cap. And there was a lot of upside still remaining for the public markets right now that we’re seeing, you know, the total top out of enterprise value, kind of that’s pretty close to their last private market valuations. So I think that that’s kind of the bridge there between the time and the total value creation occurred. But with that being said, the pricing discrepancy that’s like that’s polarizing headlines is the fact that people think that money’s being left on the table when the fact of the matter is, everybody knows that the an IPO is going to be priced below what you need. You need to create a compelling case for the public markets to want to invest in a company that is newly listed to the exchange.

Jordan French [00:16:23] Yeah, certainly. Just hold that thought really quick. Some housekeeping for a set of you. Just give us, like, the five minute signal. I want to make sure we leave some time for Q&A. You’re five perfect and then so Chindeau then to turn the tables a bit, you wonder from a retail investor standpoint if because companies are are do the perhaps regulatory costs and other costs staying private longer if they should be even considering investing in these IPOs at all? From your standpoint?

Chindeau Enekwe [00:16:55] I guess this is where I think, you know, everyone knows what we’re really talking. We’re talking about the we works. We’re talking about Uber. We’re talking about the recent major kind of stumbles to the market that have happened. I think what we really need to be clear about is the way that these companies have gone private has been because of like asset dislocations, like the new fact that there’s been hundreds of billions of dollars sunk into the market by new mega funds like. So when the retail investors come into the market, they are actually not taking the upside. Like Jordan just said, they’re not taking the same upside as a face, not even the Facebook we’re talking about. Microsoft went public at a 500 million dollar valuation. Now it’s one of the most is, you know, worth close to a trillion dollars. And then the same thing happened with AOL. There was a seven like also to 200 and was twenty four thousand percent return from when the IPO to when it was ultimately sold to AOL Faurisson or. Yeah, all those things. But the difference I think that’s happening now is, you know, not that the business models don’t make profit when they go to IPO. A lot of companies weren’t making profit. It’s just that the fundamental unit economics are different. And I think one of the bigger examples has been we were going to market with some funny accounting principles around community adjusted profitability. But what I think that ultimately shows is that founder friendly, late stage mega funds have not pushed back on the corporate governance principles, which would have demanded to generate some, you know, especially around accounting, like the basic the basic economic units of business. So for retail investors, just being true to understanding the basic economic units of business, you’re going to be fine. If finding a company that is true, that that’s growing but uses a uses new money to just purchase new customers, but it’s profitable at its basic level. I don’t think retail investors are going to be disappointed with that. But what I think they’re going to be disappointed with is that the upside that they would have traditionally got or what they traditionally expect isn’t isn’t so much there anymore. There’s not the traditional idea of growth stock from the 90s when the 90s and the tech boom happened. But there are some growth stocks that have nothing to do with technology that are still hot and that they can invest in, you know, if they were in not Pizza Hut, but.

Jordan Nof [00:19:33] Was a pizza?

Chindeau Enekwe [00:19:34] No, it’s Domino’s. They would have Domino’s Monster Energy. They would have had the best time of their lives for the past five years. So, you know, it’s the same kind of.

Jordan French [00:19:42] Turning into a stock panel for four half half a minute there. But you touched on accountability. You said it. And Jordan also brought into this conversation governance controls. So I want to do that right before we go into Q&A, Will, I want to be able to field one or two questions. And because of the unique position that you sit in. Right. As sort of these regulatory facing voices, you’re facing regulators, you’re facing investors and the sort of founders themselves. Is there something missing within the regulatory framework that you’d like to see, or is there too much perhaps, and it should be peeled back to let something else come in? Where are we on that balance?

Chindeau Enekwe [00:20:21] I think we’re at a funny place where our typical retail investor, when they want to invest in private market opportunities, they’re highly regulated. You know, there’s all these risk D now there’s reggae crowdfunding, there’s all these barriers to getting you in and then you have to be. So the companies have to start when it comes to crowdfunding. So very small investment amounts, but when it becomes the very large private market investment amounts, the sort of similar governance that you would require of a smaller company raising a crowdfunding you don’t have, there’s not there it’s based on these supposedly sophisticated investors should be making sophisticated decisions, but they’re doing it ultimately with our money, our pension money, our long term savings, and they are making their judgment calls on their own. So I think there is something because it’s relatively new, it’s only been for the past four to five years that there’s been this large amount of money in the private market. And then when you look at it from the standpoint of the trillion dollar, 80 trillion dollars of capital out there, it’s not that much capital. But in terms of how much value is being created there, it is a lot of value for a lot of for a very small amount of people. I think that there’s going to be an adjustment eventually when the political tides turn, that addresses it somewhat, but not now. But for retail investors, it’s just to be very discerning. In the typical way of how you look at any business is how you should look at an IPO.

Jordan French [00:21:48] Certainly. And hearing that you’re both in in deep. It sounds like also just rationalize or rather to to put a pin on it. Companies are staying private longer, rationally to capture more value, not leave money on the table that they were perhaps in past decades. I’m going to turn to Q&A if you just raise your hand. We definitely have time for, I think, one maybe two questions. Two questions. Great. So just raise your hand. I’ll I’ll be walking Mike, and come to you. Just raise your hand in the air. If you have questions for Chinedu and Jordan, I’ll come right to you and just say your name.

Audience [00:22:25] Thank you very much. Jordan, I just have a quick question with regards to the title, The Talk Staying Private Longer on what’s your respective relationships are with firms these days considering things like, you know, maybe an exit path isn’t necessarily an IPO because of some of the recent debacles or, you know, potentially the acquisition play, which we’ve seen maybe get a little bit overcrowded in terms of, you know, coming in at these moments and, you know, keeping these companies private. Are you guys doing more work, you would say, with PE firms when it comes to exits? Just curious.

Jordan Nof [00:22:54] You know, I think there’s some skepticism on it. Yeah, definitely some interest, you know, of coming downstream into the later stage rounds of financing. Something that I would say, at least in my experience, is that people remain skeptical on is that, you know, if you look at the business model of venture and of private equity, they are literally the exact opposite. Like we are optimizing for the outliers, whereas private equity wants to mitigate against those. So, you know, one zero in my portfolio does not you know, it should match every every deal matters, but it’s not going to wipe away the Kerry for my entire fund, whereas that’s not the case on the private equity side. So one notion that brings skepticism to investors that are already on the table from the venture side, is that what happens if this deal, you know, if it starts to not look like it’s going to return it to X? You know, private equity investors, notoriously, they just want their money back. And so their ability to force a sale, that would be just, you know, a one X for them. Whereas, you know, that’s that’s taking another turn off of my fund. So because as I’ve already been marked up, this is already a late stage deal. So I think that that’s one skepticism. But they are definitely getting more active and it’s another way to stay private longer.

Jordan French [00:24:14] Any idea to that Chindeau?

Chindeau Enekwe [00:24:15] Not much, but what I would say is if you’re I mean, it’s not really the conversation is different. If you’re doing a trade sale or that type of sale, you’re talking to a sophisticated private equity buyer. And in my experience, those conversations don’t yield the type of results that either party really wants. So, yeah.

Jordan French [00:24:41] It looks like that’s all the time that we have a big round of applause to very busy man. Jordan, of Tusk Ventures and Chindeau Enekwe.

 

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