The Behind-the-Scenes Mess Now Facing the VC Industry

confidence that anything is working. So people are dumping stuff and they're buying dollars. Yeah. We are recording this on June. It's Monday. Black Monday is trending on Twitter. It's not like it. It seems like a little exaggeration. It's early in the day. Yeah, so we'll see what happens. But what I will say is on Friday, I think the SP five hun was down to point nine percent something like that, And it has been just incredibly painful for

a lot of stocks out there, but tech stocks in particular. Yeah, tech stocks in particular, as everyone knows, have gotten crushed. And then of course that feeds in a very linear way to private tech companies. Of course, we've had this big private tech boom VC, all these startups and everything, and every late stage private company you know, aspires to I p O, so off the I p O windows

plunging or falling. Then that hurts their values. And every mid stage company expires to be an age stage company, and every early stage company expires to be a mid stage company. So there's no way to like avoid this sort of follow on effect. Like individual companies can do fun, but as a whole, what we see in the stock market I think pretty straightforwardly translates down into less liquid, riskier private tech. Right, So you would assume there's some effect.

But obviously because a lot of these companies, while all of these companies are not listed, you can't actually see what's happening to their valuations in real time. So we can look up the S and P five hundred or you know, Amazon or Alphabet or whatever and see what's happening. It's a little bit harder with some of these startups. The only thing you can do, you know, you can see VC returns and what they tell their investors. But even still, the only time you'll often like get like

a true like mark as in mark to market. I think is like when they do a raise, and of course no one wants to actually do a down round raise, so you never actually get it. So anyway, this is the irony, right when when valuations are going up and people are doing repeated fundraising rounds at higher valuations, everyone issues a press release and talks about it, and then when things are going in the other direction, it's just

silence and crickets. So I'm very pleased to say that today we're going to try to figure out what's been happening in the world of venture capital and startups. We're going to be speaking with Tyler Tringus. He's the founder and general partner of Calm Fund. So Tyler, welcome to the show. Hey, thanks so much for having me. Tyler, maybe just to begin, you can tell us a bit more about Calm Fund. What is it and how does

it differ from a traditional venture capital firm. Yeah, so, um, we are an early stage investor in technology companies, so in a lot of ways we we look a lot like um, you know, a venture capital firm in the sense of we you know, invest early, we partner with the founders, we provide community, mentorship resources, all that kind of stuff, and we're with them kind of the whole way until they eventually either exit the company or or UM I p O UM. But UM so, so we

share a lot in common terms of the structure. UM. Where we differ is we are one of the only funds doing early stage tech investing with a different thesis than the traditional venture model of basically you could colloquially call it like unicorn hunting, right looking for you know, billion and ten billion dollar outcomes UM, and our model is based around the idea that you can, now, for maybe the first time in you know, tech investing history,

you can invest pretty early stage in companies that are substantially de risked and going after sort of um, slightly more niche opportunities where it's just not the same kind of risk profile as a traditional kind of venture UM, you know, winner take all kind of model, and you can build an entirely different sort of approach to portfolio

construction around that. So, can you explain why the typical VC approach is as you say, unicorn hunting, And of course for years there's like, yeah, well, you know, nine of ten of our portfolio companies are going to fail, but one of them is going to be the next Airbnb or Uber or Facebook. And that's how that's the game is like just you just gotta hit one. Why has that become or why especially over the last decade, but probably before, how did that become the dominant strategy

that so many firms settled on? I mean, I think the very simple answer is that's the strategy that worked right um in the sen that you know, people sort of reverse engineer the portfolios that were very successful and they looked back and they said, hey, you know, it turns out we had this power law distribution where you know, almost all the returns came from um, you know, our biggest winners getting into Airbnb or Uber that sort of thing,

and nothing else really mattered. So what we should do is really shift our strategy to be completely focused on maximizing our chance of getting you know, one or a few of those huge outlier returns in our portfolio, because that's what's worked for you know, the best venture funds in the past. Um. The maybe slightly more um uh theoretically sound version of that's just when you have very very high risk ventures, which is what venture capital is

built to do right. It comes out of the semiconductor era of building you know, massive factories and and launching semi conductor products and things like that, where you had huge upfront costs, high risk, no real ability to predict sort of market demand. You needed to be compensated for that risk with very very very outsized returns um at both the company level and at the sort of overall fund portfolio level. Right, you needed to make sure that

you couldn't just generate a two x fund. You needed a five x fund or something to to really move the needle, and so you needed hundred x outcomes to get to that five n UM. So that's the that's the general UM I guess history of of that approach.

It's interesting, Tracy. You know, you know something we talked we've been talking more and more about on the podcast, like this idea of like capital investment coming back and actually spending and then thinking about like all these companies over the last ten years, like what capital did they really need? Like software? It's like they didn't need to build a job factory or a chip founder. I was just gonna say, I call this the UM, this overall dynamic,

the peace dividend of the sas wars. Right, So the idea of like a peace dividend where you know, you you just are left with all of this kind of infrastructure and stuff after the kind of bubbly phase of things, and um, you get to use all that stuff for free.

Right and so now, yeah, you're right, It's like the software companies that are going to market are really not They're not venture opportunities in multiple respects, and one of which is they're just not that capital intensive before you can start to de risk and see if people actually want this thing. Well, presumably a lot of the money just went into trying to gain market share, right and right, that was it. Um. But okay, so here's my big question based on that. I can't imagine anyone going out

and sort of saying explicitly that their unicorn hunting. In the current environment, it just doesn't feel like an environment conducive to finding those types of companies and getting the funding for those types of companies. So what are venture capital firms traditional vcs doing right now? I don't know if they would agree with the premise of your question, To be honest, Um, I think a lot of venture funds still think that, um, you know, the fundamental sort

of approaches is more or less the same. I mean, they're they're still looking for those kind of large outlier returns, especially if you're investing early stage, and their view is just, hey, you know, I think, uh maybe Mark Andreson kind of said this a while back, and it's become kind of an ethos throughout the industry, which is that you know, there's only a few huge outlier companies that matter every year, and your job is just to try to get into

those right and you know, the valuation you do it at doesn't really matter. Um, It's all about you know, making sure that you get into the coin base or whatever thing that's going to generate a hundred x or five x return for your fund. UM. I don't think that that approach has changed a ton right now for UM, for the traditional early stage venture funds who've been at it for a while. So what are they doing right now? Though? What?

Or what? You know? So it's like you have this incredible ten years in which the strategies have just worked so well and so beautifully, uh for you know, at least ten years, but probably more. But you know, thinking about the big you know you mentioned Mark and reason I inc. A sixtenen Z was two thousand and eight, two thousand nine, like essentially like right at the bottom of the last crisis, So just like truly an incredible decade.

Where do things stand now in terms of like strategy on June third two, Well, I think the dominant strategic consideration right now for VCS has a little bit less to do with what's happening exactly now and about what's happened over the last few years, because you know, like you guys were talking about in terms of private valuations, you know, there's a bit of a of a one way ratchet right where once you invested a company at a particular valuation, there's really a humongous amount of incentives

not to generate it down round, not to raise more capital at a lower valuation and lock in that sort of negative return. Like you know, stocks go up and down. Why is it that in private markets they're like down rounds are like, so do everything to avoid a down round? Um? Well, I mean it kind of like trades you alluded to, there's a real sort of um, you know, heads I win tails you lose dynamic in private valuations, which is just you know, when they're going up, you're able to

report those quote unquote paper returns to your LPs as markups. Right, so you're sending these updates to your LPs um, you know, saying, hey, you know, our our fund is now worth two x what you invested. It's worth two point five. Now it's worth three. And those are all based on those up grounds, right. Each time a new priced round happens, you mark your

existing ownership up. And there's just a lot of sort of incentive not to want to send a quarterly report that says, hey, we're now a two point to fund versus the two point five because we took a really

big mark down. Um. It's just part of the overall psychology I think between you know, venture funds and their LPs, which is that those returns always go up, and you're going to really stand out as an anomalous sort of thing for them if you're one of the few funds in their portfolio that's returning or that's you know, marking sort of negative returns for a particular quarter or year. Um.

So that's that's really it. It's like there's just a lot of incentive to to really navigate around that um to try and either convince the company to completely shift gears and you know, cut their burn layoff staff, start to focus on profitability so that they can quote unquote grow into those valuations, right, so that you know, maybe they would never have gotten there in the typical sort of twelve to eighteen months, but if they can extend their runway to three years, well then they can spend

that three years getting to the point where they can raise at least a flat round or or an upground um or There'll be a lot of incentives to sort of structure around a down round because you know, if somebody comes in and says, hey, I want to miss more capital in this company, but you know, the last valuation was was sort of bananas. We're not going to

invest at that. Your your options are you can either to the down round, right, you can say, fine, let's find a new price, or you can add in all kinds of you know, liquid a scan preferences and special terms and things like that to keep the nominal sort of headline price you know, the same or up uh,

and everybody is kind of happier that way. There's there's also the dynamic of employee options right there, sort of um um a little bit of dynamic there where employees don't want to see the headline valuation going down because their stock options are you know, on a strike price from the last round and things like that. So it's a huge amount of incentives to um to sort of

not really accept the reality of lower valuations. So can you talk to us a little bit more than about how lower valuations are down rounds, how those actually come about, like, because as you say, there are so many incentives to keep the valuation up as much as possible. And then the other thing that tends to happen is because these are a liquid markets, it feels like you could sort

of resist the new pricing for quite a while. So what what is typically the process or the er that will lead to a lower valuation for a startup for instance? Is it just the company can't get any money without taking a lower valuation and they need the money, Like I'm just trying to understand exactly, like what the trigger is that will have one company except a lower valuation

versus another that's able to hold on for longer. Yeah, So the first thing is that it's very very rare, So so we're we're basically trying to UM generalize about an incredibly small anecdotal data set. It seems to me like, UM, you know, as I think about the few instances I've heard of this, UM, the most common scenario would be when a sort of new investor of a completely different

archetype wants to come in and get involved. Right, So this would be like when you would see sort of pe or hedge funds and things like that can involved UM because if you are an investor in technology companies regularly and this is your business, you know, you really just are highly incentivized to make sure that there's not

a down round. In fact, you know, I wrote a little thread to founders basically talking about how you know, if you are UM, you know, running a company that just raised a very very large, high valuation venture around, you are sort of misaligned with your investors. They're they're quite incentivized to UM to want you to sort of really double down and go big or go home, right, Like, doing it down round is kind of like the worst option.

They would rather you either sort of you know, gut it out and and somehow hit the metrics that you need to raise an upground or just fail right, Um, you know, and so there's a lot of counter incentives to what would be the sort of rational strategy, which is to try and you know, pivot to profitability, even though you are seeing some folks start to sort of preach about that as well. Um, you know, it's it's just there's a ton of incentives against it, and you

would probably do it if you had no other choice. Um, And you know you've got an offer from some sort of you know, private equity and d or something like that to do a bridge around um, where it can kind of be justified. Hey, we're working with these folks, um, because they're just you know, different types of investors. So of course there's gonna be worse terms with it. But

it's a real negative signal in the industry. Can you talk about from your perspective, So your investments are you're not taking the unicorn hunting approach because, as you've said, you believe that it's possible to invest in relatively early stage tech companies but that don't have like high downside risk and so that actually you're not just trying to oh nine go to zero and one goes to a hundred billion or whatever it is that being said, I'm sure this is you know, there's some of the same

macro stresses are going to apply to every company's Can you talk to us about like the advice you're giving is it the same as like, you know, because everyone VC puts out these memos cut caught, you know, this is the time, profitability, etcetera. But can you talk about what those conversations are like beyond just the sort of

like the press released memo tweet thread level. Sure, yeah, I mean so, to be clear, the reason that we think our thesis works is less about any kind of change in the validity of the venture capital model and more just about the ground sort of shifting under everyone's feet where a lot of software and kind of software enabled the e commerce and things like that, uh sass, all these kinds of products they sort of shifted out of the venture profile right where they just became de

risk like we were talking about before. So it's more just that there's this segment over here that we think, you know, at least our strategy is valid, if not more applicable to these opportunities because they're not as capital

intensive and quite frankly not as risky. It doesn't change the fact that, you know, if you want to build factories in space or launch rockets you know that are reusable and all this kind of stuff, you really do need to still, um, you know, go on that traditional venture capital approach as long as you're really having those

winner take all dynamics at the at the other end. Um. But in terms of like the conversations we're having UM with companies, I mean, we honestly like our overarching UM message has been sort of stay the course, Like we we were sort of fighting a little bit of against the tide um for the last couple of years as capital became really easy. So even founders that maybe not really a fit for traditional venture we're getting term sheets and saying, hey, this guy wants to give me six

million dollars, should I take it? Um? And we were saying, well, you know, maybe, but um, you know, you're going after a fairly niche market. You think, but how much did the appeal for these founders to take that how much was it affected by opportunities to cash out early some of their shares, some of which even in probably the opportunity to make life changing amounts of money even in a relatively early round. Yeah, it's a really good question.

We have not seen that very much in our portfolio, in part because you know, most of our companies are optimizing for being capital efficient, the vast majority of them have not raised additional capital, So so we haven't seen a ton of that. But you did see, you know, quite a lot of that going on in the market, um, the last couple of years. And UM, I think it's a real function of the fact that, you know, the entire venture community for the last two years was just

getting completely squeezed UM. And there was just a supply and demand dynamic going on where there was just an oversupply of of capital relative to um you know, the number of real venture scale game changing opportunities, or at least the perceived set of those. And so there was this competition to compete, right all for better terms and to offer more attractive kind of secondary sales for the founders. UM. And you saw some sort of truly um so, some

truly crazy stuff. I think the first one that kind of hit the news was was Clubhouse early on and the founders too million dollars off the table. Yeah, I remember that, and uh, and everyone was like, oh man, like they're barely you know, they barely launched, and they just raised this huge third round. And however, many months and the founders took two million dollars off the table and that was news. And then later over a couple of years, you saw you know, founders taking five million,

ten million, and two hundred million off the table. Million off the table as a founder UM fact check beyond that, but I believe it was reported that the founder of hop in the virtual conference software they kind of went from they went from z you know, they were they got probably the biggest COVID boost of maybe any company, uh maybe Zoom aside um where they basically run virtual conference software, and UM, they're one of the sort of

like steepest valuation trajectories I think anyone has ever seen. They went from kind of you know, very o seed round to six billion dollar valuation and over the course of basically COVID less than two years UM. And I believe it was reported that the founder took UM two million or more UM off the table. Amazing. Good for them, Good for them. I mean, it's hard to blame people

for taking it right. I mean, it's um, it's hugely misaligned with you know, your your employees, um, who certainly were not offered that same level of liquidity, um, you know, and and now have a bunch of their stock options locked up at this kind of like very very high valuation. And we'll see what happens to those I think, um, you know, we're going to see a huge wave of employees. See millions of dollars of equity wiped out hoppin founder

in June. This is, according to the Financial Times nets a hundred million pounds so dty millions something and share sales amazing. I had no idea that's good for him anyway, Sorry, Tracy, what we get say, well, sorry to press on this, but just on valuations, okay. So so in an up cycle, I guess you have this pressure on valuations and lots of money competing for the same thing, and so prices tend to get squeezed even higher. And actually we spoke

to Howard Lindson about this back in February. But you also had, you know, particularly big players like soft Bank, who would come in and squeeze a company much much higher than it would be otherwise. What happens on the flip side of that, when everything starts going down. Is it you know, people hold on because their incentive is to hold on and avoid booking these companies at lower valuations, or does like a bunch of money get pulled and the cycle is even worse on the way down. Yeah,

good question. I mean there's a bunch of different effects going on all at once right now. So maybe the biggest one is the pullback of the multi stage hedge funds that got into VC over the last couple of years. UM. So notably like Tiger Global and co To were to hedge funds that you know built um very large technology practices and race dedicated funds for those and that sort of thing. And and they were deploying billions of dollars into the space up and down, everything from seed rounds

to Series A to late stage. And that was one of the primary things if you think about like the the sort of you know, marginal demand in the in the suppliker for for startup valuations, they were really providing a large portion of that marginal demand where they were the last people who would come in at two x you know, the price of the next best offer UM. And so that was doing a lot of the work

to really push up those valuations. Um, you know, it's been sort of reported that and certainly seems to be the case that, um, those folks, you know, they're they're not dedicated venture funds, they're sort of you know, multi stage cross asset hedge funds, and so they do seem to be pulling back quite a bit. So I definitely think you will see that dynamic play out where um, you know, they they basically won't be coming into these

rounds and marking them up in a huge way. Um, in terms of otherwise what happens, I mean, I think we're going to see a bit of a delayed blood bath, to be honest, right, there's an ability to sort of just hold on and wait it out. You know, if the company, you know, a company has raised at you know, ten times the valuation that they really should have and they have eleven months runway in the bank, you know,

what do you do. Well, it's going to be such a trivial amount of money relative to what people invested that you don't just like return the funds. You just kinda try to make it work, right, You just kind of hang on and see if you can get lucky and hit that inflection point and maybe raise some more capital, or maybe the market turns around. But if things stay as they are, I think, you know, over the rest of the year, you're going to see a lot, lot,

lot of high flying you know, late stage companies. UM. Maybe even the ones that just eight big rounds of layoffs and things like that to try and stay alive. Um. You know, they're just not gonna make it, you know.

Tracy asked about the soft banks, and you of course mentioned the uh, you know, the Tiger globals and all those, but then the other phenomenon and again there's something that we chatted with in one of our previous chats with Howard Linson is like and he's talking about this, and you mentioned the squeeze that all these obviously are feeling that like in March when uh the when the pandemic hit and everyone was at home and very quickly asset

prices started going up and Zoom started taking up. That Actually, like you had this situation where like everyone became an angel investor and everyone was like started like, hey, let's do a Zoom meeting. We don't even have to fly to meet you anymore. Let's chat for fifteen minutes. And also maybe I have like a substack so I can promote your company and my investment. Let's let's try check.

You have all these like fang rich people like Facebook, Google, Amazon employees who probably of you know, maybe a few million but in the bank or something or several million, and want to cut fifty hundred thousand dollar checks. Can you talk like how big of a phenomenon was that and how much how did that let's say new money or inexperienced money. Can you talk about the effect that

that had and sort of like competition and valuations. Yeah, so, I mean you're right, and that there was just a huge you know, it was everybody has a venture fund now was the kind of joke, and um, you know everybody started doing angel investing um angel list that the platform for angel investing really contributed to this where they launched a pretty um neat fund product that allowed you know, your your sub stackers and things like that to really

easily and cheaply spin up a venture fund. Yeah, the rolling funds does that work? I never looked up like how did the rolling funds work and talk to us about like what that the fact that had Yeah, rolling fund was basically angelist. Did you know, did this whole product ized version of event your fund, where traditionally you'd have to pull in you know, lawyers to do your docs, and you need a fund administrator to your back end and tax people to do your tax and all the

stuff that we have to do. Actually we have like, you know, a team of thirty people that we fractionally use to sort of run our fund. Angela said, Hey, if you want to do traditional venture investing, will do the whole back office, and by the way, will also make it really really approachable for individuals to be LPs in your fund. LPs are the limited partners who who

invest the capital into your fund. Um by basically setting it up to where it's more of a subscription product, so you can actually just invest you know, ten thousand dollars a quarter and it's a fixed, you know, flat number. You can make it up down every quarter that you want,

you can change it to. Just added a lot more flexibility that I think brought in not just a whole bunch of new funds, but also a huge new influx at least in volume, maybe not in total dollars of LPs from folks who had, you know, done really well in crypto and done really well, and they're you know, stock portfolios, decided to diversify a hundred k of that into um, you know, a venture fund from someone that you know they admired on the internet. Um, you know.

So so that dynamic really overall increased the There was sort of a bottoms up to effect where there was a huge increase in the volume of capital out there

chasing opportunities. And then but the thing is, like, these are not price setters, right, So a lot of these funds that were set up, you know, they're writing relatively small checks and they're also not sort of super experienced vcs, and so when they go into a round, all they want to do is find an already priced and mostly full round, you know, and put their fifty k or hundred k into that round, and they just kind of take the price as okay, well that's somebody else's problem.

But the problem is you had this top down effect, which is all of these huge multi stage funds getting involved. And that's the hedge funds as well as some of these really really big funds like Sequoia and recent Horowitz. These kind of folks, they were the ones in many cases coming down and setting the price at you know, seed or or Series A some of these early rounds.

So you have these angels coming in with lots of new cash and they're saying, hey, we want to get into this round, but we don't want to set the price. And then you have something like Tiger coming in and saying cool, like, we'll set the price, No big deal. The problem is those two groups are completely not aligned with each other, and in fact they're actually selling different products to their LPs. The angels and the venture funds.

They're trying to do the traditional thing. They're trying to put in their hundred k and get you know, a hundred x outcome on that right there, looking for those real outlier returns. The very very large funds had essentially become, even though nominally they would be sort of venture funds, they were basically growth private equity right they were raising

billion dollar, multibillion dollar funds. And the way that you move the needle on a multibillion dollar fund is when you put you know, fifty million, a hundred million in into these companies at late stage and then the I p O at three x, and that's how you generate your sort of reasonable growth equity type of of returns, right, and that those would be sort of like two x to three X kind of outcomes, not your hundred X outcomes.

And what these huge funds were doing is they were basically viewing the seed rounds and the series A rounds

as um just kind of optionality. Right. They were going in and they were buying the option, sometimes explicitly in the form of pro rata, which is I invest in your seed round, and I have special terms that say, you know, I get to invest you know, more and more at each subsequent round um, and then sometimes just kind of implicitly just by saying, hey, look, you know we lead your seed round, so let us lead your A and B and see and all that sort of stuff.

And so you have these these large players who are not really that concerned about the price at seed because that's not their game, right, But they're the ones setting the price. And so that people who are trying to make all returns on this difference between the seed round

valuation and the ultimate valuation. Now they're investing at four times, five times, ten times higher than they were just several years ago, and so their returns are you know, if all things are equal, unless the world kind of magically changes and and everybody I p O s at a hundred x higher, you're just going to have you know, ten x five x, you know, two x lower returns

at seed. Um. So that was like one of the big dynamics right there, which was that people who were basically nominally vcs but we're actually running different products that were more like private equity were the ones setting the price. And then you had this huge influx of new capital that was just very happy to go along with the

price and with capital work. Yeah exactly. Yeah, So this was actually going to be my next question, But I'm so used to thinking of Silicon Valley at this point as like you know, aggressive pricing, lots of cash pouring in the sort of excesses of venture capital. If we get a big downturn in the market, would you expect to see some of that behavior or some of the way that the industry is structured and incentivized start to change. Yeah,

for sure. I mean the so some of the stuff that you maybe are thinking of in terms of just you know, negative unit economics and things like that, I don't know how much those will go away. Um, you know, if you are in if you're in a winner take all market, sometimes it does make sense to you know, under price your product and grow really really fast, right,

So there's always going to be incentives for that. Some things that I think definitely will change UM are a lot of the stuff around the way that UM the competition for employees has sort of evolved, where you know, competition structures for senior engineers have just are just absolutely

eye popping. I don't I don't know if you if you've seen any data there, but you know you have folks just getting you know, six K based salary and four hundred K year in stock options and all this kind of stuff for for sort of mid level engineers, like just really truly bananas offers going on on top of you know, tons of perks and and all kinds of stuff like that. So I do think you'll start to see a pretty significant softening in terms of UM

the competition for for employees. I think, you know, it's hard to sort of uh cry crocodile here is for UM, you know, really really well paid tech employees, but they are going to suffer the brunt. I think of this with UM, you know, pretty significant losses to to UM the value of their their stock options as well as probably um, you know, much less competitive offers as they were able to kind of sort of jump from big TechCo to big tech COO kind of doubling their salary

every two or three years. Um. You know, I think that that's something that you'll see um pair back quite a bit. Yeah, you know, I want to actually press

further on that. You know, it almost seems to me and I don't know if this is true, but one might speculate that in a sense even and I'm just guessing, like I wonder, like, you know, in a sense, are even employees of a sort of startups essentially become deef you know, start taking um an angel investor mindset, Like if you think that equity in a startup is going to potentially ten x or hundred x or potentially you know, you're thinking like you have multiple options for where're gonna

go work because you're a talented engineer, and then you start thinking like, well, which one is going to be the hundred x or which one is going to be the ten x and actually like make a fortune on some of this early stage stock. But I'm just like wondering if you can like talk a little bit more

about like how this relationship is going to change. And you know, even like fang level if if if the assumption no longer exists that stocks automatically go up that it's like, yeah, of course I want to get paid in the stock because stocks will go up, you know, year after year off yearf did that is sumption goes away? Like how do some of the employee the company employee

relationships start to change or people thinking about their own careers. Yeah, I mean I think the folks who are at you know, Google and Amazon, it's a little bit about my pay grade to say much about how that dynamic is gonna play out. Um, But you know, because I just I am not really that familiar with how um, you know, the public market prices affect kind of employee compensation things like that. But in the private market this is really

really acute. UM. I think you're right that there was this similar kind of just you know, everything goes up a little bit like Yolo mentality over the last few years, um with employees as they were evaluating their comp packages.

And you know, one of the things we're seeing as a realization from a lot of folks where you know, basically, if you were issued a ton, maybe millions of dollars worth of stock options at some of the kind of crazy valuations in a private company that we saw over the last you know, a couple of years, um, you actually not only do you need to mark those down a little bit, you know, like if you have a public company, you actually might need to mark those down

to zero um. And the reason being if your company lays you off. In private markets you often have this this very difficult and silly rule where you have a ninety day option exercise window, right, and so you need to not only if you get laid off to even retain any of that equity, you actually need to go out and buy it. You need to either have the capital or borrow it to buy that actually on it if if it's still if the price that you're buying it at is above the price you're the options you're

listening at, right exactly. I mean, it's so financially sort of owners that very very few employees. You have to already be someone who had a previous exit or something and have you know, many tens of millions in the bank to be able to to make and then like with the exact thing like give them a deal. It's like, oh, well, like we'll give you a year or you you know, you could keep your I know, it always seems like very like very cruel to the employee level. Anyway, it is,

it's really it's really bananas. And then you layer so it's difficult even in normal times for it to work.

And then you layer in the fact that you know, the company just raised at a five billion dollar valuation and you know the whispers and the private markets are that it's worth you know, million, and so now you have to make this bet to buy that equity and then gut it out and wait and hope that it I p O s at you over that five billion dollar valuation that your options are issued at right, And it doesn't work exactly that way, but that's the basic

dynamics of it, where you're making this this fundamental bet on the company that just laid you off in order to just sort of get your equity, and you you're even seeing sort of you know, and so basically all that adds up to most of these folks are just gonna walk away from that equity, right, It's just not ever going to be valuable and In fact, you saw UM recently there was a very extreme example of this. But uh so Bolt, which is sort of famously high

flying UM some would say overvalued. UM. I would say that companies UM that uh you know they did. They sort of came up with this quote unquote solution for this, which is that they would actually loan their employees the money to go ahead and buy that equity so that they would own it so they wouldn't have this ninety day option exercise window. The problem is they're then taking out personal recourse loans, right, so you know this loans have have the rights to go and seize their employees

assets from the company to own this equity. And if there is a down round, right or something like that, Um, there, their loans are going to be underwater and they're going to have personal recourse against that. Right. It's absolutely crazy. And and there was a feature recently of at least one employee because they did that, and then a couple

months later they announced a big round of layoffs. And so there was an example at least one of an employee who took out you know, sort of six figures of of debt to buy that equity, then got laid off and now has you know, ninety days to pay it basically to come up with that money and to

buy it. It's it's it's absolutely crazy. Wow. UM. Well, okay, So on this topic of leverage, So this is a question I have about I guess the market overall at the moment, like how much leverage is actually embedded in the system, especially as we see you know, UM crypto prices go down and things like that. But UM, when it comes to venture capital, I mean, there was an article that Bloomberg published last week. I think it was about UM the D one hedge fund borrowing billions of

dollars in order to purchase stakes in private companies. How much of that is going on, Like how much leverage is embedded in venture capital such that when valuations start going it could become problematic? I think very little. UM, even the largest sort of venture funds. UM. You know that the sequoias and injuries ince of the world. UM don't really use leverage. You you use sort of UM sort of convenience products in terms of like capital call

lines of credits and things like that. UM just basically kind of bridging the gap between when you invest in a company and when you call the capital from your from your LPs um. But the vast majority of traditional venture players are using, you know, no debt, so I think it would just be you know, the few folks you know, coming from the sort of hedge fund world and that sort of thing, that um might be using leverage.

But I mean it's kind of crazy because they're they're not cash flowing assets, so you really are taking a very very high risk bet um by by levering those up, and traditionally most investors in the space are not doing that. You know, I'm curious you mentioned the folks the crossover

funds that came from the hedge fund world. Of course, the pre eminent one that everyone talks about is Tiger Global, And it seems to me that, you know, as you mentioned, they're not really the c in a sense, they're not really hedge funds sense they're sort of late stage private you know, if you think of like a hedge fund, it's like, okay, like we're gonna pivot to uh energy investing this this quarter because the macro environments changed. It seems to me like you cannot do that with a

late stage growth investing. You are all in on one strategy and you can't just like pivot. It's like we're we're value investors this year, We're oil investors this year. Like you're all in, Like what do you think is like how important were they had those entities become like to the overall start up ecosystem, and like do you think they're gonna like what what do you see is

like the future of them? I mean I think, like, I think Tiger is down extraordinarily amount of money loss, especially when you think probably think about the inflows that came in in recent years, huge dollars up in smoke, Like what is this or like does that model come back in the downturn or does it get rethought? Yeah? I mean also a bear in mind that, um, you know those headline lost figures that are being reported for Tiger, that's their public markets right there. That's not even factoring

in all the venture investing that they've done. For for all the reasons we've been talking about, there just haven't been down rounds. So you have this dynamic where you know, you have these realized losses on your public portfolio and unrealized losses on your private portfolio, and it's it's a real tough situation. Um, you know, I I I do. I think this is going to be a bit of

a one off anomaly. Um, My macro kind of basic view is that for the last couple of years, in these zero interest rate environments, you had these really really vast pools of capital, right, these just you know, sovereign wealth level kind of pools of capital that we're sitting on hundreds of billions of dollars and just sort of frantically looking for anything that would generate old right, because there was just nothing right, Bonds were used, let's come like,

everything was just useless. And you know, if you need to put ten billion dollars to work and get some kind of good return on it, your options were just incredibly limited. And I think into that space stepped in a couple of hedge funds who said, hey, yeah, we can put you know, I mean I think Tiger invested an entire multibillion dollar fund in less than a year, right, They said, hey, we can put that money to work and we can generally right, Like that was like just yeah,

and just very large checks as well. But I think it was I have to look at them. It was a three billion or six billion dollar fund that they deployed in like under a year or plus remind us a year, um. And and that was the product they were selling right at the end of the day. You know, all funds are selling a product to their LPs, and and the product they were selling was, you know, we're going to take huge, huge pots of money. We're gonna

absolutely fire hose it into technology companies at the late stage. Um, we have a bunch of people who have some venture experience. So, like I said, we're gonna we're gonna be investing early to get that optionality to put a lot more capital in later. But ultimately they were there to serve this you know, this this demand for some amount of yield in a very uncompetitive market, and that dynamic is changing

right now. Right Like, if you look at the public markets now, you're like, hey, actually there's probably quite a lot of yield to be had here, and interest rates are going up, so maybe maybe bonds are going to

be more attractive and stuff like that. So I think that while the model is not necessarily going to be like disproven or or abandoned, I just think the demand for it is going to get dispersed across a whole bunch of other assets, and I really doubt that we'll see you know, multi stage hedge funds raising more further incredibly large kind of late stage tech um funds and and doing what they've been doing over the last couple

of years. Uh. You know, Joe and I started the conversation talking about how when things are going badly in the public market, we we kind of see just how badly because we can pull up at chart and watch the line go down. It's a little bit trickier with um the world of startups and private equity and private money and venture capital and things like that. What, in your opinion, is the best thing to watch out for to to try to gauge how bad things are getting.

It's a good question. I mean, the one interesting dynamic here, which is the valuation is going down, but software companies are still doing very well. You can even look in the public markets. Yeah, you see these companies that are, hey, we've got you know, another record year for you know, revenue is up, you know, losses are down, et cetera. Like they're the fundamental business of most technology companies. And we see that in our portfolio as well. Even at

the earlier stage that we're investing in. Like, you know, companies are not affected by this kind of macro change um in terms of their underlying business. It's purely a question of the fact that the same assets are being

you know, repriced much much lower and so UM. You know, I guess the thing you want to look out for is basically just that squeeze right wherein otherwise good business that is actually still growing and still getting closer to product market fit and still growing their customer base and all that sort of stuff. UM, they just you know raised there there, they raised too much, and so they have to hit certain you know, growth trajectory targets to to raise their next round and um, and they just

kind of have to do that. But there there really aren't leading indicators for this kind of thing, because you're just so incentivized to just try to hit those hurdles up until the last possible second and then you say, oh, we couldn't raise around, you know, like you saw that with UM with Fast recently, where you know, they were the week before they were talking about all their plans and everything, and it's like you're you're trying to create

this forward looking you know, up into the right curve and the perception of that until you just can't raise the capital and then you shut down, right. Um, So it's gonna be a lot of surprises, I think, So real quick questions. I have two questions. One is a short one. You know, you say, like the fundamentals by

and large look strong. This is c Would you say this is distinctly different from the dot com era, in which is sort of infamously all these different dot coms they were each other's customers, so to speak, and so one company would raise a bunch of VC and then take out a bunch of ads on Yahoo dot com or whatever, and so they were sort of all the same. Like, would you say like that phenomenon, just like this is not as significant when you look at the underlying business

quality of you know, some of these software companies. I think it's far far less prevalent um, you know, especially if you look at a portfolio, like within our portfolio, we are primarily investing in SaaS companies, and those sas companies are usually selling too different verticals or industries, so we're really sort of diversified across you know, the underlying customer base of our portfolio companies customers. UM. You do

have a little bit of the circularity there. UM. You know, I think I saw this kind of a jokey headline or something, but it was like somebody launches a fintech for fintech's UM coming out. I do think fintech is one area where you do have a little bit of that circularity where you know, everybody is everybody else's customer and they may all sort of go down um simultaneously. UM. But there's a lot lot lot less of that effect

then than the dot com era. So I just have one last question and that is UH conversations with LPs. My understanding is when a fund raise, you know, and you here's a multi billion dollar fund. I don't think they get all the money wired to them right away and then over time they collected from the LPs. We have made these commitments, do any of those are? How

strong are those commitments? And you know you mentioned that there are alternatives and that may be part of the issue going forward, is going to be like no, they're late stage. Growth is enough the only place to get returns. And so how do you see like the relationship evolving between funds and their LPs in this environment? I think this is going to be one of the most interesting dynamics to play out over the next kind of eighteen months,

and I'm really not sure which way it goes. Which is the fact that, um, you will hear a lot of folks commentating on on the venture markets say there's never been so much dry powder. Right if you look and and and that's what you're referring to. Right, you go out and you raise a billion dollar fund, you don't you don't get it wired. In fact, you get

almost none of it wired to you. You go out, you make commitment to invest in startups, and then you call that capital from LPs and you assume that they're going to be able to fulfill those those commitments. Um. And so people are sort of adding up those headline fund sizes and saying like, Wow, there's just a ton of you know, uninvested funds out there. But it's not literal piles of cash sitting around waiting to be put into startups. It's commitments from LPs. And those LPs are

under a lot of pressure right now. Right they're diversified across public markets, maybe crypto, etcetera. They're seeing quidity squeezes and so you know, hopefully they're they're doing their job and they have you know, good risk management and they have UM a ton of you know, or they have

the capital sort of set aside UM. But I do think there's going to be a very interesting sort of UM implicit and explicit negotiation between fund managers and LPs UM that that raised or you know, had committed very very large funds right now to sort of say, hey, you know, maybe let's slow down the pace here a little bit UM you know, coming from the LPs, because UM, these are long term relationships, like, yes, you they did sign an UM limited partner agreement that obligates them to

to meet your capital calls, but also you want to keep them around and investing in you for the next twenty years, and you don't like now is not the time to really put the squeeze to them and say, you know, you committed this capital, we have to invest it, UM, live up to your end of the deal or else. UM. There will be some amount of that, but it's gonna

be very interesting to see how that plays out. And I think there's a real risk that there's actually not nearly as much dry powder as everyone is UM predicting because of this dynamic where LP's are going to really push back and say, hey, like, let's slow this paste down a lot, let's deploy this over three years instead of one year, right, that sort of thing. Alright, Tyler sringas of Calm Fund, thank you so much for joining all thoughts. Thanks, that was great. Yeah, thanks cool, Yeah,

thanks guys, that's what's really cool. So, yeah, Joe, I thought that was a really interesting conversation. And one of the things I really like about it is, I guess Tyler's emphasis on incentives, right, And like, I mean, obviously in traditional finance in public markets, there are different players with different incentives, but I feel like that's just magnified

in venture capital. And I feel like when you look at the ecosystem of how it works with the funds and the LPs, everyone has slightly altered incentives, and so it leads to these interesting dynamics like the ones that Tyler was describing. Well, there's so many, uh yeah, so many that he described that I hadn't really thought about

or understood until you articulated them. But you know, for example, obviously, if you're the founder of a startup that can raise it a five billion dollar valuation and take a hundred million dollars off the table early in your career. That's really great, but it is really problematic for employees that potentially have years and years and years before they're going to see any liquidity on their equity, and in the meantime maybe they want to switch careers and have to

buy back their stocks. So you know, that's just one example. But also you know the issue with do you really want to like call your LPs right now and tell them they have to pony up the cash. That's going to be a sort of an awkward converse. Stan At a minimum, Yeah, I guess like the older I get, the more experienced I get in the financial industry, I just think everything is ruled by people not wanting to have to make that one phone call. It's just right.

Everyone loves cash at key times, and no one wasn't called where they have to. It's all about the phone calls. It was the other thing that I thought, well, there was numerous things, you know, the the I don't know, unholy marriage between the sort of like sub stack angel list vcs at the low end or sort of like let's do the VC thing and then except basically being priced takers for what these sort of like big funds

was like a really interesting dynamic. And you could just see how like someone in the middle, or someone who's like a kind of normal VC that's not one of these mega funds, but also not someone who's just sort of like spun up an angel list fund in April, would like get really squeezed, as he put it, by this sort of huge influction of cash coming into the market. Yeah, well, I guess like it's just gonna be really interesting to watch the next year or so, I imagine, Yeah, what

did he's a good term? I don't basically just the delayed blood path, Yeah, I think really, And so it's like we don't really know yet how this is going to be play out, but everyone is an incentive to keep the numbers up nominally right, And this is the classic thing about I liquid markets. Right when things start going badly, it can take a while for that to play out because people have the ability to resist some of the pricing pressures um but not forever. So the

timing of it is also going to be interesting. I think totally lots lots more to talk about on this topic. Alright, shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Isn't All. You can follow me on Twitter at the Stalwart. Follow our guests on Twitter. Tyler Tringus of the Calm Fund he is at Tyler Trinus.

Follow our producer Carmen Rodriguez at Carmen Irmann. Follow The Boomberg had a podcast, Francesco Levy at Francesco Today, and check off all of our podcasts on Twitter onto the handle at podcasts. Thanks for listening.