Investing Unscripted Episode 81: Venture Capital, Stocks, and Why it Matters to You

Note: Transcripts are edited, but not that well because Jason does it. We may earn commissions from some links. Thanks for the scratch.

Jeff Santoro: [00:00:00] Hey everybody. You probably already heard that we have changed the name of our podcast from the smattering to Investing Unscripted. We had a short pod that went out earlier this week that announced it. 

Nothing should change for you as a listener. It should still show up in your feed and everything should be as it has been in the past with only a name change to be the thing that is different. So, mentioning it here before we start the show, because we recorded this episode before the change. So we hope you enjoy the episode and thanks for listening. 

Jason Hall: I'm Jason Hall joined as usual by Jeff Santoro, the voice of the people. Hey Jeff. 

Jeff Santoro: Hey, how are you buddy? 

Jason Hall: I'm good. I'm good. I'm pretty excited. My favorite college football team is doing pretty good. They got a big game. A lot of people are going to be listening to this podcast while I'm watching that game.

And we have a very, we've got a very special guest that's joining us this week. Introduce him in a minute. He's here entirely[00:01:00] so we can talk about that football game.

Jeff, before we get to that, I know we'd like to do some housekeeping. 

Jeff Santoro: Yes. As a graduate of a college that barely has a football team. I look forward to hearing you to talk about actual college football. But before we dive in. Real quick housekeeping. It's good to be back. We had, we were off last week, even though there was a podcast we recorded to the week before.

So, it's good to see you again, my friend. I hope you had a good Thanksgiving. But for the people listening, we would really appreciate you continuing to be so kind as to give us ratings and reviews on the podcast apps. That is the single best way for us to get the show out to a larger audience.

And the more people that listen, the more great content we can bring to you. So we really appreciate it. And I'll keep it at that. Oh, wait, one more thing. Check out our newsletter. You're going to want to subscribe to it. This will air the day after our second live First Fridays show, which we are recording this Friday, which will be yesterday from when this drops, but the the newsletter is the best place to keep.

Up to date with when [00:02:00] we're doing those and how to get the link to join as an audience member. So ratings and reviews on the podcast apps, check out the newsletter and we appreciate everyone's support. All right, Jason, why don't you dive in here and introduce our fine guest for this episode? 

Jason Hall: Yeah, it's the coach of the University of Georgia football, I'm kidding. It's not, it's, joining me is a diehard fan of the University of Georgia football program and an incredible investor, Joe Magyer, Joe, how you doing? 

Joe Magyer: I'm great. Thanks for having me. I wish Kirby smart was here too. That would be tremendous. 

Jason Hall: It would be pretty cool. It would be cool. I said, if we ever get Kirby on, I will invite you. We will definitely invite you back. I think that would be the right thing to do. My cousin went to high school with Kirby it's actually, I think graduated with his brother, his older brother. 

But we're not here to talk about that, Joe, we're here to talk about the intersection between venture capital and public markets, some of the big trends that have happened and how that intersection [00:03:00] affects regular individual investors.

Joe Magyer: Yeah, I'm excited to talk guys. Obviously, I guess we'll dive into my background, but have a long experience in public markets. And I think that what's happening now between public and private, that intersection has become a lot more relevant to public market investors. And we can dive into a lot of reasons why. But, you know, I think it's become a lot more apparent this year. I think there's cyclical elements, but a lot more structural too. So I look forward to having a super nerdy in a good way conversation. 

Jason Hall: Yeah. Our, our, our listeners are absolutely the best nerds when it comes to investing. And I think this is going to be right up a lot of people's alley and they're going to really get a lot out of it.

So let's finish laying that foundation with your background. Where you started, how you transitioned away from public markets is kind of your focus. And in looking more into venture capital now running your own, your own show there. And how, and what you're seeing and how that's influencing your view. 

Joe Magyer: Cool. Well, I'll try and keep the life story portion here really, really tight, like fun [00:04:00] size Snickers.

But I got invested really young, started reading Motley Fool columns when I was a teenager, like back when it was in the newspaper, and became super engaged on the discussion boards. Eventually someone got in touch with me. It was like, Joe, do you want to work here? 

Yes. So left the job in investment banking, moved to Alexandria, Virginia.

Jason Hall: This is close to 20 years ago, I believe, about 18 years or so ago, right? Somewhere along time. 

Joe Magyer: Yeah. In my head, it's not 20 years, but it's almost, almost there.

Jason Hall: Relatable. 

Joe Magyer: And lived near Fool HQ in the DC area for six years. Loved it. Worked with amazing people, many of whom you have had on the show. And I then had an opportunity to go to Australia to help grow the Fool AU business.

Living abroad was never really part of my life plan through, call it my twenties. But I did, I did have this aspiration to expand my horizons as an investor, cause I'd kind of grown up doing [00:05:00] US mid- large- cap stocks and obviously you can do very well owning those. I own plenty of them myself, even though I'm focused on venture today and I probably will for the rest of my days.

But, the craftsman in me, who's always looking to do better and better work was excited about the idea of getting outside my comfort zone, went to Australia, was there for nine years. I didn't necessarily expect it would be nine, but the whole time we were there, I worked with amazing people and focused mostly on small cap growth in Australia.

So anyone who's not familiar with that, it's a really like niche part of global markets, Australian small cap managers are some of the only ones in the world where the average manager outperforms their benchmark net of fees. So it's a really inefficient part of global markets, which if you're into that kind of thing is pretty interesting.

Venture markets in Australia are also not very mature. So depending on how you look at it in dollar terms, it's something like [00:06:00] 150th the size of the U S. In terms of venture funding, granted the populations like 13 times larger here, but even pound for pound, it's a huge difference.

So you have companies list much sooner in Australia. And so you have what amounts to public venture. We did a lot of that at Lakehouse Capital, which I co founded with Donny Buchanan, who's an amazing guy and had a good bit of success investing in, were essentially public venture companies on the Australian exchange. 

Love that experience. Great team, had a good run. But for a variety of reasons, but mostly personal, wanted to just come back to America and when we did, decided to kind of step back from being at the Fool family companies for 15 years, and just focus on early stage investing. 

So to kind of get to like, you know, what I'm doing. Initially I came back and I guess a good question was like, why early stage to begin with? So, you know, initially started looking at to step back even further.

I should, because [00:07:00] this is a show where people mostly are going to public markets talking about early stage venture capital. So these are startups that, and the ones I'm focused on are technology, heavily software companies, technology enabled. These are companies that are growing very, very quickly. 

They are very, very small. They are very high risk and they're private and they're looking for capital and experience from investors to help them grow faster and well and build large enduring companies. So I'll probably stop there because I've been talking for a while. But hopefully that brings people up to where I'm at now.

Jeff Santoro: Yeah, no, that's great. I think just before we dive into like specific things we want to talk about in terms of what, what you've learned in your current role and how that compares to your work previously with public companies. Let's just get some terminology straight cause we, we talk almost exclusively about public investing on our podcast.

So for listeners who maybe hear the terms venture capital and hear the terms private equity, but don't quite know [00:08:00] the difference between the two. Can we just give quick definitions of the differences between those two ways to invest privately? 

Joe Magyer: Yes. They, they can sound pretty fuzzy and similar if you're not close to, to what they're doing.

So. So they're both investing in private companies, but the strategies themselves are very, very different and the types of companies are very different. 

So I'll start with private equity. So private equity is like a rebrand of leveraged buyouts, if that helps to provide some context. So typically this is when you go in, you buy a private company, that's of decent scale, so it's not a startup. It's fairly mature for a variety of reasons. The owners might be looking to sell, company is probably somewhat under managed and the new buyer or private equity firm thinks they can come in, reduce costs, maybe introduce some revenue synergies- private equity people are like the ultimate synergy people- enhance the value of the business.

They [00:09:00] acquire it by using, mostly funding the acquisition through a lot of debt. Hopefully in three, four years, they can go and sell the business to another buyer and having grown sales, cut costs, they get a really good return. So that's kind of private equity in a nutshell. 

 And where it's very different from venture is private equity firms will have like super concentrated portfolios and they are extremely protective of downside. So to them, having a total loss on a single investment would be, maybe not catastrophic to fund returns, but crippling.

So, you know, there's serious downside protection again, because they'll use massive amounts of debt to fund the acquisitions they make. So they need to be very conscious of that.

Venture capital is investing in companies that are private, much younger, super fast growing. And that, that capital that's going into these companies, by the way, this is directly invested in the company. So unlike public markets where it's secondary, where if you buy [00:10:00] shares of Coca Cola, you know, you are, you own a piece of the company, but you're not giving money-

Jason Hall: You're not buying it from Coca Cola, you're buying it from another shareholder. 

Joe Magyer: Yes. Whereas in venture you're buying directly from the company and you're investing directly in that company. So it's very illiquid as a result. And we can speak to that probably later. But yeah, you're backing startups of many different types, technology like tech based venture is probably the most popular that you hear people talk about. But there's also biotech. There's also media, there are many different stripes of, there's consumer. 

So there's a lot of different types of venture funding, but essentially trying to back great founders, great teams very early and helping them to scale. 

You'll have within that, there's kind of like, I won't get too far into the weeds, but you'll have angels. So these will be investors who are like writing the first checks into a company that is hyper risky. But also the, the tail of asymmetry, if you're right, is, is the largest. 

Then you kind of have [00:11:00] seed funds, which is more or less what we're doing today at Seaplane. Where there's a little bit of traction, there's a live product. They won some early customers, but they need a little more institutional support capital. 

You move on up to like a series A, that's kind of where you might have like a Benchmark, which I'm guessing even a lot of public investors be familiar with Benchmark, but they back some amazing companies. Uber, which turned out to be really controversial and there's a TV show about it. But it's an amazing team. And then you get into later stage, which is basically more like pre IPO investing where company is very large. 

And 30, 40 years ago, that company would have already gone public by that time. But today there's this audience of investors who are like, well, I want turbocharged or maybe not turbocharged, I want returns that I think are higher than what I can get in public markets, I'm willing to take some of the liquidity in exchange, but I don't want to be as early as seed. So it's kind of this like middle ground where there are a lot of investors are. 

But to kind of zoom out further, private [00:12:00] equity and venture both have gained a lot of attention and interest from institutional investors over the past couple of decades. Yale in particular, David Swenson pioneered the idea of why don't we diversify further into asset classes where we think we can get really good returns, but acknowledging that the liquidity profile is very different from public markets.

So if you're running a super long term focus strategy. As they do it, you know, pensions, endowments, then getting the hopefully excess returns that you get in private relative to public is pretty compelling, which is why it's, it's grown a lot over many years. 

Jason Hall: You were kind of foreshadowing some of the things that we're going to talk about a little bit more here and like the key trends, it's really going to be kind of the, the, the main course of, of our conversation, but I want to, there's a couple things I want to highlight there that I think are really really important. 

Number one is like a lot of this evolution of large money that's behind some of these big trends. Part of that evolution [00:13:00] or some ways that I think more and more retail investors can even maybe get exposure to some of these markets. And we'll talk a little bit about that too. But the one thing that I wanted to hit on to kind of set this up a little bit more is thinking about looking at venture capital today and the things that you're focusing on, because this is directly tied to the things that have changed that affect the retail investor. 

In the time that you've been involved in VC and again, you know what you were doing in Australia is probably more like VC was in the U. S. in the early nineties, maybe than VC in the U. S. is today. How have you had to start thinking about changing your approach to VC since you've come back stateside? 

Joe Magyer: It's a good question. So for me. Like what I'm doing now is when I thought hard about where I wanted to focus, it was where can I get maximum asymmetry and have a lot of fun doing it with the skillset that I have and being grounded about that.

And so for me, that was kind of [00:14:00] seed, which is like I said earlier, you know, live product, early traction, maybe a couple hundred thousand in revenue. Annualized or on up, but something to work with. I'm not that guy who can look at a startup, like look a founder in the eyes, and be like, this guy's the next Elon, you know, maybe there are other VCs who can do that. Well, I don't think I'm one of them. 

Jason Hall: We can take that a couple of ways, by the way. 

Joe Magyer: Well, 

Jason Hall: as an investor, that's a pretty clear, yeah, you want to find those guys. 

Joe Magyer: But I, you know, try to play to my strengths and I'd say at my core, I'm a really good business analyst and conceptualizing business models. I think if I had an investing superpower, it would be that.

So, I try to go to a place where I can do that and a lot of my work is geared around trying to wrap my head around what the current economics of a business are today and visualizing Visualizing what they could be and having the public market background helps kind of inform what the end of some of these movies could look like because I've seen a lot the ending of a lot of these movies.[00:15:00] 

But and I guess the other things I'd say are similar are, you know, very process driven. So a lot of people at kind of the stage of that, it's a little, I don't want to say shoot from the hip, but it'll be a lot more narrative driven and I'm not necessarily narrative driven. And that's not, it's not a judgment. It's just not how I operate.

But I try to be very checklist driven. Be very, I wouldn't say regimented, but I'd say very focused and not cutting corners on a specific process that I run. I won't get into all that. 

What I will say is different, you know, is probably the biggest thing is just sourcing. So in public markets, the same, like all the companies are just sitting right there waiting for you to find them and they're just right there in public, and you can find all their historical financials. You can use free screening tools to find, you know, you can search on different parameters for the kinds of companies you want.

And in public markets, it's less about, um, the top of the funnel and sourcing and it's more about your [00:16:00] strategy and selection and portfolio construction. I would say as far as like adding value and choosing the part of the market you want to be in the first place with venture sourcing is cruge.

Crucial. It's huge. It's, it's crucial. It's, it's a key part because 

Jason Hall: Did we just, did we just coin a term? Cruge? 

Joe Magyer: We did. Like it.

It's, great deals don't just land on your doorstep. Your network doesn't build itself, you know? You need to get out. You need to talk to founders. You need to meet them. You need to be super proactive and engaged.

And Building out a network of like minded investors that you can share deal flow with, you know, conferences are nice, but it's really, it's networking. It's talking. It's a lot of coffees. It's exploring. It's talking to accelerators, just being super extroverted and getting out and finding opportunities before other people find them.

Because, you know, if you're at the stage where I'm focused, these are not companies that anybody on the show would have heard of, I mean, maybe, but probably not. There's still much, much too early for that. 

And so that's [00:17:00] the biggest difference. I think the other would be probably, and there are many, but information. So again, you've got audited financials with public companies, years of operating history. In early stage venture that all goes out the window. Like nobody has audited financials. If they've got a couple of years of financials, right? Well, it's a lot to work with. So it's, it's a lot harder. There's a lot less information, but one thing I will say that it's positive and that I actually, it was really helpful compared to public markets is there's no real question of like material non public information or inside information because you're talking to private companies about a private transaction. 

So I can talk to a founder, like, what is your current cash? You know, who do you have in trials right now? What might those deals come through as, whereas in public markets, I would literally train my analysts to not ask those questions of management teams, because that'd be material non-public information. 

Jason Hall: You, you box, you box yourself out immediately. [00:18:00] 

Joe Magyer: Yes. So I found that to be you know, kind of like when Mario gets a star and he's like takes off and he's, he's running really fast. That 

Jason Hall: was another 

And now that music is playing in my head right now. 

Joe Magyer: Yeah, that's yeah. Look, I, I could go on, but I'd say those are probably the biggest differences. And of course, you know, from a research standpoint, I'd say liquidity and risk are at the meta level, the biggest things, but we can, we can get to that.

Jeff Santoro: So I just have a quick follow up to, to everything you just said. I always imagined that in venture capital, there would be a lot of companies that need funding sort of knocking down your door and trying to pitch to you why you should invest in them. But you, you, you seem to intimate that there's a lot of you going out and finding the right deals.

Is that simply because if there is a truly great idea out there, you want to be the one who gets to it before someone else? Or is there a lot of, you're just getting cold calls by this guy who's got this product and this woman who's got that product trying to get you to invest? Like, how does that dynamic work?

Joe Magyer: No, you're right there. There's a lot of cold [00:19:00] inbound. I get cold inbound every day. I welcome that if you're a founder out there. Unlikely, but if you are and you want to get in touch please do, but- 

Jeff Santoro: I know this podcast that could use some funding, but we can talk about it. I can talk about it.

We'll talk about that offline. 

Joe Magyer: Yeah. All right. Yeah, I get a lot of cold inbound. And I look at, look at all those and it's a mix, like the more established a brand, the more volume you're going to get on inbound and the higher quality to be blunt of those of deals coming in. 

I mean, there's this interesting thing with asymmetry around deal flow where, you know, the old Groucho Marx line, like, I don't want to be a member of a club that would have me as a member. You know, I'm butchering it, but you get the gist of it. There's a little bit of that in venture. And so sometimes I would say like the percentage of cold inbound contacts I get from founders where I take a meeting is pretty low. I'm being really candid relative to if I get a warm referral from an [00:20:00] investor, I know with a similar strategy and they know what my tastes look like. That would be much, much higher probability.

But then on the outbound, yeah, to your point, it's frankly, it's just hustle. And sometimes you see something and think this could be a really good fit with what I'm trying to do and I'd like to be a part of it and those kinds of opportunities that tend to be more competitive, they're usually not just going to like fall in your lap. There are exceptions to that. And just like in public markets, I do think valuation matters and that's probably its own line of conversation. Maybe, maybe for a different day. But yeah, it's, it's a mix of those things. 

Jason Hall: Well, valuation and also terms. I've, I've done a couple of private deals as well. And like, if you're involved in, if you're an angel or friends and family or something like that, you should understand that dilution is going to happen as this business grows.

You want to try to build the deal so that you can minimize that impact for future investments. You may make, make sure you're [00:21:00] positioned to participate in them. Make sure that the multiple on those, maybe if you can get advantageous terms, you want to try to do that. So that's something that retail investors buying stocks don't really have to think about.

I think a couple of things you were saying there that I think is really, it's really interesting is that in a lot of ways, like Jeff was talking about how it's you have to go find a lot of those deals and the ones that fall in your lap. Joe, I think there are probably a lot of those are going to be based on, your network, right?

They're going to fall in your lap because the people you know that are involved in them know that that, that founder is looking for more funding and well, this is right up Joe's alley. Joe, you're going to like this one, kind of thing and how incredibly different that is. 

I want to highlight that again and emphasize it because retail, and we've talked about this before, but I think putting it in the toolbox, everybody listening. You're never going to have that advantage of speed over Wall Street. You never ever, ever will.

Because everything that we've talked about, the information is out there in public already. All of the quant firms, they've [00:22:00] responded to the filing before you can even check your email, right? They've already traded on that information. You just, you, you can't. So it's, it's a different game that, that Joe's playing.

I think that's really important to emphasize and Joe's leveraging skills that he's built based on that particular pursuit. So I think that's really important, Joe.

Let's transition over talking about IPOs. So again, you're a venture capital investor. Your payoff, ideally, is that IPO, right?

Joe Magyer: The dream.

Jason Hall: That's the dream, right? That's how you turn, that's how you turn the donkey into a unicorn is, is you invest early and eventually the company goes public. You're able to take a portion or all of your, you know, your seed investment that you made when it goes public, you can exit, right? 

You can exit however you choose to and you win. You take that multiple and then you go find another five, 10, 20, and you put that money back to work and you, you know, wash, rinse and repeat.[00:23:00] 

Let's, let's talk about, so we've kind of laid some groundwork for that. Let's talk about how, how that's changed from venture through IPO. 

Joe Magyer: Yeah. So if you go back in time again, kind of what we're talking about before. The venture landscape has become a number of things have happened. One is it's become more institutional.

So frankly, there's just a lot more capital that's going into venture, particularly at the later stage. There are investors who want that kind of extra oomph and their returns, but that hopefully they'll get liquidity around sooner rather than later. But then also at the early end of the spectrum, which is where, where I am, like a number of things have happened that have changed dynamics and all this flows back into public IPOs.

And I'll, I'll speak to that, but like one is the rise of cloud computing. So it is much easier and cheaper to start a startup today and get traction than it was before, which means you need less capital and funding. [00:24:00] Which means there's room for smaller and smaller funds, including mine, to step in and add value.

So that has changed dynamics quite a bit. Another is that accelerators exist today. So like Y Combinator, Techstars, guessing some folks heard of those. They have put a lot more clout in the hands of founders, partly by getting the better valuations. And I won't get too far into that, but helping them to command better valuations, drive more demand for what they're doing, and also help founders be better equipped to go on and create value.

Another is just, there are tools to help smaller funds exist, like AngelList, which is what I use for all my back office, but being really honest, 2010, maybe even 10 years ago, I don't know that the tools would exist for a fund of my size was very small boutique to really operate independently, but because there are now tons of automated tools and systems out there.

That, that allows for this. So both at the, the smaller [00:25:00] end and at the very big ends of town with adventure, there's just, there's more capital and there's more institutionalization of the asset class. Where that comes into play for public investors is that companies are just staying private for much, much longer.

And they're doing that because regulatory burdens have gone up over time in public markets, compliance burdens have gone up, costs have gone up as well, and, you know, I mean, you guys, this is a very long term oriented show, but the reality is most investors. Are not long term oriented, you know, they're very focused on short term results.

Analysts are compensated on quarterly price target, you know, for earnings estimates and your accuracy. So it's not a shock that private. In that founders want to delay going public for as long as they reasonably can, because they don't see a lot of appeal into being public. So in a long term sense, you have companies that are [00:26:00] just trying to defer this for as long as possible.

So if you take Stripe, I'm going to say Stripe is now a 13 year old company. And it's still. You know, it might go public next year, but this is a business that's raised over 8 billion in capital. And it's still private. Like that is mind blowing. Whereas if you go back in time, Amazon IPO with a market cap of a bit over $400 million.

Jason Hall: Right. I think they raised, they raised less than a hundred million dollars in their IPO. Yeah. I mean, Netflix probably raised $60 million in its IPO, seven, six or seven years later. 

Joe Magyer: At the time, there just wasn't, there wasn't a venture ecosystem to support that and going public that early made sense from a commercial standpoint.

Today, it doesn't, and you'll have something like an Uber list. When Uber billion valuation. You know, and I think to frame the relevance here to public market investors, you know, you kind of think of it along these lines, like someone coming in and investing in [00:27:00] Amazon at the IPO, they have made from then to now.

A ballpark, like 3, 500 X on their return. Pretty awesome. Like epic win. You know, you would have turned what 30 grand and like a hundred million, like epic, epic win. But these companies, like if Amazon were to come along today in a private, it's not listing at that price. Right. And if it were to list instead, it were Uber did at 80 billion.

Amazon's at 1. 5 trillion today. That's still a great jump, you know, let's call it like 18 X, but it's not a 3, 500 X. Right. So where I'm going with all that is a lot of the juice is getting squeezed out before these companies make it to being public. So for investors who are like, and this isn't everyone to be clear, I appreciate, but for investors who are actively hunting for like the next Amazon or the next Microsoft, like.

Companies of that quality that people actually [00:28:00] agree could be, they're not going to list until a huge amount of the return profile has already been won by the, by the earlier investors. So, you know, as an aside, that's part of what drew me into being early in the first place, but you know, it, I think it changes dynamics if you're a public market investor and how you think about that.

Just to, 

Jason Hall: just to put some, some actual numbers on it because it is absolutely. Mind numbing. This is through the market close when we're recording this late, late November $1, 000 invested at the debut price, Amazon's debut price. $1, 000 will be worth a million and a half dollars today. You know, those, those, I mean, that's, this is the exception, right?

How many companies went public within 12 months of Amazon that were worth 0, you know. 

Jeff Santoro: And it's a, I agree with you, Joe. It's a really good thing for public market investors, just retail investors like us to think about because you hear the, this could be the next Amazon line [00:29:00] used about almost any company that people like.

And the reality is, like you said, there may never be another Amazon in terms of total returns. I mean, you're still going to get. A company that maybe surprises people like it came public earlier than that, because no one knew it was going to be the next Amazon. And then it turns out to be. But I think I, what you're saying is like any consensus around the private company that this could be the next, whatever they're just, you're never going to see, see those returns.

I had a follow up about what you just said, but then I wanted to come back and ask another question about the V. C. You know, you said the the whole goal is to get a company that you invest in early to go to IPO. Like that's where you sort of cash out. But I want to ask a different question first.

Do you think that this change of companies staying private longer is that is a good thing or a bad thing for public markets writ large? Mm. Because the reason I ask this is, is because we saw a different dynamic in 2020 and 2021 where, because of zero interest rates and [00:30:00] SPACs and, and all the bubble and craziness, we saw a lot of companies come public early that maybe shouldn't have, sort of like the, the opposite problem.

So I'm just curious with all the change you've seen, like what, what you think it means in terms of, is it good or bad for public market investing in general? 

Joe Magyer: Yeah. Well, to the. So what you're talking about with 2021, there were about five times as many IPOs in 2021 as there have been in 2022 and 2023 combined.

So like 2021 was just bananas, like confetti. It was wild. And a lot of VCs at that time had some exits that probably did very well with assuming, assuming they were able to sell after their escrow period ended. You know, it's an interesting question. I, I think it depends a little bit on your strategy.

As I said, like if you're someone who is like a super long term growth oriented investor, then this trend is probably really frustrating because it means [00:31:00] you're getting in much later. And so your potential return skew just isn't as nearly favorable. Not true. These companies are also much more mature.

Like we talked about Amazon, like, oh, it was this, you know, 3, 500 X, but Very, very few investors invested at that point in time and held through. I think David Gardner would be one of the few people I know. Maybe the only person I personally know who's been invested in Amazon for close to the, since close to the IPO.

So, you know, it's easy to say that you would ride that train, but, but most people get off much, much earlier. 

think a good thing here is that the companies that will be IPO ing, generally speaking, will be more robust. And I think that is probably a good thing as far as, you know, let's call it downside prevention for companies. The trade off is the upside is just lower, right? And so I think for investors who traditionally relied on [00:32:00] small caps to provide.

Like the growth profile of the portfolio that has just changed and I don't think that's that's as easy to get as has been in there in the past where you'd have these big breakouts, small cap wins, there, there will still be them. It's just they're going to be fewer of them today than I think there have been in the past.

Jeff Santoro: So then let me flip the question is, is, is private companies staying private longer a good thing or a bad thing for the venture?

Joe Magyer: I think VCs are happy for companies to stay private for longer, up to some point, because if you back a world class startup at seed or series A, and it goes public two years later, and traditionally you You would exit your stake within basically as soon as you're allowed to through whatever escrow you've committed to after an IPO and return that capital to your blended partners.

You know, you're missing out on a lot of that [00:33:00] return and you're essentially giving that back to public investors. So you know, there's this balance of like personally, like I'd be happy for them to stay private. But at some point. Your investors do want capital returns, so they may be super long term oriented, but eventually they, they want, you know, actual dollars back to them.

So a typical venture fund is average life of 10 years. So that's kind of time, time horizon. A lot of these funds are working with, so if you've got investments that are drifting past that, which will happen, like Stripe. 13 years in and there are other examples you know, sometimes your LPs can get a little frustrated with that, but there's nuance.

So nuance parts are if, if I had invested in this was before I got into venture, but if I had invested in Stripe. It's seed. I don't think any of my investors would be complaining that it hadn't gone public yet. I think 

Jason Hall: Because that illiquid number does continue to get bigger, right? And that's the point, right?

Joe Magyer: Yes. And I [00:34:00] think everybody would be happy with that. 

Jason Hall: So to me, it sounds like a couple of things are happening. If, if the companies are IPOing more quickly than anticipated you, if you're. If you're operating a fund and you have investors that have committed capital, not only are you missing out on some of that potential upside, but also you have to go do the work again.

You, you gotta find another one. And if it's double, well, you gotta find a couple more right? With those funds. And your hit rate has to be just as good, because if it's not, well, you know, you turn to win into a loss. So I'm sure that that's another complication you have to have to factor in as well.

Joe Magyer: Well traditional venture fund structure, it will usually be something like. You'll take in, a venture firm, will create a partnership. They're the general partner and there will be limited partners in the fund who are the investors in the fund, right? And- 

Jason Hall: Anybody that's ever invested in Enterprise Products Partners has experienced that. As soon as you buy that ticker, you, you're a, you're a limited partner and the general partner, they're the people that run it.[00:35:00] 

Joe Magyer: Yes. So capital comes in and venture. You would take traditionally roughly four years to put that money to work in initial investments in companies. And then also follow on investments where you're kind of averaging up with the companies they scale, maybe using pro rata rights or using capital to support them.

And then ideally in year seven through 10 ish, you're harvesting gains. And I should say the biggest wins are through IPOs, but acquisitions are usually where most wins happen in venture. So you're far more likely to get acquired than IPO, which can still be a very handsome return for early investors.

But where I'm going with that is that fund itself after there's a big win, they distribute all the cash by the time that happens, they would have already probably created a new fund that's coming along. 

But yes, I think there is maybe not a constant state of reinvention, but there [00:36:00] is this element of, you know, each few years as a venture capitalist, you need to saddle up with a new fund and you need to go out and find great new opportunities and balance that technology is changing, business models are changing, evolving, and you know, one strategy that worked for you at one point in time.

I mean, if you go back and look at different stages of venture, there have been windows where biotech life sciences.

It can change a lot and you have to stay fresh and current, which can be hard, but it's fun. 

Jeff Santoro: So other than a company you've invested in privately, either IPO ing or being acquired, are there any other ways that investors Get get paid. Are those two the two kind of endpoints? 

Joe Magyer: Yes, but those are the main. Those are the main ways. But in practice, like, if you become a limited partner in a fund, or if you make an angel investment, a direct investment into a startup, you should go in like eyes wide open of like. I'm not getting capital back on this until they sell the business, um, wind it up and I get [00:37:00] pennies on the dollar or, you know, toot the moon, there's an IPO.

However, there are some paths to getting liquidity that are becoming more common. And I actually think are going to contribute to. This trend of like a lengthening amount of time, the company stay private, I think will contribute to them staying private for longer, which is that there's now more liquidity coming into secondaries in private markets and particularly venture.

So there are funds that are dedicated to buying stakes off of venture firms for venture funds, but it might be like, look. My fund was really early in Stripe, my investors, my LPs would like to get some capital back. I want to keep most of this, but I found a secondary fund or a family office, wealthy family, who wants to own a piece of the company.

We don't want to sell our position. We can take some off the top. And I think liquidity around that and those kinds of transactions, they've increased a lot. I think they're only going to continue to increase. And as that [00:38:00] liquidity. Increases over time. It's just that much more stretches out the case for these companies to stay private for longer because then there's less pressure on, you know, companies to the list.

Jason Hall: It's almost like there's, it's evolving to the point where we're going to see secondary markets develop for the, for the venture, for the venture space. And it's going to just be like, turn, it's going to turn into the stock market for venture capital. Is that ever going to happen? 

Joe Magyer: I mean, you flash forward and at some point it's like, we have this, it's called the stock market. But yes, that's, that's kind of where, I mean, that that secondary activity exists now and it already does, it already does.

I think it'll become much more liquid and institutionalized over time. 

Jason Hall: So we've talked about the, the, the, the massive trend that certainly impacted investors. And before I ask the next question, this is almost the, to get us all thinking about the, how much does it really matter part?

I'm not sure if it matters for investors, but I want to, [00:39:00] I just wanted to, I want to talk about this. So I've decided to just run some numbers for the magnificent seven plus one, but this is looking at. Well, the great things about stocks is you get the cherry pick, , you can torture the numbers to say exactly what you want them to say, but this is looking over since 2010, Apple, Microsoft, Meta, Netflix.

Well, I got to pull that out because it didn't. That's messing up the numbers here. Apple, Microsoft, Netflix, Alphabet, Amazon, Nvidia. The, the, the lowest CAGR of those compounded annual growth rate, um, is about 18 percent for Alphabet. You know, it's, it's delivered 400 percent in returns in 13 years, which is pretty freaking good.

The rest of them, except for Nvidia, which ridiculous returns have all generated mid 20% compounded annual growth rate, which is any investor should be very, very happy. 

Joe Magyer: That's great. And I own some of those and I've held them that long and I'm cheering for them. 

Jason Hall: Yeah. So none of these, none of these were, were tiny companies [00:40:00] 13 years ago, I guess is my point. But so, you know, maybe we could just end the episode right now. 

No, I'm kidding. 

I do want to, I do want to talk a little bit about the, the, the, the, are there trends you think that might be reversing going, going the other way? 

Joe Magyer: Well, yes. So, well, okay. I'll say this. I don't think it's trying to go in the other way, but one thing that is favorable for public investors is that companies as they've moved to be more capital efficient, more IP driven in terms of the services they provide and the value they create.

They should be able to scale higher and grow faster for longer. So because of that, there's a good argument that on the one hand, you're going to lose out on the next Microsoft, you know, in small cap growth, there's just gonna be a lot fewer of those available. The upshot is you're going to get more authentic, like large cap growth, like large cap growth.

You know, if we went back 30, 40 years, like the companies that would be in the large cap growth bucket. [00:41:00] We would consider to be trash compared to large cap growth as it exists today, where you're like, Oh, these companies have like, you know, powerful network effects, really unique and enduring I P throw off tons of cash, very low capital requirements, awesome balance sheets.

So that's real, and I think that's great. So that's something that I think public investors. Still very much have in their corner and continue to play to their strengths and should, you know, I think that's something that will continue to be a tailwind. 

Jeff Santoro: So let's, let's pivot to interest rates because it, that's a topic that I know we've talked a lot about just in previous episodes, because it's been had such a big impact on private market investing.

So I'm curious what impact, uh, higher interest rates has had on, on what you do in, in the VC world. 

Joe Magyer: Yeah. So the Zerp, zero interest rates were for venture like that, basically, and the valuations just went completely [00:42:00] bonkers. Deal counts went wild. There were startups that had very flimsy business models, narratives, founding teams that still got funding because the cost of capital was essentially zero.

Jason Hall: And because it was zero, it wasn't just that money was cheap. It was easy to get. 

Joe Magyer: Yes, yes. So you combine those things and, and by the way, that's what the Fed was helping to, they wanted risk taking, you know, like they were trying to spur it and they got what they wanted. And, um, So valuations went to the moon and you had companies, it was just, it was very loose, like the ecosystem at large as interest rates have returned to what are historically normal levels, though, that has completely rug pulled startups that had raised money on insane prices.

And with [00:43:00] weak unit economics, I mean, I've, I've seen some companies that had done like series B, which is you're starting to get towards late stage there. They didn't even have attractive or like viable unit economics. Like if the transaction is-

Jason Hall: Series B, that's your, you've, you've already raised money two or three times at that point. Right? 

Joe Magyer: Yeah. Like you're getting up to this place where you should be fairly proven. It doesn't mean you're going to make it to an IPO, but like you're pretty far along in your journey and some of them just have literally, you know, economics that did not work, like does not compute. At the transaction level this business may not make money. So no matter how much you scale it, it's fundamentally broken.

And still some of these companies raise money. To go back, these companies raise money like that, they're all in a world of hurt. Because now-

Jason Hall: Nobody wants to do a down round. 

Joe Magyer: They're, no. Nobody wants to do a down round. And even if you can avoid it, you have this problem of like, you might have raised money at, I'm going to make up a number, 40X saless. Just making this up. [00:44:00] Well, the problem now is even if you've been growing, you still need to get back to a level where the investors who committed to you thus far will get a capital return.

If you turn around and sell the business, because there are these things called liquidation preferences, they're typical in venture capital fundraising and investing where, um, a VC needs to get a return on their capital before common shareholders do. 

So in practice, what that means is that if you've been growing, but not shooting the lights out in your startup and you raised money at a valuation that said you would, you could be in this place where currently the founders, if the business were to sell tomorrow at fair market value would walk away with zero. So that's a pretty awkward situation to be in.

And founders, a lot of founders out there, unfortunately are in this place now it's like, well, do we grind this out? We hope the valuations improve. We grow our way into the price we used to have so that we walk away with [00:45:00] something. Or if we don't, what do we do, you know, what, what's a way we can exit this and get something. So there are a lot of really painful conversations happening throughout the venture ecosystem.

That's kind of at the micro. More, when you zoom out, deal funding- so the amount of capital being invested, new capital going into startups, that is just plunged. 

I mean, receeded, it depends on what month you're looking at, but it's probably down two thirds from its peak. So, there's much, much less capital coming in. 

People have gotten risk averse. New commitments to venture funds are down 75 percent in 2023. And I would say it's getting worse throughout the year.

So, if you view that as a leading indicator for the amount of capital in the space for the next few years, which I do, because the deployment window for these funds is typically four years, I mean, it can be shorter, it can be longer, but four years, this will be an indicator. There's going to be, there's a big cyclical drop that's [00:46:00] already happened and will continue to happen.

So, startups are being much tighter. They're, they're not hiring the barista as early as they might've done before. They're not getting artisanal bacon in the company cafeteria. Like all the costs are being much more scrutinized, which is good and it's healthy. 

And I think, you know, to some, I mean, you, at the macro, you want capital to be allocated efficiently and effectively, right, in markets. So that's good

. But there is this ongoing correction. And I think what that means is. You know, as we've kind of talked about IPOs, the IPO window is largely shut. Like you're only IPOing right now from venture if you have a fantastic business, like truly fantastic. Otherwise it's just really hard to, to go public and get demand from public investors who have been horribly burned from buying companies that listed in 2021. You know, so there's a lot of pushback there and you know, I, I don't see a lot of that [00:47:00] cyclical stuff, it's going to take a while, I think years before that stuff unwinds.

But some of it's not all a bad thing. You know, if it leads to people being more disciplined, both founders and VCs, I think it's a good thing. 

Jeff Santoro: Yeah, it, it, it's, to me, it seems healthy on the beginning of the process, right? If this prevents businesses that should never really get funding from getting funding, that's probably the thing that's healthy for everyone.

But you do have to, you have to feel a little bit for the people caught in the middle. Like you said, like the ones who had gone through series B and now all of a sudden the funding dried up. You don't want to go to it. You don't want to do a down round. And now you're stuck in the middle.

And it's kind of hard to blame them. They were just at the right place at the wrong time, you know, right? 

Joe Magyer: They were just going with the flow. Tough timing. And I'm very sympathetic to that. And founders, you know, they're, they're hustling and they've made sometimes like all in bets on these companies they've started. 

Jason Hall: I want to, I want to tie all this in together to talk about how it affects us, regular individual investors who aren't participating in, in venture. 

Because I think it's [00:48:00] really important you talk about, you're talking about how VCs become so much more institutionalized. So you think about a pension fund, for example an endowment, you know, these, these, these entities, they have two things. 

They have tons of money. And they have very specific obligations every year that they have to deploy that that money. 

And what we've seen is interest rates have skyrocketed. They've been able to risk off because, well, you know what? You don't have to take on more risks to hit your return goals anymore.

Maybe you, you know, maybe you wallpapered it with "we're diversifying our strategies" right? We're and now you're just saying, you know what we need to do? We need to go back to basics and you're just buying T bills because 5% is enough to cover your nut every, every year, right? 

And that's changed things. And I wrote about it, Jeff, in our newsletter, I think week before last, how there's a lot about this that I think makes me really optimistic. I think there's a lot of founders out there, they're going to prove to be generational entrepreneurs and they're going to create a ton [00:49:00] of wealth for a lot of people. 

I was thinking about it from public markets perspective, because, because, you know, it's, you've got a lot of public companies that, well, guess what? They, they can't raise capital anymore. They can't afford to take on a ton of debt and they have to tighten their belts and they have to innovate. And pressure makes diamonds

. And I think that that's, what's going to be happening in the public space and also in, in private markets for VC as well.

I think the private equity guys are happy as pigs in shit right now because they're getting more calls from the institutional people looking to put money to work because they can make more money on the leverage side and to look for those distressed opportunities.

So do you think that that's also creating more opportunity in VC as well for people like yourself that do have liquidity and you're looking for opportunities?

Joe Magyer: Yes. Yes, strongly. So if you, I mean, a simple way to think of it is. 

Jason Hall: Have money when nobody else does. 

Joe Magyer: Well, yeah, exactly. I mean, you know, the old [00:50:00] cash is king. It, it's a cliche, but when other people are not the point and you are, you're going to see better deals, you're going to get better terms. And with better valuations, and I don't want to make that sound like it's overly opportunistic, like what I tell founders is when it comes to valuations, like we want to find what is a fair price for both sides, because one thing that's not healthy, you know, if you.

If an investor essentially takes advantage of a founder with terms that are just really harsh, either the founder is going to remember that and have a big chip on their shoulder about it, and that's not a good thing, or they may not know that you, um, maybe took advantage of them through more sophisticated terms or whatnot because they don't have as much experience.

In which case you should feel bad about yourself. And that's not likely to work out well for you reputationally either. And anyway, just to say venture space reputation matters a lot because a [00:51:00] lot is referral based. There's a lot of networking, you know, founders will back channel to find out more about you as an investor.

They'll talk to other founders that you've backed. And so. 

Jason Hall: You're not just, you're not just buying stock in that company. You're becoming a partner for potentially a lot of years. 

Joe Magyer: Yeah, yes, and you know, I guess to get back to the, your question, I kind of veered off, but look, I mean, if, if there's two thirds less competition and prices have softened and whatnot, then yeah, I mean, you know what you were saying of, um, a lot of institutions now are kind of like, well, we're getting back to basics with our portfolio construction reality is a lot of them overcommitted.

In 2021 and 2022, like they got some of them got greedy, you know, it's not a popular thing. They, but some of them got greedy in some cases they felt like they needed to keep investing with really hot venture funds. We're firms and we're going to keep allocations with their new funds. So yeah, I think it's a mix of, there's a lot of that [00:52:00] on the BCs, but LPs who threw a lot of money adventure in 2021, like there's a little bit of egg in their face too, you know?

And nobody, nobody says that on VC podcasts, but I guess because I've got a new fund, I can say that and I'm not hurting anybody's feelings or at least nobody who's invested with me. 

Jason Hall: We'll follow up with you in four years. 

Joe Magyer: Yeah. We'll see. We'll see. 

Jeff Santoro: So Joe, I, I assume that, , some of your invested wealth is tied up in the VC stuff that you're doing, but I'm going to assume you also still own some publicly traded socks because you referenced that earlier in our conversation.

So I'm curious what your work in private markets has taught you about how you think about investing in public markets, if anything. 

Joe Magyer: Yes, but it might be in for people who have kind of followed some of my stuff. Over time, they might find this kind of like unsatisfying. So I'm a-

Jason Hall: We love unsatisfying answers here. They're our favorite. 

Joe Magyer: Or why people listen to the show. Yes. The unsatisfying. Yes. So I now do [00:53:00] a fair bit of indexing and I never did that. For like 15 years, I never did that.

But I, I feel like I'm just, I'm all in now I'm doing. What I'm doing career wise. And so I just, I don't have the time or focus to be out finding great public opportunities.

It's, it's not going to help my LPs. I got a ton of capital doing what I'm doing. Like I'm, that's my focus. So I still own a lot of public companies, which I've invested in some for, you know, for more than a decade with no plans to change that.

But as far as like new capital that I have come in, if it's not going into what I'm already doing or if I sell something, which doesn't happen very often, but if I do yeah, I'm just using different funds to give me different exposures. And yeah, never thought I'd be one of those guys, but- 

Jeff Santoro: No, but it makes perfect sense, because you don't have the time like we, we talk about that a lot in terms of, you know, cause we talk about stocks and investing all the time on, on this show, [00:54:00] but we also admit that you know, Jason does it full time for a living and I'm just obsessed with it as a fun hobby. So it makes sense that we would want to be stock pickers. 

Like we, I I'll read a 10 K for fun. Where, but most people don't want to read a 10 K. So it's probably good to just be an index. And whether for you, like, I'm sure you would be interested in spending the time if you weren't you know, doing all this other stuff. So it makes perfect sense. 

Joe Magyer: If I had 48 hours in the day, I probably would. Yeah. But I guess if I was being glass half full and if I did have 48 hours, you know, the fact that I'm looking at so much stuff, it's fairly bleeding edge. You do get kind of the teaser trailer of where a lot of technology is heading, and that probably is helpful as far as looking at a lot of public companies and better understanding competitive risks and dynamics.

But again, like, you know, and that, that helps with the companies that I'm invested in, but yeah, for now, it's as far as we're just trying to keep focused. 

Jeff Santoro: Yeah, that makes sense. So not mentioning [00:55:00] any of the companies that you're currently invested in. Is there a private company that you would love to see come public? 

Joe Magyer: Yes. Well played by say any of the ones, I wouldn't mention them anyway, but any of them I'd love to see go public. 

Jeff Santoro: Right. It's a given that you'd want to see all of the ones you invest in go public. Right. 

Joe Magyer: All my children. Yes. So it's not a startup, but growing up in Atlanta, I'm a complete Chick fil A homer. And I raised my kids that way. It's a tremendous business. Cathey family has created tons of value. They have super loyal customers because it's a great product. Great value, service is, I mean, the service you get at a typical Chick fil A is better than you get at most sit down restaurants where you're tipping someone.

Jason Hall: They also don't screw up your order all the time. Looking at you, Wendy's in Rockmart, Georgia. 

Joe Magyer: Yes. So it's, it's just very consistent execution. Like any time I have a bad experience at Chick fil A, it's more like I can't believe that [00:56:00] just happened. Like the strangest thing just happened. Someone wasn't like 200 percent nice to me. You know, how dare they? 

But they've just set such a high standard and they have such an amazing culture. So it has nothing to do with startups, but it's a wonderful business that I admire. And I love the food. 

As far as startups go, ironically, you know, 2021 kind of sucked forward so many IPOs that like that really like most. Startups that were anywhere near being able to do an IPO. They did it in 2021. So I'd say the few that are able to list now are ones that are still private late stage. And again, I have no investing interest in these. 

Purely like curiosity, like. Anduril would be one that would interest me. So if anyone's not familiar, it's American defense, a lot of autonomous defense tools and systems. I have no insight into what their [00:57:00] financials are like, their scale whatsoever, but it's one I'm curious about. And if they were to list, I would check out the prospectus pretty quickly, just that-

Jason Hall: You want them to list just to read the S-1. That's really all you're- 

Joe Magyer: Yeah I think it'd be a really interesting as one. And the founder has pretty big personality, too. But then again, that's one where like probably not a lot of motivation to go public anytime soon. 

Yeah, I mean OpenAI If they still exist by the time this recording goes live, given everything that's been happening. And it sounds like they will, but that's, you know, a fascinating situation. Yeah. Those are probably the two that I'd be most curious to tear open the S1s. 

Jason Hall: Joe, any last words before we, before we call this? 

Joe Magyer: No. I really appreciate you guys having me on. I think the show is great. I love the spirit of what you're doing. I love people being along for investing journey and there being some community around it. 

Jason Hall: And that is our goal. Joe has been great having you on learning more about what you're doing, catching up. I do have one [00:58:00] last question before my last, last question. How do people find you? 

Joe Magyer: You can find me on Twitter @Magyer, that's my last name.

You can find me on LinkedIn. If you're a founder, get in touch. I'll listen. And seaplaneventures.com. So it's the homepage for my new firm. 

Jason Hall: We'll have that- those of you driving, you don't have to stop and write it down. It'll be in the show notes. We'll have it. There you go. It'll be right there. We'll put it in the show notes.

We'll have it on the transcript as well. On the newsletter. You can find that at the smattering.net. You can also find that in the show notes. You don't have to write that down either. 

And here's the last, last question, Joe, I'm curious. If not- but it will be our University of Georgia Bulldogs that win the national championship. If not, who will it be? 

Joe Magyer: Oregon. I think they're playing really well. I think Dan Lanning is a very talented coach. Really strong, defensive mind. Obviously comes from the Kirby tree. 

Bo Nix is executing really well. Michigan would be my other... when they're, you know, if you look at Michigan, they've lost [00:59:00] their last six bowl games, let's say six. Not an awesome track record of preparing in the postseason.

So anyway, I could go on a long thing with that, but that's, that's how I would picture it playing out. 

Jason Hall: Yeah. Oregon that is becoming Bulldogs West. I'm going to go with you, we'll go with that one. That's for sure. 

Joe, again, appreciate you coming on. We'll see you soon. 

Joe Magyer: All right. Thanks guys. 

Jason Hall: As always. We are more than happy to give our answers to the hard investing questions out there. Have great guests like Joe come on, give their answers to the hard questions about investing, but it is up to you. My dear listeners got to figure it out for yourself. Answer this question yourself. You do it. You can do it. I believe in you. 

Hey, Jeff, we'll see you next time, buddy. 

Jeff Santoro: See you next time. 

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