Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
What's the Alternative? | Episode 5 | Venture Capital Reimagined featuring Dave Thornton
7 Plays11 months ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode "Venture Capital Reimagined", Shana is joined by Dave Thornton, Co-Founder, CEO & CIO at Vested. Vested is pioneering index-like exposure to the VC asset class, across company stage, sector, and founding year. Vested acquires its exposure by providing funding to the departing employees of VC-backed companies, who find themselves in the acute distress of having 90 days to find the money to exercise their expiring stock options. This revolutionary approach allows Vested to provide liquidity for startup employees and along the way democratize access for investors to access the beta of venture capital unlike it’s ever been done before.
Dave is Vested’s Chief Executive Officer and Chief Investment Officer. For the last 11 years, Dave has been a serial entrepreneur. His most notable accomplishments include the founding and successful sale of PatientFinder, and his collaboration with Emilio Seijo (a Principal Quantitative Strategist at Vested) in the creation of a real-time illiquid asset pricing model which is algo-trading a $300M book at a name-brand bank. Dave also spent time building the systems at a hedge fund within Citigroup, and worked as a Program Manager at Microsoft. Dave received a BAS in Computer Science from the University of Pennsylvania’s School of Engineering and Applied Science and a BS in Economics with a concentration in Decision Processes from the University of Pennsylvania’s Wharton School. Dave earned a JD from Georgetown University.
Learn More About Vested: Vested Investor Site
LinkedIn: Dave J Thornton
Learn More About Banrion: Banrion Capital Management
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana 𝕏: @shanas621
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results.
The guests featured on this program are participants on Banrion Capital Management’s platform. As such Banrion may receive payment for their participation as a platform partner.
Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Statements attributed to an individua
Recommended
Transcript
Introduction to the Podcast
00:00:02
Speaker
Welcome to Von Ewen Capital Management's What's the Alternative podcast. Joining host, Sheena Orzipf-Sistle, the queen of alternatives and founder, CEO of Von Ewen Capital Management as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
Meet the Manager Series Introduction
00:00:29
Speaker
Welcome everyone to What's the Alternative? Meet the Manager, one of Van Wens' series of content for advisors to learn more about alternative investments.
Introducing Dave Thornton and Vested
00:00:42
Speaker
With us today is Dave Thornton. He is the founder, co-founder
00:00:47
Speaker
and chief investment officer at vested, which is a really unique way for advisors and their clients to access venture capital. What they're doing is really groundbreaking and disruptive to the industry and something you should really know about because not only is it going to help gain exposure in a really diversified way,
00:01:09
Speaker
to venture capital types of companies. But more importantly, there's an element to what Vesta does that can actually help advisors grow their business. So with that, I'd like to introduce Dave. Dave, thanks for joining us today. Hey, Shannon. Thank you for having me.
00:01:26
Speaker
And I wanted to start by talking a little bit about your background. Do you have a really interesting background? You went to law school, if I recall, you worked for a hedge fund, then you've worked in some startups yourself and you've had some successful exits. So tell us a little bit about your background and sort of what drove you to come on board with vested and develop this really unique venture capital investment opportunity.
00:01:53
Speaker
Yeah, happy to talk to you about it. Although, as you already alluded to, my background is a little all over the place. Luckily, it all coalesces nicely with invested. So I did an undergrad that was between business and computer science.
00:02:09
Speaker
And the first stop at undergrad was a mixed job at Microsoft that was more computer science than business. The second job was the most important one as it relates to prior corporate background invested, which was building out a hedge fund within Citigroup, where given my background, I built all the trading models and the risk models and automated as much of the back office operations as I possibly could. Got a lot of operational experience at running a fund.
00:02:35
Speaker
went to law school, as you mentioned, and then jumped into the entrepreneurial world. In the first business, which has one important thread to vested,
Challenges and Solutions for Startup Employee Equity
00:02:44
Speaker
we built bespoke machine learning models in areas where I happened to be a subject matter expert, one of which from my time at the city hedge fund was a very liquid asset class.
00:02:56
Speaker
we ended up building a real time liquid asset pricing model, a subsequent version of which is now trading a $400 million book at a brand name bank. I mentioned this because when we get into vested, one of the most important pieces of IP with invested is a private company pricing model that the exact same crew has built. The final thing that I did before vested and the pointer directly to vested was I started and then successfully sold a healthcare analytics business
00:03:27
Speaker
The business itself has nothing to do with Fested, but the very end state of the business has everything to do with Fested, which is it was one of our data vendors that was buying us and it was a part cash and part stock deal. And I effectively gave one of my employees accidentally terrible advice on how to think about the stock part of the deal.
00:03:48
Speaker
producing for him a tax bill that I didn't see coming, that he didn't see coming, that we both found out about in like March of the following year. And because this employee had chosen to go 100% stock for his part, he had no proceeds from the acquisition to pay for it.
Evolution of Vested's Venture Capital Products
00:04:03
Speaker
And the pointer directly to vested was that somebody with my background should not be screwing up startup equity. But if I'm screwing up startup equity, it's probably the case that your average startup employee is not thinking the right way about their equity either.
00:04:18
Speaker
That's what actually began as a company before we got into offering this amazing VC product. We got into the business of helping startup employees understand their equity in the first place. And for those of you who are familiar with the public markets, for listeners who are familiar with the public markets, there's so much stuff in the public markets that you don't even need to think about that in the private markets is the most important set of things to think about. So for example, most companies do not have cashless exercises.
00:04:47
Speaker
And so if you get restricted stock units of a publicly traded company, as soon as the investing period ends, you can cashlessly put them into the market in one way or the other and generate cash from them. In the private markets, as an employee, you tend to get compensated heavily in stock options. And when you leave, you have to exercise your stock options typically within 90 days, which means you both need to come up with the money for the exercise. And you also need to come up with the money for taxes because as my
00:05:15
Speaker
acquisition story alluded to, stock option exercise is a taxable event that people often forget about because it doesn't actually produce real gains right now.
Vested's VC Index Strategy and Pricing Model
00:05:26
Speaker
So vested is originally was intended to help startup employees understand their equity. And over the course of time, we started to have a bunch of folks that were coming to us from our own user base asking for money. And this was the beginning of the rabbit hole that we jumped down and had been
00:05:41
Speaker
been down for the last three years as we built out the asset management side of our business. Yeah, I think it's really interesting because I think a lot of people understand it like the highly compensated executives at startups and other companies that are private have access to lending and things of that nature to help them with option exercise that some of the you know
00:06:04
Speaker
lower-level, mid-level employees don't. This is obviously a part of the market that is ripe for the taking, if you will. I think it's really interesting because you talked about your entrepreneurship journey. I want our viewers to understand that Dave and vested have been an excellent partner with Bonray since the very beginning and Dave in particular has provided myself with amazing advice along the way.
00:06:33
Speaker
and has always been very good about providing advice on the entrepreneurship journey. And I think what you're kind of alluding to, whether it be the advice you gave your former employee or the advice that you give me is that this journey and these private markets and these pre IPO startup kind of environments, it's a little wild, wild West and it helps to have someone who's been on that journey successfully,
00:07:02
Speaker
do an exit and be able to provide that advice to entrepreneurs, but not only that, but also to their employees, because they have a better understanding of how the capital structure works. And I think that really gets down to kind of vested in general. As I alluded to in the beginning, this is a really unique product. So Dave, why don't you talk a little bit how you, as you mentioned,
00:07:25
Speaker
go from helping employees fund the options that they are going to purchase to how that build out the actual product and strategy that you are offering to investors. Yeah, happy to. So let me first say that when some of our users that were at vested looking for knowledge started coming to us for capital,
00:07:49
Speaker
The first thing we did was ask what the nature of the capital requirement was. And it was almost entirely post-termination stock option exercise funding. So as I already mentioned, but I'll say it again, to be really clear, usually when you're working at a startup, it is cash constrained. It is like one of the characteristics of being at a startup. And most folks that work there don't make market salaries, or at least they're not making what you make at Google or Facebook now, Meta.
00:08:19
Speaker
As a result, the rest of their comp is made up in stock options. And because nobody reads their stock option documents, it catches almost everybody by surprise at the end of their first startup journey. Let's say you're leaving to go back to business school or because maybe Google poaches you or because you get offered a cooler hire title at another startup. You usually find out for the first time that you now have 90 days within which you must exercise your vested stock options or else they go away.
00:08:49
Speaker
And this is particularly brutal because you've been under cash comp for the last, on average, three years. So you don't have the $70,000 that you need hanging out there to effectively invest into the company you're now leaving. So that's the nature of the use case that we're solving in this fund product that I'll describe to you in a second. When we first heard about it, we were like, this is not a new problem. This is a 20-year-old problem. This more, depending on whether you were around before the dot-com bust. So we looked around.
00:09:17
Speaker
And we tried to figure out what the market that had to exist looked like. And we saw that although it was pretty robust, it was only robust with respect to senior employees leaving late stage companies. So these are the C levels that you were talking about earlier. And the folks that were coming to us were the ones that represented kind of the other 99% of startup employees or not senior people at late stage private companies. These are two sets of folks. One is rank and file employees period.
00:09:47
Speaker
Even if you leave a company that everybody's heard of like Stripe, if you only need $38,000 to do your stock option exercise, that might be a lot for you, but it is not even close to enough to get out of bed for, for any of the existing option funding shops. And so you can't get the money you need and you lose your shares. On the other side, almost regardless of the personal seniority of the person that's leaving, if you're an early or a mid stage startup employee, that is just difficult to diligence as an outsider.
00:10:15
Speaker
nobody will support that deal either. So those can be sizable deals. And if you're leaving a Series B company, nobody cares either. So we saw this very large, diffuse set of people. And what we ended up coalescing around was kind of a VC index strategy where we would help lots of folks leaving many companies at various stages and at various sectors, typically taking small bites each time. And what our resulting portfolio would end up looking like is
00:10:44
Speaker
a VC index, lots of little bits of equity exposure across the asset class to help understand what we mean by index, like what is the nature of the thing that's in our fund. I'll be a little bit specific about what our transaction is and how we help employees. Typically what we do is we buy from them the minimum number of shares in their options set that is necessary to help them affect their entire option exercise. So kind of as an example, if you need
00:11:13
Speaker
Let's say you have a hundred thousand stock options at a $1 strike price. Let's pretend for a second that tax does not exist to make this simple. You need a hundred thousand dollars. Yep. Let's say that the current fair market value of the underlying shares is now $3 because since you were originally given your grant, uh, the company's done pretty well and you know, it's, it's three X relative in value to when you were given your grant. We'll buy at $3 and we'll buy.
00:11:39
Speaker
In your case, 33,333 shares at $3 to get you the $100,000 that you need. You take our money,
Data-Driven Company Selection Process
00:11:47
Speaker
you exercise everything, and you owe us 33,333 shares deliverable as soon as the transfer restrictions that are commonly on private shares lift. So we are, in short, equity investors.
00:12:01
Speaker
We're helping our counterparties own most of their shares while we keep the economic upside associated with a portion of their shares. And again, we do that across people leaving companies of all stages and all sectors, and we end up with something that feels very index-like. Yeah, that makes a lot of sense. And I think the interesting part of this is the relationship with the startup employees.
00:12:22
Speaker
How do you, you know, you alluded to this early on the proprietary aspect of your pricing model your private market pricing model. It's really interesting because, you know, I'm sure you have lots of different startup employees come looking for funds, but you don't accept them all. And there is a method to your madness.
00:12:43
Speaker
So talk a little bit about the edge that that private market pricing model can provide. And also the edge that's provided just by having access to the data that comes with the amount of companies that you review. Yeah, so this is, as you can imagine, if we're helping out 99% of startup employees, which come from like 30,000 companies, data is very, very, very important. We are never going to operationally get the chance to meet the management team of 30,000 companies
00:13:13
Speaker
and refresh those relationships every three months or six months or a year. So we have to use data. The general ethos here is that we are using data to get rid of companies that are likely to have problems, take the remaining call at the top decile, top quartile of the asset class, and then buy only within that set of likely winners, diversified and unconcentrated and relatively cheap. The type of data that we have that's
00:13:40
Speaker
the most important to us right now is financial performance data. This is usually the missing hole in the private markets donut. Like nobody knows how private companies are doing. It's one of the benefits of being a private company if you're running one. So we have financial performance data that helps us see which companies, for example, are profitable. It's like a really nice binary thing for startups. If you're profitable, you're doing okay. If you're not profitable, you got some work to do. We also get to see which companies have revenues that are healthy and growing
00:14:10
Speaker
Again, a really nice thing. If your revenues are healthy and growing, you're likely to be able to find your next round of funding. And if they're not, you won't. We also use other data sets such as financing trajectory. So has a company been raising consistent up rounds, financing terms, employees tend to have access to common stock, which means when we help them, we're buying common stock. Common stock is at the bottom of the stack. And so it's very important to know that common stock is not going to be impaired
00:14:40
Speaker
by the financing terms that a company recently took money on. Investor quality. If Sequoia and Andreessen are behind you, that's probably great. Investor behavior. If Sequoia and Andreessen are continuing to follow on in subsequent rounds, also probably great. We see employee flows. So we have a big machine that sits on top of job sites and pays attention to whether employees are coming or going. If you're hiring, that's good.
00:15:07
Speaker
If you are laying people off in the current market environment, 10 to 20% layoffs are no big deal, 70% layoffs are probably a death spiral. If you just hired your first CFO, you're probably getting ready to go public. If you just hire your first sales team, you're probably transitioning from founder-led sales to scaling revenue. So there is a number of different data points that we pay attention to, and we use them primarily to figure out which companies are not doing
00:15:35
Speaker
Excuse me, not doing well or not likely to be able to raise money at good valuations in the current environment and we focus instead of the companies that are left. So I always like to think and tell me if I'm wrong when I think about this.
00:15:47
Speaker
Most people, when you invest in a traditional
Differences from Traditional VC Models
00:15:50
Speaker
VC, the traditional VCs focus, typically, they all have a certain area of focus. You and I have talked about this since we both had to err in the process of raising venture capital ourselves. You'd have to target certain firms because they have certain areas of expertise. They tend to take big at bats.
00:16:13
Speaker
For them to win, it's really like two or three companies that they invested in win. And the rest, it doesn't really matter because the two or three that they, you know, went up 2000% more than made up for any, you know, breaking even losses or whatever in the rest of the portfolio.
00:16:32
Speaker
But when I think about how you build your portfolio, I think of it more like you're not necessarily looking for the home runs, although you'll have them because of the way that you pick your stock, your, your positions. However, there's a lot more like doubles and triples that are in your portfolio where they may not be those like 2000% winners, but most of your portfolio will have a positive return because of the way that you do it, which is not how,
00:17:00
Speaker
traditional VC typically wins. Is that accurate? You're totally right. And it's interesting because it's not like the power law dynamic that you just described where a small proportion of winners produces most of the returns. It's not like that's not active in our portfolio. The difference is
00:17:18
Speaker
we get a ton of at bats and the likelihood that some of those outsized winners end up in our portfolio is therefore high. Whereas in a smaller portfolio that a typical BC will have, say 15 to 40 companies, like there is an incredible amount of variance from vintage to vintage. You have to get those two or three winners or your portfolio doesn't return. So same underlying dynamic, but because we have more at bats, we have a much higher likelihood of having those opportunities in our portfolio. And I'll say another thing, which is,
00:17:48
Speaker
There's a lot of literature out there that has been written on the right way to approach BC and the literature is reasonably conclusive in the early and mid stages of the asset class, which is picking winners is very, very difficult. Even if you have access to the management team and consider yourself an incredible soul reader, like the better strategy by default, unless you have
00:18:13
Speaker
some sort of proprietary edge on access or pricing or the ability to really pour gas on the fire of your own companies is to diversify. Like you want to be in a portfolio with 500 early and mid stage companies as opposed to 15 unless you think you have a special edge. And then on the later side of the asset class, this dynamic kind of goes away. The winners have manifested at that point. Like you knew who Facebook was before they were public.
00:18:40
Speaker
The game at that point is about access and price, not about understanding that this is the company that's gonna be the winner. So we actually view what we're doing as a pretty fundamentally sound way to approach the asset class. Yeah, that
Vested's Appeal to Financial Advisors
00:18:53
Speaker
makes a lot of sense. It's one of the reasons why I think your strategy resonates so well with the advisory community. You know, you're not, the typical financial advisor that Bonrin serves is one of what I'd like to call the mass affluent. And I just came back from the Tiburon CEO summit and
00:19:09
Speaker
We spent a lot of time talking about where the opportunity in the marketplace is. And one of the places that we spent a lot of time focus on that they spent a lot of time focusing on was this idea that the Mass Affluent Advisor, the advisor whose client is, you know, maybe they're accredited because they have $700,000 that they're using for investments, they own a home.
00:19:30
Speaker
maybe they have some other investment and they reach that accredited investor hurdle because of their salary or whatever. They have typically not invested in this space before, and they're looking for a way to understand it and go in a way that they're comfortable with. I think your product resonates with that area of the market because of the nature of that indexing type feel that
00:19:59
Speaker
I don't even want to say singles, because for the most part, you've got doubles, triples, and a couple of home runs in your portfolio, because correct me if I'm wrong, but one of the benefits of doing it the way you're doing it is in many ways, you're getting these stock options at a major discount. And that gives you an edge, because in some ways, you know the actual value of the stock at the option price, whereas the traditional VCs, it's all kind of made up.
00:20:27
Speaker
Yeah, well, traditional DCs, so they'll buy into a company at the market clearing price, meaning they have to pay the highest price to win the deal that they just won, which allows them to do the financing. They will then typically continue to carry that asset on their books at the price that they most recently paid until there's a new round of financing and there's a new price set. And the problem with doing something like that is in market environments like right now, where the private markets have
00:20:56
Speaker
hit a bump in the road for the last year and a half, it still looks like they're holding things at great prices when in fact they're not really. So one comment is in the secondary markets, which is where we live when we're helping employees fund their stock option exercise, you can't really hide from reality nearly as much. The second comment to your point about discounts is in addition to the comfort of being diversified across the better names in the asset class,
00:21:23
Speaker
We also do tend to buy our exposure at discounts. And the discounts do two things depending on the market cycle. During a down market cycle, they provide protection. If we're buying in and I'm just making this up at 50 cents on the dollar, then the dollar can fall and the funds will still be performing. In an up market, it provides substantial opportunity for additional appreciation.
00:21:49
Speaker
If we bought in at 50% of where the most recent VC bought in and that VC has a 10X, that's going to be a 20X for us.
Market Opportunities Amidst Economic Changes
00:21:57
Speaker
So the discounts, the discounts do a lot of work in all my market cycles. You know, it's so funny as you're talking about this, like I'm thinking about how this is such a fantastic way to gain access to these pre IPO venture backed companies.
00:22:12
Speaker
I don't know if you've seen it yet, but I watched the Blackberry movie over the weekend. Have you seen it? I didn't even know it existed until somebody mentioned it on Twitter. No, I just remember. I have my memory of living on Wall Street during the Blackberry denouments, but I haven't seen it. Yeah, I actually do too. I remember when everybody had a Blackberry. I had a Blackberry and I would have like my normal phone and then my work phone was always a Blackberry.
00:22:37
Speaker
And it was like a status symbol, but it's funny because part of what that movie entails is that the way they get a lot of these amazing engineers to come in and work for them.
00:22:50
Speaker
is by what you're doing is completely legal. But what they were doing were backdating employment contracts so that they could give them stock options at the pricing from six months ago or whatever it was. But the point is that actually is kind of, in a way, you're getting in a legal way. You're getting in at the older price. That's right. You're getting in at the older price yourself. That's the discount that you're getting, which is truly remarkable. And that's actually
00:23:18
Speaker
why a lot of these engineers that they brought onto Blackberry made so much money in the end. Yeah, it's interesting. You can think of discounts. In an asset class that's mostly rising, you can think of discounts as a form of time travel. Yeah, exactly. Exactly. If you haven't seen the Blackberry movie, you should watch it. It's fascinating. Now I will. It was super hard to find. Like I thought I'd find it on Amazon, but I ended up watching it on Apple TV. I think it's available on YouTube too. It was like 3D.
00:23:46
Speaker
We'll do it. When Kim and I are done with the morning show, we'll move over to the Blackberry movie. Yeah. It's not that long, but it's actually the movie.
00:23:58
Speaker
for all the success Blackberry had during that time period, like, wow, what a dysfunctional company it was. But anyways, I digress, try to keep things a little interesting for the audience with something that maybe they can relate to. Let's talk about, you touched on it a little bit, but let's talk about the current market environment and why this is a really interesting environment for venture capital. I think a lot of people saw what happened with Silicon Valley Bank
00:24:26
Speaker
and now think, oh my God, this is a horrible environment for venture capital. And maybe if you're raising capital, it's not necessarily the easiest environment, but if you're allocating capital, it's a different story. So touch upon the opportunity that we currently have in the marketplace right now. Yeah, you're right that from an asset allocator seat, particularly what we're doing is incredibly interesting right now. So this market for
00:24:51
Speaker
the rank and file or the early stage employees that are leaving startups, it might not be obviously huge unless you get the following explanation. So employees tend to own like 15 to 20% of a company's capital stack. So if you think that private companies during the good times were worth like $4 trillion and maybe now they're worth like $2 trillion, 400 billion of that belongs to employees.
00:25:18
Speaker
Employees leave all the time. Like they just follow the natural labor flows of the market. There is nothing wrong with a company that loses a couple employees a month and has a hundred employees and an HR department. That's a pretty typical thing. At the moment, employees are letting their options expire with it at the end of that 90 day window that I described at 76% rates. It was 74% a little bit ago and Carta came out with new numbers. Carta just happens to be the source of truth for all this stuff because they manage the cap tables for
00:25:47
Speaker
80% of private VCVAC companies, 76% option expiration rates. What that means is if this market is $400 billion big in general, 300 billion of it goes up in smoke. It is a very, very large market. And it is a market that is, I'm not sure the right way to say this, it is programmatically accessible at scale. You're basically just following the employees from job A to thing B.
00:26:15
Speaker
And if you can do that well, you can tap them on the shoulder. You can let them know that they can keep most of their stock if they accept funding for their stock option exercise, and you can allocate to this very diversified VC strategy. So at this moment in time, it's an interesting market, especially because companies are doing 10, 20% layoffs across the board. It's producing even higher rates of people going from company A to thing B, and it's actually an easy time to deploy capital.
Benefits for Advisors and Employees
00:26:43
Speaker
Yeah, it's kind of interesting in that respect. When you're raising capital, you get cut on what you think your valuation is. Most VCs out there will challenge your valuation because they can right now. It's an environment that's not as competitive as it once was in terms of the deals. But the good deals, you can get
00:27:12
Speaker
know, great allocations there. And I think to your point, you know, we're in an environment where maybe there are some layoffs, maybe people are leaving for more stability because they, you know, they want that employment stability in a time where they might feel insecure with the economic conditions. And this really is a way for someone like you to be able to review the landscape.
00:27:35
Speaker
of startups and decide like this one is one that I would be really interested in hopefully we can get some employee compensation or sorry employee flow that would be really interesting for this but let's talk about the you know kind of the fun part for advisors
00:27:52
Speaker
You know, we've talked about this a lot. There is an opportunity here for kind of a mutually beneficial relationship between what vested does and advisors in general. And again, that mass affluent market, because these are employees and you and I have talked about this, that for the first time in their life, they have a lot of money.
00:28:11
Speaker
You know, these are the mid-level employees that weren't making that much. You know, they didn't have a lot of money. And then all of a sudden, you know, these options, you know, monetize in some way. And all of a sudden, they have all this money they've never had before. Like, think about that and how that could impact, you know, their lives. But that also means that there's a good chance for the first time in their lives, they might actually be seeking out advice. Yeah, yeah, that's totally right. So we have
00:28:41
Speaker
a very natural full circle relationship with the wealth management channel and with financial advisors in particular. On the one hand, their current clients who might never have been able to access VC can subscribe to our fund product and access VC in their portfolio for the first time. And that's good for differentiation and for making sure that the clients that have been looking for access to alternatives actually get it before they leave for another financial advisor that does offer them that. But then on the flip side,
00:29:07
Speaker
The nature of our fund product that gives the access to VC is we're helping startup employees own private shares. Once they have their liquidity event, they pay us and we have a direct conversation with them in which maybe not with the right words, they will invariably ask, do you guys do wealth management? And of course the answer is no, it's a heavily regulated space. It requires a ton of expertise in infrastructure. We have no intention of getting into wealth management.
00:29:33
Speaker
But at the same time, we don't want the last conversation we have with this particular user to be like, no, go with God. We actually want to have somebody to refer our clients to. So we actually anticipate that as we scale up our funds, we are going to be producing quite a few high net worths in this way. And we expect to build out with our earliest capital partners in the next couple of funds, a referral relationship around the liquidity events that are produced in the funds.
00:30:01
Speaker
Yeah, I think that that's so interesting because it is kind of a pipeline of, you know, not only new potential clients that are coming into wealth, but also, you know, we talk so much about like next generation of investors Gen X, millennial Gen Z.
Liquidity Expectations and Valuation Approach
00:30:18
Speaker
That's exactly who this pipeline is going to be filled with. So it's exactly the kind of
00:30:24
Speaker
people and relationships that you would want to build and grow your business with. You know, it's for the advisor community, it makes a lot of sense. So let's talk a little, let's go a little bit off topic here for a second and just talk about, you know, we touched about the environment for venture capital and why it's interesting today, but overall economically speaking, like there's a lot of question about, you know, potential IPO activity slowing down. So when we talk about look,
00:30:52
Speaker
liquidity of your fund, right? So I think it's really important that advisors understand when you are invested in venture capital, private equity, anything like that, the liquidity is not like the traditional public markets. There are limitations to liquidity. So with the market conditions and the economy, the way it is, there's not a lot of IPOs or liquidation events going on for a lot of these companies.
00:31:19
Speaker
So what can the advisor and their client expect the experience to be from a liquidity standpoint? Interestingly, okay. So first acknowledging the market environment that we're in, it's going to be, in my view, probably six to 12 months before you start seeing the public markets function the way that they used to, which then has the downstream effect of making the non distressed mergers and acquisitions markets function the way they used to. And all of that relates to.
00:31:48
Speaker
the secondary markets for private shares, which have been anemic for the last while. So we do need probably six to 12 months to start having the world move the way that it used to move. That said, our funds are extremely diversified. In the next fund, we're probably gonna have well over a thousand positions in it. And yes, some companies are waiting 10 to 12 years to IPO. And those are the ones that you're really holding your breath for. And as positions, they don't turn into cash anytime soon.
00:32:18
Speaker
But number one, early liquidity events happen all the time at the corporate level. So my old company, the healthcare analytics company that I described, we sold 16 months after our seed round. And that happens quite frequently. It just, unless it's a billion dollar acquisition, it doesn't get like a press release in a Wall Street Journal article about it. So you should expect liquidity from a large portfolio as almost like a law of large numbers certainty.
00:32:48
Speaker
uh, around 10% of the, of the positions that are going to go to that are not going to zero will be liquid in a given year. The average time that we've analyzed to a non-zero exit is about 4.1 years, but it's not like they all happen at the 4.1 year mark. There's some in year one and some in year two and some in year three, and then some bunch in year four, and then you're waiting for the IPO. So our intention is actually to distribute as soon as we have liquidity events, which should happen relatively early and often.
00:33:17
Speaker
because of that and because of our ability to support that and our subsequent funds, we're also going to have a tender offer feature, which basically bakes in the liquidity that you need on a quarterly basis. All right. So let's talk about the pricing, right? So, you know, when you're dealing in private markets, there's an aspect of, you know, trust and how the individual positions are priced.
00:33:41
Speaker
and how that impacts what the client sees. One of the cool things we're doing at Bondrean is we're doing some integrations that are going to allow for clients to be able to see on their statements with their traditional investments, these private investments. So like a fund like vested would show up as a line item in a statement.
00:33:59
Speaker
How does that pricing work on a monthly basis? And how can an advisor address any questions or concerns that client might have on pricing? Because the topic of pricing in the private market and how that reduces volatility and things like that is a bit controversial. But I think it's worth addressing. Yeah. So the easy part of the answer is when there is active secondary market activity in a given name, we will mark to market
00:34:28
Speaker
the way one does and the way one should. So the part of our book that is full of later stage private companies, which are the ones that are sufficiently late stage to have a secondary market, having arisen around them, those are marked market. Then there's the rest of the companies, which is probably three quarters of the book, maybe a little bit more. And as you'll remember, we have our own internal private company pricing model and it's full of
00:34:54
Speaker
It's powered by financial performance data and also by financing trajectory in terms and investor quality and employee flows and all the good stuff that you'd expect it to be, that you'd expect to be powered by given the earlier part of our conversation. So what we do is we have a relatively conservative marketing policy and on day one of a position, we will hold it at cost. And then the idea is over the course of our fund, which is a five year fund life.
00:35:19
Speaker
which I should note is significantly shorter than most of your venture capital and private equity lockup periods. As the position stays alive and proves to us that our pricing model's opinion of it was probably right in the first place, we start moving it in the direction of our pricing model's price. And so we start off relatively conservative, holding a cost by the end of the fund life,
00:35:44
Speaker
All the positions that remain and are clearly doing well are worth exactly what our pricing model says they're worth. And as I mentioned, the pricing model is powered by all the data that would make us pretty good at pricing private companies. So those are the two components of the marking policy, either mark to market when there's a market or mark slowly and conservatively in the direction of our pricing model as the position matures.
Distinctive Features and Investor Access
00:36:07
Speaker
Perfect. I think some of that stuff is like the liquidity and the pricing are the questions that are most likely I think to come up between the advisors and their clients when they look at something like this.
00:36:19
Speaker
I want to point out that this is not your traditional VC kind of fund. So when I think about the home office folks that do the due diligence, and Dave knows this because we do it as well. We do due diligence. In this particular case, you can't look invested like your traditional VC fund when you're doing your due diligence. There is some
00:36:42
Speaker
really major differences and what Vesta does versus a traditional VC and like the marking and the pricing and things of that nature. And I think it's really important to point that out as people are hopefully going to watch this and want to learn more.
00:36:58
Speaker
Can you tell us, you know, first I'm just going to put that out there because I want people to know and please feel free to contact Bonnie and we're happy to share with you the work that we've done so that you can kind of see the way that we approach this because I think it's important. But can you tell us a little bit more about where people can obviously private fund has some limitations, what kind of investors can invest in your fund and, you know, how can they find more information about you? Yeah. So in the next fund that we're running,
00:37:29
Speaker
The intention is for it to be a registered tender offer fund. So it'll be not one of the more annoying funds to subscribe to, one of the easier ones. And in order to find information about the fund, please take us. So if you are a financial advisor, and especially if you work within a broader wealth management platform, you can take us up to your fund sourcing and diligence group.
00:37:56
Speaker
And as soon as they become aware of us, they will take a look at it, approve it for sale on your platform, and then you will have an easy time subscribing. Alternatively, if you want to look on your own, you can go to vested.co slash investor, which is the investor facing portion of vested and start kicking the tires on prior performance and the way that we describe the fund.
00:38:19
Speaker
Awesome. What kind of resources do you have for investors to learn more? White papers, I think you guys have a great white paper. Is there any information that investors can request from you to get more information on the fund? Yeah, we have a fund strategy deck, which is not about a specific vintage of vessels funds, but rather about the strategy as a whole, which is a good resource for understanding the nature of the trade that we're doing.
00:38:45
Speaker
and you can email investors at vesta.co in order to ask for it. The fund strategy deck is where I would start. We also have an institutional grade data room. I would not suggest that you start there. And lastly, when you alluded to it, your next fund is going to be a registered tender offer fund for advisors who are super interested and want to talk to clients about it ahead of that. When do you expect to open
00:39:15
Speaker
the window for fundraising for that fund. So the marketing period is open now and we're primarily having conversations with, uh, wealth management platforms as opposed to individual financial advisors. Although if you think that you, the platform in which you work might be interested in vested, then please find us and have a conversation with us and see if it's worth laddering us up to, uh, to the group that does the investment committee type work at your platform.
00:39:42
Speaker
The first close is likely to be in the first quarter of next year, which is 2024. This is probably gonna be a close for qualified purchasers initially. The second close, which will be for the accredited investors is likely to be in the second quarter of 2024.
00:39:59
Speaker
Awesome. I'm going to just, you know, sometimes I want to make sure our audience understands qualified purchaser requirements, essentially net worth of 5 million with most of that being liquid. I don't believe, correct me if I'm wrong, David, real estate can be included in that. Whereas the accredited investor is a little bit different. It's a net worth of a million dollars. I believe real estate can be included
00:40:23
Speaker
and or having a salary requirement that meets certain hurdles. I encourage you to look at those definitions to become a little more educated on it as we talk about alternatives here all the time. Those definitions are super important to understand in terms of which clients you have will be able to qualify for
00:40:44
Speaker
investing in a product like the one that vested offers. But with that, I'm going to leave it there. I think advisors and clients can learn a lot. This is such an interesting and differentiated product. I can't stress that enough. I look at a lot of venture capital funds.
00:41:03
Speaker
and interval funds and, you know, tender offer funds and ways that they're approached. This is really differentiated in just the index-like way and the power of your pricing model that you have behind you.
00:41:19
Speaker
and just the unique aspect of, in many ways, you're helping people. And I think that will resonate with clients because at the end of the day, you're helping the little guy access something that does potentially provide the ability to grow your wealth beyond what you may have ever imagined.
00:41:47
Speaker
And I think that that's a noble thing to do. And I think that investors can look at it in that noble way. You're helping the little guy. Yes, this is most definitely a feel good trade. It is a travesty that 76% of startup employees on whose backs the value of these companies is built are letting their options expire.
Conclusion and Financial Disclaimers
00:42:10
Speaker
This is their future wealth creation.
00:42:12
Speaker
Exactly. So thank you for joining us, Dave. As always, you can find us on YouTube. If you like this video, please hit like and subscribe. Leave a comment. If you want more information, you can contact us or you can contact Dave directly with the information that he provided in terms of
00:42:33
Speaker
Contact, you know, at Bonin we are here to help advisors allocate at scale to alternative investments and help you find partners in the space that are going to provide you the support that you need when you talk to clients and I can't say enough.
00:42:50
Speaker
how much of an asset Dave is in terms of being able to help you with those conversations. Dave is absolutely one of the very few people that I think can truly make a difference in helping you close business and bring in those opportunities with not only the unique strategy, but just his ability to talk
00:43:11
Speaker
about the strategy to the everyday investor. So thank you, Dave, for joining us. Really appreciate the time. And with that, until next time, have a great day, everybody.
00:43:25
Speaker
The opinions expressed on the What's the Alternative podcast are for general and financial purposes only and are not intended to provide specific advice or recommendations for earnings to deal with any specific security. This is only intended to provide education about the financial industry. The determinals and documents may be appropriate for you.
00:43:52
Speaker
podcast is no guarantee of this result. The guests featured on this program are participants on Bonnan Capital Management's podcast. As such, Bonnan may receive payment for their participation every platform partner. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investment involved with and possible loss of principal capital.
00:44:22
Speaker
and other entities so they may lose value. Investors should carefully consider investment objectives, risks, charges, and expenses. This and other important information is contained in the front perspectives and summary perspectives, which can be obtained from a financial professional and should be read carefully before investing.
00:44:42
Speaker
statements attributed to an individual represent the opinions of that individual as of the date of the published podcast. You do not necessarily reflect the opinions of barman capital management or civil justice. This information is intended to provide educational value, highlight issues, and should not be considered advice, an endorsement, or a recommendation.
00:45:02
Speaker
All bonding capital trademarks mentioned are owned by bonding capital management Inc., an affiliated company, or its funds. All other company and product names mentioned are the property of their respective company.