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The Alternatives Mason: Building Alts Knowledge Brick by Brick | Episode 3 |Democratizing Access to Venture Capital Featuring Dave Thornton
6 Plays1 year ago
Welcome to The Alternatives Mason: Building Alts Knowledge Brick by Brick. Banrion Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. Since education is such a big piece of the Banrion mission and business, we are excited to kick off this series to dive into the nits and grits of the alternatives space. Episode 3 "Democratizing Access to Venture Capital" features Dave Thornton, Co-Founder, CEO & CIO of Vested, one of Banrion Capital's partner asset managers.
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
Host Brittany Mason’s diverse background has given her a unique perspective stepping in to the role as Chief of Staff at Banríon Capital. Throughout her career she has embraced challenging projects proving her ability to lead the development and the successful launch of brands. From staffing, branding, and marketing, Brittany has spent the last 20 years working in the fashion and entertainment industry with some of the world’s most iconic brands. This includes but not limited to event management and production for high scale events like the Superbowl, Indianapolis 500, TAO Group, NYFW, Miami Fashion Week, product launches at Salesforce’s Dreamforce, CES, and partnerships with brands such as John Frieda, Eleven Australia, and Valentino.
Her extensive work in the industry motivated Brittany to produce her own events. In 2013 her first directorial project was to spread awareness for Prostate Cancer. This 1 minute campaign video reached 13 million in just a few short weeks. This is when Brittany began producing charity fashion shows and coaching young entrepreneurs under her brand MOXIE Media. In Just one year Brittany worked with approximately 100 thousand students. In 2017 Brittany launched MOXIE Media Productions in Ireland, becoming the Director and license holder of Miss Universe Ireland. Brittany is known for the rebrand and launch of the Universe brand in Ireland and over the course of 5 years built a historical track record for the country that earned several global awards. Miss Universe Ireland became one of the country’s most exclusive and sought out events to attend. In 2019 MOXIE Media gained the right to Miss Indiana USA and Miss Indiana Teen USA making it the first production company in history to participate in the 3 largest competitions year after year; M
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Transcript
Introduction to Alternatives Mason Podcast
00:00:00
Speaker
Welcome to the Alternatives Mason podcast with host Brittany Mason, Chief of Staff at Bonner & Capital Management. You'll learn how to build alternatives knowledge brick by brick. Bonner & Capital Management uses technology to help independent advisors scale and educate themselves on alternative investments. And since education is such a big piece of what we do, we are excited to kick off the series to dive into the nits and grits of the alternative space.
00:00:32
Speaker
Hello everyone, my name is Brittany Mason and I am chief of staff here at Bannering Capital Management. Welcome to episode three of The Alternatives Mason, where we are building alt knowledge brick by brick. On this episode, please welcome our very special guest, Dave Thornton, our co-founder of the CEO and chief investment officer at Bested.
Dave Thornton's Entrepreneurial Journey
00:00:54
Speaker
For the past 12 years, Dave has been a serial entrepreneur. His most notable accomplishments include the founding and successful sale of Patient Finder and his collaboration with Emilio Sejo, a principal quantitative strategist at Vestin, and the creation of a real-time illiquid asset pricing model. Dave also has spent time building the systems at a hedge fund within Citigroup and worked as a program manager at Microsoft.
00:01:21
Speaker
I also understand you went to law school, Dave. That's so exciting. That's awesome. So thank you so much for taking the time out of your busy schedule to join us here to talk about the alternative space. I am very glad to be here. And thank you for having me.
00:01:36
Speaker
Thank you i'm really excited to learn more about what you're doing over invested I I understand that you guys have really carved out a very unique approach.
Creation and Evolution of Vested
00:01:45
Speaker
When it comes to the seas and making the seas, you know more accessible, so I would love to start with that let's learn a little bit more about what you're doing there. yeah happy to um let me first back up and give you background on.
00:01:58
Speaker
Vested the company, our trajectory was not always to be an asset manager, making a VC product that is accessible for more investors. So it's kind of important to understand where we came from. Vested originally was created to help startup employees understand their equity in the first place. Most startup employees are pretty heavily compensated in stock options. They are pretty heavily
00:02:24
Speaker
under compensated in cash because most young companies don't have cash. And most of them make bad decisions as it relates to their stock options as the stock options mature and especially as they end up leaving companies and are almost forced to do something with those stock options. So the first version of vested was just a website and the website had free content such as articles on the difference between stock and stock options articles on
00:02:53
Speaker
key stock option terms like early exercise, and also free tools, such as an equity grant fairness calculator or an outcome simulator. Out of the first year, year and a half worth of user base that we built on that website with the free content and the free tools, we started to have startup employees come to us looking for money, which was interesting because we
00:03:20
Speaker
were very clearly and explicitly not in the capital providing role. So when we looked into it, we saw that the folks that were coming to us for money were coming almost entirely to find funding for their stock option exercise. Typically after they had left the company and encountered for the first time the dreaded 90 day post termination exercise window, which is
00:03:47
Speaker
you get stock options at a startup, you leave and you find out that you've got 90 days within which you must exercise or else all of your equity disappears. So all of the asset management work that we're doing right now came from that basic need. There's a market for what I just described, stock options funding, but for the most part at the time that we were looking at this, it only really served senior employees and founders of very late stage private companies.
00:04:14
Speaker
And it was the everyone else bucket that was ignored. And so we built almost like an index-like fund strategy around helping everybody else, where we decided we would help employee by employee, sector by sector, leaving companies in stage by stage in little small bites and build up a hugely diversified, very unconcentrated portfolio of exposure to venture-backed common stock.
00:04:41
Speaker
And that is the product that we kind of productionized and have brought to market. And it's been pretty interesting because we didn't really understand that there was a deep need for this. We were solving a problem for our employees as we built this fund product. And then we started learning about who our investors were or should be.
Vested's Fund for High Net Worth Clients
00:05:01
Speaker
And we saw that there was a huge set of investors that were kind of locked out of VC, but that had been wanting to be in VC for the last few years at least.
00:05:12
Speaker
One set was folks that weren't ready or didn't have like $10 million to give to a brand name VC, either because they didn't have it or because that's just a significant portion of their overall asset allocation and it wouldn't have made sense. The other set was the grouping of investors that even if they did have the capital to do that, they were not comfortable with
00:05:34
Speaker
single fund manager, single vintage risk. And so taking all that money and putting it like on one number on the roulette wheel one time was not an appropriate thing for them. And so the VC index at a discount strategy actually really resonated with a lot of people that were looking to get into the asset class. And so that's kind of the backstory for how we ended up creating our current fund product and who it's mostly meant to serve.
00:05:58
Speaker
Okay. And now is that the product, the two for, for RIA's? Yeah, that's right. Yeah. The, the fund price. So it's not so much that it's a four RIA's, although there's a, there's a whole thread to pull there. It's mostly for their clients, the, the high net worths who've wanted to get into VC and haven't been able to. And then for a variety of reasons, the folks managing their money who are the RIA's have not been able to get them in.
00:06:26
Speaker
It has an interesting value prop for RIA specifically, which is in addition to being an interesting product to get their current clients into VC, it's also a product that is built by helping startup employees own private shares. And when those startup employees have their liquidity events, they will typically pay the fund and they will have their first million dollars and they will need wealth management. So it's kind of like a nice full circle relationship with the RIA universe.
00:06:56
Speaker
Oh, nice.
Risk Management and Financial Performance
00:06:58
Speaker
And so I see that you're also managing real risk in the VC asset class during these crazy times. Can you tell me more about that? Sure. So yeah, it's a very easy trade to put on in a flat market. It's a slightly different trade, at least from a risk management perspective, in the type of market that we live in right now. It's a little bit
00:07:25
Speaker
tongue in cheek to call it something index like because number one, we're not putting in one unit into every company and therefore it is explicitly not an index. But number two, we're not waving in every deal that walks in the door. We're actually doing quite a bit of selection on the companies and we still have a substantially broader remit than
00:07:46
Speaker
any of the other folks that are participating in the BC asset class, at least as far as I'm aware. So like there are a few thousand companies out of the 30,000 US headquarter venture backed companies that we like, which is like 10 times bigger than the next biggest remit. But it is not every company. It's only like the top 10% of the asset class that's kind of making it into the portfolio. And we do this in a very data driven way. So number one, we've got
00:08:15
Speaker
financial performance data on roughly 75% of VCVAC companies. And in a market environment like the current one, it is crucial to know how well companies are doing as it relates to financial performance because most founders don't want to raise money while the markets suck. And if you don't want to raise money while the markets suck, then you need to be able to make it through the next two years without having to raise money.
00:08:41
Speaker
And so financial performance gives us visibility to that. We also have visibility into a company's financing trajectory. So in other words, are they raising progressive up rounds on a decent cadence or did they just raise a flat round after four years? We have perfect visibility into that company's financing terms. So are they offering off market terms like participating preferred, high liquidation preference multiples, huge cumulative dividends or not?
00:09:10
Speaker
We have a sense for the investors that are behind those companies and whether they're blue chip investors or not. We also have excellent visibility into the employee flows to and from the company. So company just hires its first CFO. Great signal. They hire the first sales team. Great signal. They lay off 50% of the workforce. Terrible signal. And a number of other kind of signal sets that we can get into.
Stock Options Abandonment Problem
00:09:38
Speaker
That's the basis upon which we decide which few thousand companies we love out of the overall universe. And therefore how we manage our risk during times like this. Fascinating. Yes. Fascinating. Avoid risk as much as we can. Diversification does a lot of work too. What's that? I said diversification does a lot of work too.
00:10:01
Speaker
That's for sure, it's key. So I mean, this is a very vast space, the alternative space. I would love to know more about your journey and how you even came into this space in the first place. I would say it's more through the side door than anything else. So I do have a hedge fund background as we discussed. And so there's a little bit of an argument that I have an asset management background, but mostly I've been an entrepreneur for the last 12 years.
00:10:31
Speaker
starting and failing, starting and succeeding, seeing companies, you know, go from zero to one a couple of times. And yeah, no, for sure. Um, definitely didn't do everything perfectly on the way to where we are now. Um, so I've, I've seen a lot of ups and downs and I have a pretty deep well of empathy for the VC asset class and the founders and the employees that are participating in it. So when,
00:10:59
Speaker
It turned out that we had an opportunity to participate in it, I was actually pretty excited it's it's neat to have a product that is helping startup employees with a huge problem and just to put numbers around the employee side of things. Roughly 50% of in the money stock options go abandoned by employees because they can't find the money that they need.
00:11:22
Speaker
And we're talking like hundreds of billions of dollars worth of this stuff over the course of 10 years. So this is like a legitimately big problem that you almost need to have worked in this world to know and appreciate. And then on the other side, we get to make a VC fund product and we can like I as a human being get to skip the line as an asset manager and go from working at a hedge fund in my past life to actually running a fund in my current life without having stopped in between too many times. So I'm actually pretty excited about it.
00:11:52
Speaker
It's amazing. It's amazing what you've accomplished too over your career and how diverse your career has been too, you know? Mostly I can attribute that to me figuring out what I didn't want to do in my twenties. The career arc has been meandering and it has not been meandering
Who Should Invest in Alternative Assets?
00:12:10
Speaker
on purpose. I just finally landed in the place that I liked, which was entrepreneurship.
00:12:14
Speaker
Awesome. So while bottom line, when it comes to alts, I mean, they're, they have a reputation for being, you know, complicated. Why do you think that is? There's no price transparency for the most part, depending on what asset class you're talking about within the very large world of alternatives. And also they're extremely liquid. So you kind of, you need to figure out what they could be worth, and then you need to be ready to patiently wait to see whether you're right.
00:12:44
Speaker
and both of those things kind of suck. So it's not that they're incredibly complicated, like private equities and public equities would be assessed similarly if all the information was available for both, but you actually have all the information for public equities, whereas you almost have nothing for the private markets. And so it feels much more opaque from the outside.
00:13:10
Speaker
I heard you say earlier that you do serve high net worth investors. So you're saying that is a good option, that they are a good option for high net worth investors. I mean, I think less, I would say less categorically than that. So not everybody should be dabbling in
00:13:31
Speaker
heavily liquid asset classes. So for example, if you don't have a decent amount of discretionary investment capital, then it's kind of it's a little bit scary, you might not want to be tied up for the average 10 year lifecycle of a VC fund. If you do have enough capital that you can put some of it to the side and not think about it for a while, then for sure, because it's the various alternative asset classes have proven themselves to be significantly less correlated to stocks and bonds, which is what the traditional portfolio has been made of historically and
Challenges in Accessing Alternative Investments
00:14:01
Speaker
that's especially important since especially in the last couple years, stocks and bonds turned out to be correlated in a couple instances. So it's a great place to be if you can comfortably be there.
00:14:14
Speaker
I've also heard you say in interviews in the past that you would guess the percentages of people that could access alternative investments versus those that actually do access alternative investments, they just don't line up. So what do you feel is holding people back if they do have access? I think a couple things. One, I touched on earlier, which is just risk tolerance. So like VC as an example,
00:14:41
Speaker
VC fund managers have huge dispersion in their returns. You do not want to be accidentally in the bottom quartile of VC fund managers having invested in your local VC and not appreciated that that's where they would end up. And there's a lot of randomness to it as well. So risk tolerance is for sure one. I think there's a whole other set of complications that relate more to financial advisors who might manage money that could go into VC and
00:15:12
Speaker
it's just private assets are tough. Like you've got a hundred page sub docs to get through and a ton of reporting to do that. Like if you end up in multiple different private asset managers and you get reports from each one, you've got to consolidate them for your clients. Uh, ever since Bernie Madoff custodians have been very important. And so you need to get like onboarded as a fund manager onto the various custodians that are used by the various financial advisors. And that's not something that everybody's got muscle memory with. So I think,
00:15:40
Speaker
separate from risk tolerance on the investor side, there's also just administrative ease on the financial advisor side. Is there, in reality, is there anyone that doesn't have access or is that just a misconception? No, there's still plenty of people that don't have access to various asset classes. So like minimums, minimums will preclude what are commonly called the mass affluent and also the accredited investor set from accessing
00:16:10
Speaker
some of the funds, we're trying our best in our own fund. In our prior fund, we had a $250,000 minimum, which is great because it's less than 10 million, but it's also not great because it's a lot more than 100,000. And so I think there's still a long way to go in terms of truly democratizing access to all these various alternative asset classes. And how would you, I mean, how could we go about it? How do we make them more accessible?
Trends in Alternative Investments
00:16:40
Speaker
One way that we're going to be checking out over the next bit is to register your fund. And registration takes away a lot of the, it introduces a number of other regulatory and administrative headaches, but it also takes away the minimum ticket size issue as an example. So, and why don't we talk about some trends, you know, what would you say are the emerging trends that you're seeing in this space?
00:17:10
Speaker
There are a number of trends that were slowed down by the financial markets ending in May and June of last year, but I've seen a huge push on the investor side into the alternative asset classes. They're getting a ton more airtime than they used to.
00:17:32
Speaker
As I've kind of learned it, a lot of that is driven by the ultimate investor set rather than the financial advisors. I think financial advisors don't necessarily have a lot of incentive other than client retention to be the first to jump into an alternative asset class. But the investors have been the ones who didn't want to get into crypto wanted to get into VC and the ones who didn't want to get into VC wanted to get into private equity and then prior credit and real estate. And so there's been a bunch of
00:17:58
Speaker
demand on the side of the investor base to open up alts. I will also say that on the private company, private shares liquidity side, there has been a significant trend arrested a little bit starting last year, but I think the train has left the station on this, which is liquidity around private shares. So startup employees, usually you work at a startup for a number of different reasons, not all of which are
00:18:28
Speaker
our money, you like the ability to contribute to something meaningfully at an early stage, and you don't like having bosses and a whole bunch of psychological and personality characteristic things, but also you get stock options. And if you happen to work at Facebook, you are done working for the rest of your life. And that's a meaningful incentive, except that your stock options are usually only worth something on paper for the better part of like six to 12 years.
00:18:56
Speaker
And that kind of sucks because you're kind of eating ramen noodles and crashing on your friend's couch. And when you're in your 20s, you can do that. And when you get a little bit older, you can't anymore, which sucks. So the trend towards creating some amount of liquidity around your private shares before there's a corporate level liquidity event like an IPO or an acquisition is a really clear trend. And I think it's
00:19:21
Speaker
slowed in the last year only because financial markets have forced it to slow, but I think it's gonna go straight up and to the right again as markets come back. That is great advice. Would you say, I would like to know what are your tips really for learning more about this
Learning Resources for Alternative Investments
00:19:41
Speaker
space? Because my listeners and myself, this is a whole new
00:19:46
Speaker
platform and we're all just about finding the best tools and tips and educational access to really fully understand the alternative space. What would be your favorite alt resources? So on the investor side, I actually have liked a number of the podcasts that I've come across in the last year. So the alternatives Mason as an example, but
00:20:17
Speaker
Meb favors podcast and, and Andy Hagan's podcast, which is the alternative investing podcast. I also like a bunch of the resources that are put out by some of the shops that are providing the plumbing for the alternatives universe. So I capital and case are a couple ones that have put out a bunch of good literature to help
00:20:40
Speaker
Both their users were primarily financial advisors and the ultimate clients or the investors learn a significant amount about private equity VC well less VC but private equity, real estate, private credit, and a handful of other alts categories on the employee side.
00:21:00
Speaker
Utilities like Vested provide a decent amount of content on how to think about your stock and your stock options. And we've got some of the shops that I mentioned focusing on the later stage companies and the senior employees also provide a great amount of content. So Quid and SecFi and ESO Fund and Liquid Stock are good sources of content. Well, thank you. I am going to look into all of those.
00:21:27
Speaker
Is there anything else we would like to add? Anything else you'd like to add before we wrap it up?
Brittany Mason's Career Transition
00:21:34
Speaker
Anything else I'd like to add? I am curious, I guess, on what you've seen in your first couple of episodes of kind of opening up the alts world. So what are you guys planning on getting into? Is it asset classes? Is it the administrative side of things? Is it investor psychology? Like, how are you thinking about things?
00:21:54
Speaker
Oh, my goodness. Well, there's a variety of things that I'm personally interested in with this. I mean, definitely behavioral, psychological aspect of a lot of this for sure. And I mean, I'm just a sponge right now learning everything I possibly can. I just finished the the unified bike. I
00:22:16
Speaker
the fundamentals and alternatives. I just finished that. So that was really informative and I'm just like a sponge right now taking all the information in that I possibly cared about this space.
00:22:30
Speaker
Um, there's now on the first couple of episodes, I talked a little bit about, you know, what I was doing before this very, very different. I was more in marketing and advertising, working in, you know, fashion and entertainment. So, um, you know, went from the fashion industry over to finance. So very different, but I'm loving this world and learning, um, you know, all about it. And the alternative space is one that is very exciting because it's growing and.
00:22:57
Speaker
you know, it's pretty large and it, you know, it seems.
00:23:03
Speaker
Um, you know, there's a lot of attention moving in that direction. So for sure. So you just made me think of something, uh, come back to me later and let me know, uh, what you think about the following. So what you think about the following. So behavioral, uh, how, how investors react, uh, to the ups and downs of the stock market is really interesting to me. And I kind of think from the perspective of a liquid, uh, investments like most alternatives are.
Investor Behavior in Illiquid Investments
00:23:33
Speaker
that that may be a feature rather than a bug. So like you see a bunch of people when stock markets move up a little bit and down a little bit, go absolutely bananas and sell too much or buy too much. And it's kind of nice in the liquid universe where you don't have prices that are moving up and down constantly in terms of getting people to chill out and remember what the point of the liquid asset is in the first place.
00:24:00
Speaker
As you come up your own curve, let me know if you end up agreeing or disagreeing with that.
00:24:06
Speaker
I will, I will let you know. I really appreciate it. This has been very informative for me and our listeners. So again, thank you so much for taking the time to chat with us for a little bit about this space. And I'm definitely gonna take all the advice that you've given and look more into those resources. So thank you so much.
00:24:30
Speaker
And thank you so much for listening. Be sure to follow us on all of our social networks, Twitter, LinkedIn, and Instagram, banner and capital. Thanks so much for tuning in and we will see you on the next episode where we will dissect all knowledge brick by brick right here. Thanks so much. We'll see you next time. Bye.
00:24:57
Speaker
The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or 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.
00:25:17
Speaker
Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparisons are unmanaged and have been invested into directly. As always, please remember, investing involves risk and possible loss of capital. Please seek advice from a licensed professional.