E78: VC fund metrics that matter, private market update, recession, student loans, Bill Hwang arrest

We were going to have you speak, Friedberg, but we realized you're not capable.

So we want the show to be entertaining.

Yeah, that's not Percival Friedberg.

You guys are missing out. I'll tell you guys what makes my stand up comedy so good.

Oh God, here we go.

Oh my God. We're back on this. Jesus Christ.

It's my creative sensibility. So if I have some time to prep and write my script and read my own creative insights. Yeah.

Okay. Bring one joke next week.

JKO, for all the time we've spent together on this podcast, you know so little about me. It's so depressing, I gotta be honest.

Well, you know, here's the thing about friendship. It's a two way street. You gotta open up a little bit.

We gotta go out and get drunk one night.

Absolutely.

Let your winners ride rain man David Saturn. And instead we open sources to the fans and they've just gone crazy with it.

Love you, queen of Kinwa.

I just want to give a shout out to this guy, Andrew Lacey. Okay? Shout out. He is the CEO of a company called Pre Nouveau.

Oh yeah.

Can you just flash it on the screen? Prenuvo. I went to Prenuvo and what they do is they do a head to toe MRI scan in 45 minutes and they use a bunch of machine learning and image recognition to help a radiologist interpret these mris in real time. Beside you. It's a service that you have to pay a few thousand dollars for. There's a location in Silicon Valley, in Redwood City and a couple of others. And we mentioned it. But the reason I'm bringing this up is he sent me an email yesterday and he said, I just want to thank you and the besties for mentioning Prenuvo because we had a bunch of people come and he said, we found no less than eleven life saving diagnoses.

1111 people.

Eleven individual listening to the pod.

Pod saves lives.

Went to Prenuvo after hearing about it, had a head to toe MRI, found all kinds of issues from a brain tumor and brain cancer to stomach cancer and other things, and was able to get the care that they needed.

Amazing.

Anyways, I just want to give a shout out to him for doing a lot of really important work. And for the folks that are listening that have some money set aside and can afford to do this, I would just really encourage you. We have no financial stake in it. Nothing other than we are users of it. But check out prenuvo.com and shout out to Andrew and his team there.

Okay, here we go. Three, two. Let's start the show. The war in Ukraine has him insane in the membrane. And Biden's new disinformation council is going to have him detained to calm him down from tanking. Salana, he started smoking that marijuana. You know him as the rain man. He's here again. David Sachs. How you doing?

Have a good week?

Yeah, not bad.

All right, well, big energy, this, huh? Okay. In high school, he had no friends but thanks to the pod, undergrads are in his dms all forms of steak he's a persian he's the vanguard of all the virgins the queen of Quinoa, the sultan of science, David Friedberg.

Wait, I missed, like, half of that because Tramatha's laughing so hard.

I can do it again.

Do it again, do it again.

Let me try. From the top. Out takes. In high school, he had no friends but thanks to the pod, undergrads are in his dms all forms of steak he's a Persian he's the vanguard of all the virgins the queen of Quinoa the sultan of science, David Freeberg.

Just for the record, there's no undergrads in my dms, but I appreciate the intro.

All right, we'll check. All right, in three, two. He's right for freebird is tweaked and the show hasn't started.

I think I'm taking over intros next week.

Okay.

I'm at least going to do Jcal.

Please, by all means. Next week you do mine.

You're a comedian who has the chance to prepare in advance and think your thoughts. Go ahead, big boy.

Give me a week.

You got it. Okay. Cheers. Next week.

Let's see these latent stand up skills in action.

Yeah, absolutely.

He's been hiding them from us.

Yeah.

I don't know. A lot of stand ups who hide their ability.

You know, the funny thing about hiding something and not having something from the outside in, they look the difference. Sorry, Jake. I'll go over to you. Okay.

He's dropping annual letters in luxurious sweaters. As far as the specs go, well, it can only get better. Syndicator himself, Jamal folly hopatia.

Ouch.

I cannot comment on the specs.

Oh, my God. I mean, this is getting brutal. Who's writing these?

Oh, my lord.

All right, everybody, it's been a big week.

Did you read my annual letter? Any of you three assholes?

I saw your.

No, that's a no. I get it.

I reviewed the table where you listed all your results. And I actually sent it to my team. I was like, this is a really nice way of summarizing a firm's results over a long period of time, because you had every fund and your totals and all the key metrics.

Well, can I talk about that for a second? Yes, please. What's incredible about what you're saying, sax, is I was interested in a bunch of other funds that I'm invested in and their returns. And then I've also seen a bunch of leaked fundraising decks of all kinds of other firms, from growth stage to crossover to PE. And it's incredible that they are not standardized.

Right.

Some people only show gross irr, some people show net irr, some people don't show the total value of the paid in capital, which means if you have $100 fund, what is the total value of all of its holdings? Some people don't show DPI, which is distributions of paid in capital, which means, okay, for every dollar you've taken in, how many dollars have you sent out if you don't show all of them? What was shocking to me is how much you can kind of hide and play and manipulate the numbers. And one of the most crazy things that I saw is that there are these late stage funds that write into their fundraising decks that what they actually use are lines of credit to juice Irr. So what they do is if they're about to do a deal, they'll actually get a loan from a bank, put that money into a company, wait until it's about to get marked up, and then what they do is they actually call that original money from their lps and pay back their capital call line of credit. So what does it do? It inflates IRR. But this is why, if you see the other numbers, it still shows that it's kind of like not doing much of anything. So if you ever see multi hundred percent IRRs or high huge IRRs with zero DPi and a marginal TVPI, it's folks that are playing games to trick LPs. Just a heads up, too.

That is so weird. So what you're saying is just to summarize for people in the audience who don't understand, hey, we get judged on the rate of return each year. So if the stock market does seven or 8%, we're expected to do triple that. So we got to hit 2020, 5% each year. Now the clock starts ticking when the money gets called from the lps, the partners.

Correct.

And gets put into the company. So if you invest in year two of your fund, you pull the money down from the lps, you put it into YouTube, whatever it is. What you're saying is they will take a loan against that future money from a bank at an absurdly low interest rate, let's say 1% or 2%.

Correct.

They make the YouTube investment, then two years later, YouTube has a price round that marks it up 20 x. Then they put your cash in in year three of the fund year, pay back the loan and pay back the loan. Now they've paid 2% two years in a row, but the thing's gone up 20 x.

Correct.

That's dirty.

Well, so it's dirty enough that the SEC has actually now introduced legislation, it was in February, that basically is going to try to uncover all of this nonsense. And so you'll have to be much more transparent. So the format that I used, in my opinion, is the most transparent way of not being able to hide the cheese. You show all the critical elements together in a simple table that will make it very obvious who's playing games and who can actually make money.

There is a semi legitimate version of the loan thing, which is where this comes from, is a capital call loan. So we're making a bunch of investments throughout the quarter, a million dollars here for a c deal, 10 million for a series a. That's happening all the time. You don't necessarily want to hit your lps with capital calls for every single little small investment. So what we do is you get a capital call line from SVB or something like that, and then you do one capital call per quarter. And so they will loan you the money for one, two, three months, but it's not for a year.

But the reality is, if you have a reasonably well developed infrastructure, you have a cash forecast of what deals you may or may not close with probabilities. And so you know what the weighted amount of capital you need to have on your balance sheet is. So I agree with you. To have a small amount at the edges to pay for expenses, to pay for salaries, while you clean up at the end of a quarter, completely reasonable. But if you're making 5% or 10% commitments into a company and you're using this as a way to basically create subterfuge and hide, I think that that should not be allowed.

Yeah. The number of capital calls is annoying for people.

Yeah. Anyway, I did share that table with our team because I did like the format quite a bit.

I think we'll start reading it this weekend.

It's very hard for funds who are not performant to use that format. You are very highly performant, so you can use that format. But I don't think people that have not returned money or have fake paper markups can use that format because it is too simple.

Yeah.

At the end of the day, what metric do we all look at when we are lps in a fund?

Well, this is what I put down. I put down the ones that I look at for everybody else that I'm an LP in.

So what one is that for you? Multiple on cash investment.

I need to look at the totality of it. I need to understand what is your gross and your net irrs. Those are important things to understand because it shows how efficiently you put the money to work, of course. But then ultimately, then the other two things that really matter is what is the total value you've created and then