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Jamin Ball

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71
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2024-11-15
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2024-11-15
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1
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  1. “And so I think it gets harder to generate outlier returns at scale in venture funds unless you are more concentrated just because naturally you'll hug the index. But I do also think you have a class of LPs who that's the product they want to buy. Right. When you're putting a $300 million check to work, you're not necessarily expecting that to 10x. You'd be happy if you hugged the index and was slightly better.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Pitch a fund that is a large fund that will be extremely concentrated. It won't be diverse, right? It's not this, hey, let's go build a basket of 30 companies. It's let's go build a basket of seven. And put hundreds of millions of dollars into every single one of those investments. And that is the way that we are going to drive alpha above kind of the median returns. I don't necessarily think that's how most large funds are approaching the market. And so I think what naturally happens is you get bigger and bigger. You just build more of an index. And what happens when you build an index? You start to hug the median.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Because the way I think about it, ultimately, Venture will always be a power law game, no matter if you're a seed fund or a pre-IPO fund. The only way you're going to have top quartile returns is if you have power law outcomes. So the question you have to ask yourself is like, how can I generate power law outcomes at different stages? Here's why I think about it at seed stage, there's maybe this many companies that could give you a power law outcome series A, this many, B, this many, C. You know what it goes down? There's a smaller, smaller number of companies that can generate a parallel outcome as you get later and later stage. And so I do think you can.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “And not even just that, you're seeing companies like Stripe, like OpenAI, like Databricks, like Canva, like others that don't just get to 456. They get to 20, 30, 40, 50, 60, 150 in billion. And so what does that mean? It means there are world-class companies in the private markets that can absorb really large investments and still appreciate in value. The downside of that is that's not available to your everyday retail investors, right? That's only available to venture capitalists and ultimately the investors in those venture capital funds. But I do think that there is a world when you can invest at the gross stage in a very profitable way. It just has to be very concentrated into those few companies that truly matter.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Check me after. But you know, they all appreciate it from like a billion to where they are today in the public markets, right?”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Yeah, man, okay, lots to unpack there. Just a couple points off the top. One, a lot of LPs have gotten a lot bigger as well. And they just need to write a $100 million check. You can't write a hundred million dollar check into a $400 million fund. You're just never going to be 25% of a fund's LP base. And so you just have to hunt larger funds. And so you have the emergence of LPs who only want to write really large checks because they just need to move a gross tonnage of dollars. Then I'd say, you know, there's another thing, which is there is this whole, I mean, the state private for longer trend has been going for a while. And like, when what does that mean? It means you have world-class companies who are appreciating significantly in the private markets, right? It wasn't that long ago that a world-class IPO at Twilio, a Mongo, a HubSpot, a Zendesk was a billion dollars, right? And those companies entered into the public markets at a billion dollars in valuation. And I think they all, I might be wrong.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “And so, kind of benefited from that environment. But yeah, what's been interesting is as we've moved out of that phase, there's still a lot of demand, right? Like I don't see that trend shifting, at least not in a big way. Large funds have been able to raise larger funds. I'd say what's happened is that smaller funds have had trouble first-time funds have had trouble raising second time funds.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “Yeah, you're largely just repping with your existing folks. And so the access to it was hard. So all of a sudden, what happened in this zerp period was you already had a lot of latent demand. That all of a sudden now found a home, right? Because if you're going from a fund that's size X to a fund that's size 3X, you might be able to get there by having all of your existing LPs 3X their commitments. More likely than not, you're going to new investors, right? Who didn't historically have excess? And that's not to say it was all new. It certainly wasn't. You certainly had all the existing LPs also up their allocations, kind of up their size because their public portfolios ballooned. They got liquidity. You know, there was just a lot of money in the system. And naturally, when you have lower interest rates, dollars move further and further out the risk curve. And I'd say venture is far out on the risk curve.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “The emergence of private wealth platforms from big banks, right? You have individual people, you have international sovereign funds, right? You just had this rush of people who really didn't have a lot of exposure to the venture asset class prior to 2015, 2016, 2017, kind of all say at that point in time, hey, we need more venture, we want more venture. They started standing up venture teams, venture practices, venture programs to get into these funds, but they never could. The funds were too small, right? If you're going from a $500 million fund to a $550 million fund, you're largely...”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Yeah, I think the ZERP period just accelerated a trend that was already in motion, which was venture capital. And this is not a phrase that I came up with, right? It has moved from and is moving from a high margin cottage industry to a lower margin mainstream industry. 15, 20 years ago, the venture asset class was much smaller. Funds were smaller and returns were pretty amazing, right? To be in one of the top 50%, let alone a top 25% fund, the returns were great. And so what did that mean? You know, anytime you have an asset class that is yielding a really high return, that creates demand for that asset class and more dollars flow into it. And I'd say that was a trend that was happening for quite some time. And at the same time, you had a sophistication of the LP base, so people who give us money increased. And not just that, you had a globalization of the LP base. You had the emergence of single family offices, multifamily offices, rich individuals.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “Who are offered too much money at too high of evaluation, which is obviously negative, or can be negative for their business. And maybe final thing. Look, we did our fair share of overvaluing and overcapitalizing businesses in 21. I don't want this to be jamming standing on his high horse, right? Like yelling down at the masses as if I have this kind of crystal ball. You know, we are always trying to learn and better ourselves. You know, we raised a larger fund in 21 and then raised a smaller fund. And we can talk about like, hey, how can these incentives of just deploy, deploy, deploy, how can that lead to outcomes for founders and what are the implications for founders that they might not necessarily be thinking about before going into a fundraising process?”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Right. And so I would say it's economically rational to go maximize the guaranteed portion of your income stream versus the harder variable portion. And so what does that lead to? It leads to kind of what we talk about as are you a 2% firm or a 20% firm, right? Are you a firm that's looking to optimize the 2% or optimize the 20%? And that's where the incentive alignment matters because again, it's not to say that investors and founders now have opposite incentives, right? It's not like your failure leads to my success and their perverse incentives. It's just more to call out the outcome is irrelevant and now it's how can I maximize my AUM? How can I maximize my deployed dollars? But that part of it can lead to suboptimal outcomes and experiences for founders.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Yeah, yeah, yeah. So in that billion dollar fund, you're collecting $20 million a year. And I think, again, the thing to keep in mind is this. Right. And so, in that example, that's 20 million a year in fees. And let's say you 3x the fund. I mean, okay, those numbers also get significantly bigger. Now you're talking about 400 million of carry. But, you know, a reality exists where that 20 million is a lot of money now. And yes, it's still split a lot of ways, but it's now a lot of money and it's guaranteed, right? 3xing a fund is really hard, right? That almost certainly puts you in the top quartile kind of friendly vintage class. And so there's now an easy button to kind of get rich, which is raise as much money as possible. And you can get rich off that 2% off your feet. That's not to say you can't get rich off the carry. You certainly still can. I mean, the numbers are still huge, but there is a path to getting rich where the outcome of the underlying companies in a fund don't matter. And it's guaranteed.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Yes, yeah. And the purpose of all this, too, is not necessarily to highlight that there's bad behavior in the venture markets. Like I think there is good behavior of funds that are large, but it's to highlight for founders that the incentives are different. And I think it's important for them to realize that as they're deciding which funds to partner with over their tenure journey.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “Wasn't enough to, you know, really make you rich, right? I think the term that I used in the blog post was get rich, right? It's harder to get rich on 2% of a small number. And so as venture capitalists, like how did you really make money? How did you get rich? Well, it's you maximize the carry. You maximize that 20%. And what does that mean? It means for venture capitalists to get rich, you need big company exits. For founders to get rich, you have equity in one company. There's one way for founders to get rich, which is big company exits. And so those paths were aligned, right? When founders got rich, venture capitalists got rich. And more importantly than that, it was kind of the only way to get rich, right? And so there was a lot of incentive alignment. As funds have gotten significantly there, please respect.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Life is 10 years. Now that $100 million fund is 3x, so we've turned $100 million into $300 million, which means we've generated $200 million of profits. And so 20% of those profits is 40. And so $40 million would go back to the fund, which is then kind of allocated based on who owns what percentage of carry within the venture fund from kind of your partners down to your junior most folks. But if you think about that model, there's a guaranteed portion of the compensation, which comes from the management fee. And then there's a variable portion, which comes from, you know, did you make good investments or bad investments? Not that long ago, funds were significantly smaller. And so that, much smaller. Much smaller. So that guaranteed portion”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Traditionally, it's variable. Okay, and it's variable, right? It's sometimes it's 25%, sometimes it's 30%, sometimes it's 15%. But I would say it's sidebar, it's interesting how fixed the incentive pool or the price of venture capital product has stayed given how much bigger it's gotten, you'd think as an asset class expands as the supply of it expands, you'd think that would lead to pricing pressure. What's been interesting is it hasn't at all, which I think just speaks to the demand for the asset class, but maybe that's something we could put off to the side and revisit. But maybe to make this concrete, let's talk about a hundred million dollar fund that returns a 3x. And that fund every year, the fund will collect 2%. So 2 million, 2% of 100. And that is on an annual basis, kind of independent of the investments made. And it usually lasts for about a 10-year period. Sometimes that can get extended, but typically.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Capital that you invested, and there's a share of the profits that the venture firms receive. That's 20%. So maybe let's make this concrete.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “Sure. So I think, yeah, first is defining the incentives. Another way how to venture capitalists make money. I think a lot of people have heard about the two in 20. But what does that actually mean? There's predominantly two ways venture capitalists make money. There's a guaranteed portion and then there's a variable portion. The guaranteed portion is what we call the two, the 2%. So venture capitalists will raise a fund and they will charge a percentage of that on an annual basis, which is called the management fee. It's usually around two percent. It varies over time and it steps down as you go, but call it roughly 2% on average. And those dollars are used to pay salaries, pay rent, pay legal fees, all of that. Think about it as funding the operating expenses of the venture funds. And then in tandem to that, there's the carry, the 20%. And this is the firm's share of profits. And so when we make investments, you hope that those return multiples of the capital.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “Micro niche. Well, I'm not sure if I'm quite a celebrity yet, but it's certainly fun. And thanks for having me here. I mean, I kind of e-blogging is almost a personal journal that I can make public, which it forces all of us and it forces me to really refine my ideas. But thanks for having me.”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source

  21. “For venture capitalists to get rich, you need big company exits. For founders to get rich, you have equity in one company. There's one way for founders to get rich, which is big company exits. And so those paths were aligned, right? When founders got rich, venture capitalists got rich. And more importantly than that, it was kind of the only way to get rich. It's not to say that investors and founders now have opposite incentives, right? It's not like your failure leads to my success and their perverse incentives. It's just more to call out the outcome is irrelevant. And now it's how can I maximize my AUM? How can I maximize my deployed dollars? But that part of it can lead to suboptimal outcomes and experiences for founders. And we can talk about like, hey, how can these incentives of just deploy, deploy, deploy, how can that lead to outcomes for founders? And what are the implications for founders that they might not necessarily be thinking about before going into a fundraising process?”

    2024-11-15 · This Week in Startups · Misaligned Incentives Between GPs and Founders with Altimeter's Jamin Ball | E2045 · IDENTIFIED FROM THE TRANSCRIPT · source