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Justin Fishner-Wolfson

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69
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2021-05-25
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2021-05-25
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  1. “Also, fundamentally, like in economies of scale business, right? The bigger they are, the less expensive everything becomes. And I think you're seeing that right now, especially with things like Starlink, right? So they're launching this global internet constellation to provide service anywhere in the world at high speeds. And the reason why they can do it so much more efficiently than everyone else is that they own launch. So they're reusing their launch vehicles. They're the only people who have a reusable launch vehicle to begin with. And they're vertically integrated. And so their cost of launch is much lower than anyone else who might want to build a constellation. And so you're just seeing a really valuable economy of scale in that business.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “Some sense the first investment was probably SpaceX that goes back to 2008, they did two things that sometimes one was very simple, right? They got the government to agree to fix price contracting. Historically, when they were buying all of launches and such, they were doing cost plus contracting. If you were a vendor, you didn't really care what your costs were. In fact, the more cost you had, the more money you made in an absolute sense, right? Even if your margin was fixed, you didn't have any incentive to do things better, faster, or cheaper. And it was a struggle, but they got NASA and the DoD to pay for a launch. And if SpaceX could build a launch vehicle for a dollar or $100 million, like that just impacted their margins, right? Maybe they'd make money, maybe they'd lose money, but that was their problem. And that's a very hard thing for a competitor to shift from. It's an entirely different business model, even if the end product is nominally speaking the same.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “Comes down to the people initially, right? Because you're meeting someone who is passionate about whatever it is that they're building. And so that's kind of the first filter. But the thing that we care a lot about is investing in companies that have some kind of long-term defensible business model. The challenge, especially in venture, is that, you know, everyone's basically a minority investor. And so you're along for the ride and you don't know whether or not that ride is going to be two years or 10 years or longer, quite frankly. And you want to be comfortable being invested in that business over whatever period of time it ends up being. And you don't want to find yourself in a spot where the business, you know, you're in some business that's growing really well and you get a bunch of competition and margins compressed and then multiples compress and then growth gets harder and suddenly you actually don't make any money. You really want to find things that have good long-term defensible business models. So that's the biggest we look for.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “I mean, honestly, that's where SpaceX ended up, right? They're doing one or two tenders a year and they're dealing with informed investors. So it's an opportunity to educate people on the business occasionally. It's the opportunity to provide liquidity to your employees on a regular ish basis. And that's where they ended up, which is, I think, the comment I made earlier was I can tell you how to run a good process. That's not necessarily core to your business. You don't have to think a lot about this. And I can tell you Valentier did and how SpaceX did it. What were the good and bad things that came of that?”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “Companies can't do some of the hard things that they would want to do if they were public. And so being private allows them to build more interesting bigger businesses. And I think there's certainly truth to that. So there's a lot of dynamics that liquidity actually doesn't solve, right? It actually makes worse. So it's about what's the stage of the business when it goes public? What's the leadership of the business? What's the control structure of the company? And all of these things matter. And broadly speaking, have incentivized companies to go public at a much later stage. I don't think you want to bring the public markets to the private markets because that's what makes the private markets good. I think all of the major players will resist that. And in fact, they have, right? If you look at what happened with like second market or shares post years ago, right? They tried to create a more liquid market. And that's not what people wanted. You don't have the disclosures in the private market that you do in the public market. So it's like in one sense, the public market has a lot more information, but in another sense, it has a lot less information. It has a lot more information for everyone.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “Not necessarily sure that liquidity is the solution. So, part of the reason why companies are private is because they don't want to be public. And so the question is, well, why don't they want to be public? And part of that's regulatory. All of the changes with Sarbanes Oxley and Dodd-Frank, like it changed, what did it take to be a public company from a reporting standpoint, from a liability standpoint? So those things don't seem to be going away. And then the public markets, they're liquid every day. And so people don't want their employees watching the stock price every day. That's super distracting. I mean, you could talk to the folks from Facebook when the stock went down 50%. A large fraction of the conversation amongst employees was what's going on and how does that affect me personally? And I really can't focus on my work because I'm watching the stock price, right? I mean, that was a big problem. So there's that dynamic. And I think that that ties into a belief that's somewhat true that public markets are more short-term focused. And so”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Just little things like that, irrespective of you actually have the model. And so it's so much easier to update the model over the five quarters after a company is public than to try to create the model from scratch. You're so much more likely to make errors that are very understandable. So I think that the crossover guys have an interesting opportunity to leverage the data they get in the private markets to inform a lot of better decision making in the public markets.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “It's just unfair. There's no way that people could legitimately build the model of that business accurately. In the private markets, they'll give you the model. There are these big public markets investors who are investing a lot in the private markets. And as far as I understand, most of the capital that they manage is actually in the public markets. And so all of this private market investing, even if you assume it doesn't inform anything else, which I suspect it does, just the companies that they're invested in, they know those management teams so much better. So when you listen to an earnings call and a guy says, hey, I'm definitely going to do this. You know there is zero chance he's not going to because when he says definitely he means it or it's like 50 50 right he says definitely”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “Sort of grappling with this right now because you had a number of companies go public over the last 12 to 18 months, I kind of started by complaining about the public markets and how they're evaluating these companies and maybe they were crazy high, which generally speaking I was a fan of and some days I thought they were very low, which obviously I wasn't excited about. And then I just quickly realized that the amount of information that we have as an investor in the private markets is orders of magnitude bigger than what the public market guys get. We like actually talk to management a lot for hours. You can ask them for things like cohorts, right? It's not like an earnings call where like you get three questions and then they like half avoid them and don't send you the cohort data. We actually get so much more information about these companies, especially over time. And so I think that to expect public markets investors to take an S1 and maybe like two earnings calls to really understand that business.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Good sign for the company. Everything is secondary. And it's just completely flipped in the primary markets. And I don't understand why people think it matters. At the end of the day, you're investing in a company and you have to think that that company is a good long-term bet.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “It's not any different for us. I mean, we're raising our capital comes from the same sorts of investors as people in venture firms that focused on primary investing. Our cost of capital isn't different, so I don't think our definition of success is any different. We're still looking at can you generate net 20s? Can you do real cash on cash returns at the fund level, right? Like these are the things that matter. And if we fail to do that, I mean, maybe you could take off a fund, maybe you have a bad fund or something, but if you fail to do that consistently, you're going to get fired. From a returns perspective, we need to hit the same things that any of the primary guys do. The one thing I always find somewhat odd is private markets, people think primary is normal. That's sort of the quote unquote normal way of investing. And yet if you look at the public markets, 99.9999999999999999% of the volume is all secondary. And people think primary is actually quite weird. It's just like this bizarre thing that happens every once in a while when companies issue shares in exchange for money to put on the balance sheet. That's sort of odd and it's not a”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “Incorrectly priced, whatever the heck that means. But that doesn't mean that all deals will necessarily get done. It just means if they do, they're going to kind of be in a tighter band.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “People talk about discounts, but I'm not sure they necessarily understand what the discounts are. I think it's just something that people say a lot. There's definitely an anchor point, right? Like the thing that never changes are the round is an incredibly anchoring psychological point. So think about if some company raises money at a billion dollars just as the random round number, it's very hard for them to convince me that I should pay $2 billion and it's very hard for me to convince them that I should pay 500, even if either one of those numbers might be correct based on some fundamentals analysis, that anchor point of the round is just incredibly powerful. It's not that it's the right price. It's that transactions outside of that range tend not to happen. So like what I tell people is most deals are kind of plus or minus 20% of around, not because the round price is correct, but once you start getting outside of that band, it's very hard for one party or the other to really accept that as a transaction price. The psychology of the round is very powerful. Sometimes those rounds are”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “Going to talk a little bit just off the top of my head, but if I had to take an educated guess, I'd probably say it represents 15, 20% of primary dollars, depending on how you define the term secondary, right? Obviously, there are things like LP secondaries where the dollar amounts are quite large. You'll see some like institutional secondary from one institutional investor to another. Those things would be quite large. But I think if you defined it more narrowly as liquidity for founders and executives or employees at companies, it's going to look something in that 15 to 20 percent range would be my rough estimate.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “That is great for them, but may not be really what the investors want because if you're trying to drive fund level returns, you need companies that are going to return the fund or multiples of the fund. And so you want people to go for the $5, $10 billion exits. If they have no money, they're much more likely to get taken out earlier. And I've watched really great entrepreneurs. They have decent sums of money in their bank account, but nothing like what that acquisition offer would give them. And they turn them down left and right. There's a huge difference between zero and one. And so I think liquidity helps align both the entrepreneurs and investors for the much bigger outcomes because the investors have a portfolio, right? If any one company doesn't succeed, that may be annoying, but not necessarily a disaster for the portfolio. If you're an entrepreneur, you have one company. It needs to work. Otherwise, you end up with nothing. So the way to align incentives better is to let them take some liquidity. So I think the industry has mostly come around to this understanding. It's not universal.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Couple things that I would focus on first. One is we are very interested in having a good relationship with the company and doing things that are supportive of the business. And so it matters in terms of able to access information, the time you're making the investment, but also on a going forward basis. And then you also want to know what's going on because you can actually be helpful to the business. I think that's like an important distinction. I think people sometimes think of the secondary market as just random players who don't necessarily have money, who are just calling random employees and annoying them. What we're trying to do is transactions that are sponsored by the company effectively. And then you also made this comment about wanting founders to be incentivized for the big exits. And I think the industry has mostly come around to this by now, which is that liquidity actually incentivizes people to go for the big exits. The challenge that people have is if they have no money, and a lot of people have student debt or things like that, when you have acquisition offers that come along that put tremendous amounts of money in people's bank accounts.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “It's gotten much bigger, which is really just a statement to how many companies there are that are very simple metric is how many companies are worth a billion dollars. This used to be a unicorn. That was like something that was unique because unicorn is something that doesn't really exist. And now the number of companies last month, I think the eclipse, like the number of companies when this term was created. So just the sheer volume of opportunities is so much bigger. I mean, I think it's probably grown by a factor of 100 over the last 10 years. That's part of it. I think the secondary market itself is somewhat opaque, but in many respects is similar to the primary market. If you went and asked someone like, hey, who's going to go lead whatever round you're looking at a series A round? It's like there are lots of firms. You could almost certainly list a dozen of them, but there's probably 200 of them. People only know like the part of the ecosystem that they're familiar with. As I think the secondary market matures.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Opposed to others. And so I kind of got a lot of phone calls around the same time where people were looking for liquidity. They wanted to borrow some money against all the stock they held, which was obviously private stock. And I tried to find people to refer them to. It wasn't that I thought, hey, we should go build a fund to focus on helping people get liquidity. It was really like, who can I send my friends to because presumably someone is in this business? And what I found out was that really no one was in this business. And so my co-founder, Alex, who I knew from Founders Fund, we basically started out in 2011 to build a firm that was focused on helping founders and executives get liquidity at these growth stage venture-backed companies. And the thesis was relatively simple. And I think was obvious if you were on the ground, which was that Facebook wasn't an anomaly. It was the start of this longer-term trend of companies staying private longer and therefore the market opportunity would continue to grow. And it was a way to access great companies without having to compete.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “What really happened was I was at Founders Fund in the early days and I had a lot of friends from college who ended up at Facebook. If you kind of roll the clock back to 2010, there was that Goldman Sachs round that valued the company at $50 billion. And I had a lot of friends who had all this wealth on paper. They owned all this stock and literally no money. And they didn't want to live with roommates anymore because they were probably getting married. And maybe they were going to have a kid. And at some point, if you're going to have roommates, you want it to be people that you're related to.”

    2021-05-25 · Invest Like the Best · Justin Fishner-Wolfson - Secondary Investing in Private Markets - [Invest Like the Best, EP. 227] · IDENTIFIED FROM THE TRANSCRIPT · source