Realized returns on investments for venture capital funds used to happen within three to seven years. Now, the biggest companies are extending funds to 15+ years—and investors are getting impatient. This could dampen venture capital as an asset class, but not if Aman Verjee can help it.
On this episode of The Modern CFO, Aman discusses how Practical Venture Capital is creating a secondary market from VC funds, how faster liquidity will keep VC relevant, and how his experiences at PayPal, eBay, and 500 Startups resonate with modern CFOs.
02:59 - A new application to a new asset class
Practical Venture Capital (PVC) focuses on venture capital secondary, buying LP and GP interests in early-stage venture funds, and direct secondary in breakout portfolio companies.
“It's not a new idea, but it's a new application to a new asset class. I think in venture, there wasn't a need for secondary markets, even up to 2005, 2008, 2010. I was at PayPal early. I joined in 2001. That company went public in four years, from founding all the way to the IPO. Yahoo, Amazon, and eBay were all four- to five-year exits. So, there was not a terribly long time to get your money back. The biggest IPOs, now, in the venture community are: Airbnb, which took 15 years and counting to get their liquidity. Palantir was 17 years and counting. All the biggest companies now are taking much, much longer to get their money back. So, there's much more demand on the investor side for that kind of liquidity, around year 8, year 10, year 12, and year 15. That's a fairly new phenomenon, taking place over the last 10 years. That's what we’re capitalizing on.”
20:49 - Three functions of the modern CFO
According to Aman, the modern CFO has an accounting function, a treasury function, and a data analytics function.
“There's the traditional [function], or the accounting function, which is really about understanding and applying accounting principles, backward-looking, making sure stuff gets done, operational, and that communications infrastructure is running well. That is one job. And it's a big one. That's the digital controller function. And that's always been part and parcel with the finance function and will never go away. There's increasingly another aspect around treasury and managing cash and making sure, especially in global businesses, that all the functions are adequately capitalized, and you've got the right liquid resources where you need them. That's a big problem in venture and venture-backed companies. They never have enough liquid cash. There's a lot of paper valuations. There's a lot of investors locked up for 5, 10, 15 years, so that's a big challenge. Then, I think the third part is just the business facing [functions]. How do you help a team make good decisions, and how do you use data and use analytics in order to inform those decisions?”
24:19 - Communicate data across the organization
Most departments deal with data, but CFOs have to be able to communicate it to every department clearly and accurately.
“You have to be able to communicate to all those [department] heads and the entire team about what matters. To be able to store data and make it a single source of truth. That's often a problem in big companies. Like it or not, finance is always going to be seen as an objective repository of the information that then gets to make it into boards. That's how you pay bonuses. If your data is wrong, that's a terrible consequence for the whole organization. If the head of marketing is using imperfect data or some of the analytics isn't perfect, even if it's off by 1%, they'll make mistakes, but it's probably not the end of the world. It doesn't endanger the business in most cases. Product engineers take shortcuts and make quick data-driven assumptions. Finance has got to be right. You have to be able to double click and understand some of the flaws and how data is being kept, how it's been used. You have to be facile with statistics and be able to communicate all these concepts across different teams. That's really the challenge of the CFO job.”
29:43 - The need for a secondary market
As COO of 500 Startups, Aman had a unique vantage point to observe the shifts taking place in the venture community, as well as the developing needs of LPs.
“What we recognized a few years ago was that as these funds are getting longer and longer with no liquidity back to LPs, there’s this pent up demand from sellers who've been in a great fund for 8 years, 10 years, 12 years, but haven't gotten their money back. The fund is maybe up 6x, 7x, 9x on paper, but family offices may want to rebalance their portfolio. They have cash flow needs, they have liquidity problems and so they want to be able to sell. No one's doing it in that market right now. There's no market for venture secondary right now. We are literally buying great portfolios at a 30% discount to fair value and there's no bidder. We are the only bidder who says I'll take that portfolio of nine great companies and a lot of other companies you may have never heard of but we like, and I'll pay you 30% less than the fair value. The challenge in this space is they're all private companies, so you don't have a lot of information about the companies, but that's where Dave and I excel. We've been investing in private companies and figuring out how to diligence and source intel about them for years now.”
33:53 - Venture capital as an asset class won’t reach its full potential without meeting investor needs.
Private companies are extending their funds to longer and longer timeframes, but LPs want their money sooner. If this keeps happening, VC may stop being an in-demand asset class.
“I'm just going to extend the fund. We're now in year 17. Please read the fine print in your LP agreement. I can extend the fund as long as I want to and, when I have money, I’ll give it to you. Those early LPs are looking for liquidity and may want to take some money off the table for good reasons. That just doesn't happen in VC today. If that continues, VC as an asset class will just be an afterthought. It won’t ever be as big as private equity, or as big as it should be because it's not solving the key problems. So, I'm hoping that PVC can help solve the problem and really help the whole asset class, too.”
35:39 - Modern CFOs serve as the custodian of their CEOs long-term vision.
The CEO-CFO relationship is most productive when both address their strengths and weaknesses in sharing the vision of the company and grounding that vision with current financials.
“You have to take your cues off your CEO, because it is a team sport. In many of my cases, I've had CEOs who were very strong in product and marketing. They would kind of amp stuff up. They would tell a story where there's always a happy ending and there's a hero in the story - it's just Marketing 101. The CFO has got to be the counterpoint to that. You have to be prepared, for sure. You have to be able to tell a story with financials and data to ground people, investors, in reality. That way, I think they feel like there's an inspirational CEO, but also someone who is on the team who's very complimentary, and who can keep the company from running out of cash. If things don't work according to plan, there's a backup plan, and this person's got it. Some CEOs are very, very buttoned up and maybe not as charismatic and maybe more introverted. Their role tends to be more focused on what they're good at, but leave a lot of the effort to the CFO.”
37:07 - Make honesty your policy
A thoughtful, measured approach when responding to investor questions is best when the answer isn’t quite at your fingertips. Honest and transparent communication builds trust and helps foster a long-term relationship.
“For a CFO, especially in a fundraising context, you are going to be with this investor for a long time. It's okay to say, ‘I don't know or I’m not sure. Let me come back to you with a thoughtful, prepared answer. Here's what I think, but here are the caveats, assumptions, and what I have to research.’ Don't leave yourself exposed by putting yourself out and answering a question and not having it backed up. Investors will always figure that out in diligence. God forbid they don't, but they invest. Then, they’re on your board or you're working with them every day. If something comes out later, that's the worst thing.”
39:30 - Untapped human potential outside Silicon Valley
Aman sees rapid changes occurring for both entrepreneurs and investors, especially in terms of diversity.
“The number of entrepreneurs who are outside of the valley, outside of the U.S., from different and diverse backgrounds and geographies, as well as their ability to iterate, build businesses, access capital.. is so great; Relative to even 10 years ago, or certainly 20 years ago, that it's quite astonishing. I think we'll be stunned in the next 10-15 years by the types of companies that get started outside of the valley, all over the world. The types of entrepreneurs who start them who don't meet our expectations or our thoughts on what entrepreneurs should look like, or their backgrounds and where they went to school, what their particular situations were. I think there's a large untapped human potential that is just now unlocking and it's happening because investors are globalizing. They're more willing to take those risks than they used to be.”
41:05 - The next iteration of venture capital
Aman has proven this concept and strengthened his investment thesis alongside the expertise of the PVC team. Launching PVC’s first fund will modernize the VC ecosystem with more sophisticated and transparent valuation models, which will result in a more liquid marketplace for locked-up investors.
“It's been great working on these deals to prove out the concept and work out some of the kinks. Actually having a fund where we can then diversify and go across 10-20 different portfolios and do this in a more systematic way is a game-changer for us and for the industry. I said before, I don't think venture will be around if they can't promise realized returns to investors in 3, 5, 7 years. 10 to 17 years is just too long for realized returns, and that's not a timeframe that most investors can stomach. Creating a way to value these assets in a fair, transparent way, create some liquidity for investors, be able to have a little bit of a marketplace, and maybe take a company like this, scale it, and take it public... That’s not going to happen in 12 months. Maybe, that's the 5-10 year timeframe, but it is the longer-term goal.”